U.S. bank regulator encourages banks to reconsider small-dollar lending

Pete Schroeder

WASHINGTON, May 23 (Reuters) - A leading U.S. bank regulator on Wednesday said banks should consider offering more short-term, small-dollar loans, inviting the industry to engage in lending it had once actively discouraged.

The new guidance from the Office of the Comptroller of the Currency (OCC) makes explicit that the regulator would be open to banks offering such short-term loans, inviting banks to compete with alternative financial products like payday loans.

"It's my viewpoint that consumers should have more choices," Comptroller Joseph Otting told reporters at a briefing. "What we're really trying to do is encourage banks to look at this segment and think about how they can offer products in that market segment."

The three-page bulletin from the OCC does not alter any existing regulations, but makes clear an about-face at the national bank regulator.

Under the Obama administration, the OCC had actively discouraged short-term lending by banks, issuing rules in 2013 that effectively drove banks away from that type of lending by imposing strict limitations on what customers could be extended that type of credit and on what terms.

The OCC rescinded those rules in 2017, and Otting said the purpose of Wednesday's bulletin was to make clear where the regulator now stands.

"This is the signal that they have been looking for," he said. "A lot of banks have been working on this, under the anticipation that we are going to release this bulletin."

These short-term loans, usually ranging from $300 to $5,000, are usually relied on by consumers to help cover short-term gaps in funds. In the wake of the 2013 rules, few banks offered these types of loans, leading borrowers in need of short-term lending or with a subpar credit history to seek out alternative options, like payday lenders.

Critics of such short-term loans argue it can trap borrowers in a cycle of debt as they struggle to pay off the debt, which is often accompanied by extremely high interest rates.

Otting argued on Wednesday that banks could be in a position to service a portion of those lenders and offer products that are more appealing to borrowers without placing excessive risk on banks.

"I am an advocate for figuring out a way to get national banks back into that space," he said.

Currently, rules established by the Consumer Financial Protection Bureau (CFPB) restrict the terms of loans with maturities of fewer than 45 days. Those rules will take effect in August 2019, but the CFPB, under new Republican leadership, has said it plans to revisit those restrictions.

The OCC said on Wednesday it wanted to work with the CFPB in that rewrite to ensure banks can offer short-term loans across a variety of maturities. (Reporting by Pete Schroederd; editing by Jonathan Oatis)