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OCC Bulletin on Installment Lending Outlines Principles of Reasonable Pricing and Affordability

Wednesday, May 23, 2018

Banks and Agency Have Responsibility to Uphold These Principles

WASHINGTON, D.C. – Today, the Office of the Comptroller of the Currency (OCC) rolled out guidance addressing installment lending with repayment periods ranging from two to twelve months. The guidance encourages banks to make these loans while cautioning banks to adhere to principles of reasonable pricing and affordability. It also reiterates the agency’s longstanding opposition to “rent-a-charter” arrangements used by high-cost lenders to evade state usury law. The OCC’s enforcement of these principles and responsible practices by lenders will be critical to the effectiveness of these guidelines. The Center for Responsible Lending (CRL) calls on banks, and the agency, to apply these principles in a way that ensures installment loans are affordable and reasonably priced.

CRL and several consumer and civil rights organizations across the country have urged financial regulators to ensure bank loans do not exceed a cost of 36% APR. In addition, the groups have urged regulators to require banks to determine whether borrowers have the ability to repay their loans based on an assessment of the borrower’s income and expenses. Otherwise, banks may lend based on their ability to seize repayment directly from the customer’s next incoming deposit—meaning the bank is repaid but the customer is left without sufficient funds to meet other obligations and expenses, leading to a cycle of unaffordable debt.

"The OCC’s guidance underscores that costs must be reasonable and loans must be affordable,” said CRL Senior Policy Counsel Rebecca Borné. “Adherence to these principles means that the annual percentage rate on bank loans should not exceed 36%, consistent with what the Military Lending Act requires for loans to military servicemembers and with the law in many states. In addition, banks should only make loans that borrowers have the ability to repay while meeting other expenses. That means not relying on incoming deposits alone, or ‘payment-to-income’ ratios, to determine loan eligibility.”

The guidance also reiterates the OCC’s longstanding opposition to “rent-a-bank” arrangements, whereby banks partner with nonbanks and nonbanks rely on bank preemption privileges to circumvent state usury laws.

“We appreciate the OCC’s confirmation of its longstanding opposition to rent-a-bank shams,” said Borné.

The guidance explicitly does not apply to very short-term loans of 45 days or less that are covered by the Consumer Financial Protection Bureau (CFPB)’s payday lending rule. That rule establishes an ability-to-repay requirement, based on income and expenses, for payday and car title loans, including 200%-300% interest “deposit advance” payday loans that a handful of banks were making until 2013. These loans were structured just like loans from payday storefronts and led to the same debt trap. The CFPB rule has a compliance date of August 2019, and the Bureau should allow that rule to go into effect as scheduled. In the meantime, the OCC should reinstate its 2013 guidance, which it rescinded last October, that advises banks to determine ability to repay on such loans. Last fall, more than 100 organizations sent an open letter to banks urging them to pledge that they will not start making payday loans.

For more information, or to arrange an interview with a CRL spokesperson on this issue, please contact Carol Hammerstein at carol.hammerstein@responsiblelending.org.