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Federal Financial Regulators Urge Banks to Make Small-Dollar Loans

By Dave Kovaleski - Mar 26, 2020 at 3:27PM

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The move is designed to help struggling individuals and small businesses

Federal financial regulators are encouraging banks, credit unions, and other financial institutions to offer responsible small-dollar loans to consumers and small businesses during the coronavirus crisis.

Small-dollar loans -- which are typically between $300 and $5,000 -- can help Americans with cash-flow needs, unexpected expenses, or income disruptions during this period of economic hardship, according to a joint statement issued by the Federal Reserve Board, Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corp. (FDIC), National Credit Union Administration (NCUA), and Office of the Comptroller of the Currency (OCC).

A banker holding money and a pen about to provide a customer with a loan.

Image Source: Getty Images

The agencies said the loans should be issued in a fair, responsible manner that applies with current laws and regulations. The loans can be offered through open-end lines of credit, closed-end installment loans, or structured single payment loans.

Large banks haven't typically offered small-dollar loans, but that started to change in 2018 when the OCC modified its policy to encourage small-dollar loans to be repaid within up to a year.

So-called payday loans are a form of small-dollar loans that often carry high-interest rates and short payback periods. Regulators are explicitly urging lenders to off fair and responsible loans, which would not include these type of payday structures.

Further, regulators are encouraging banks to consider "workout strategies" for borrowers who cannot repay a loan due to unforeseen circumstances. The strategies would help them repay the loan while mitigating the need to reborrow.

Also, the CFPB is postponing some data collections from banks and financial institutions on CFPB-related rules to let them focus on responding to consumers' need. "Our actions today are temporary and targeted to support consumers by allowing financial companies to focus their resources on assisting consumers," CFPB Director Kathleen Kraninger said.

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