OCC Encourages Short-Term, Small-Dollar Lending to Consumers

Written by: Nate Van Emon

On May 23, 2018, the Office of the Comptroller of the Currency (the “OCC”) issued a bulletin encouraging OCC supervised banks to offer short-term, small-dollar installment loans to subprime borrowers who have the ability to repay the loans. The OCC’s position represents a significant change in the role OCC supervised banks can plan in satisfying the short-term credit needs of consumers, including consumers with poor credit histories. The bulletin states that national banks and federal savings associations are uniquely positioned to offer responsible short-term credit products that align with the OCC’s core lending principles. Importantly, the bulletin also lists the following policies and practices that its banks should consider when offering these loan products:

  • Loan amounts and repayment terms that align with eligibility and underwriting criteria and that promote fair treatment and access of applicants. Product structures should support borrower affordability and successful repayment of principal and interest in a reasonable time frame.
  • Loan pricing that complies with applicable state laws and reflects overall returns reasonably related to product risks and costs. The OCC views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).
  • Analysis that uses internal and external data sources, including deposit activity, to assess a consumer’s creditworthiness and to effectively manage credit risk. Such analysis could facilitate sound underwriting for credit offered to consumers who have the ability to repay but who do not meet traditional standards.
  • Marketing and customer disclosures that comply with consumer protection laws and regulations and provide information in a transparent, accurate, and customer-friendly manner.
  • Loan servicing processes that assist customers, including distressed borrowers. To avoid continuous cycles of debt and costs disproportionate to the amounts borrowed, timely and reasonable workout strategies should be used.
  • Timely reporting of a borrower’s repayment activities to credit bureaus. Borrowers should have the ability to demonstrate positive credit behavior, build credit history or rebuild credit scores, and transition into additional mainstream financial products.

Given the significant market size of the short-term credit industry, the OCC’s bulletin will likely cause many banks to consider competing with “payday” and other non-bank lenders in the short-term, small-dollar lending market. However, deciding whether or not to offer these credit products will require banks to weigh the significant strategic, credit and compliance risks against the potential profitability of such products. The full text of the OCC’s bulletin is available here.

May 24, 2018 at 2:20 pm

FinCEN Issues FAQs Regarding CDD Requirements for Financial Institutions

Written by: Lauren Haahr

On April 3, FinCEN issued Frequently Asked Questions (“FAQs”) to assist covered financial institutions in understanding the scope of the “Customer Due Diligence (“CDD”) Requirements for Financial Institutions”, which were originally published on May 11, 2016 and amended on September 29, 2017.  The majority of the FAQs provide additional guidance regarding a financial institution’s obligations to collect, identify and verify information regarding the beneficial ownership of a legal entity customer.  For example, one FAQ addresses the means of identity verification that are sufficient to reliably confirm beneficial ownership under the CDD rule.  The FAQs also clarify that certain types of entities, such as sole proprietorships (individual or spousal), unincorporated associations, charities or non-profits, are not considered legal entity customers under the CDD Rules.  The full-text of the FAQs is available here.

April 4, 2018 at 1:52 pm

Proposed Amendments to Regulation J would Prevent Reserve Banks from Accepting Electronically-Created Items

Written by: Lindsay Harden

On March 15, the Federal Reserve Board published proposed amendments to Regulation J, which covers the collection of checks and other items by Federal Reserve Banks and funds transfers through Fedwire. The proposed amendments are intended to clarify and simplify certain provisions of Regulation J, remove obsolete provisions, and align the rights and obligations of sending banks, paying banks, and Federal Reserve Banks with the Board’s recent amendments to Regulation CC. The Board also proposes to amend Regulation J to clarify that terms used in financial messaging standards for Fedwire funds transfers do not confer or connote legal status or responsibilities.

In 2017, the Board published a final rule amending Regulation CC to reflect today’s virtually all-electronic check collection and return environment. Among other things, the amendments created a regulatory framework for the collection and return of electronic items (i.e., electronic images and electronic information derived from paper items). The Board is now proposing amendments to align Regulation J with the Board’s 2017 amendments to Regulation CC and incorporate certain provisions, including the Regulation CC warranties and indemnities, by reference.

The Board’s 2017 amendments to Regulation CC addressed the return requirements and indemnities that apply to “electronically-created items” (ECIs), which are check-like items created in electronic form that never existed in paper form. While the Regulation J amendments generally align with the Regulation CC amendments, they create an interesting disparity as it relates to electronically-created items. The Board proposes to clarify that electronically-created items are not “items” under Regulation J, meaning that ECIs cannot be processed by the Reserve Banks. According to the Board, this proposed clarification would not prevent parties that desire to exchange ECIs from doing so by agreement using direct exchange relationships or other methods not involving the Reserve Banks. Despite the availability of such alternative methods, the proposal would certainly affect the creation and acceptance of ECIs.

In addition, the Board is requesting comments on whether and to what extent it should consider amending Regulation J in the future to permit the Reserve Banks to accept ECIs. Thus, there remains some uncertainty about the nature of ECIs and the legal framework that applies to them.

The proposed rule is available here. Comments on the proposed rule must be submitted by May 14, 2018.

March 26, 2018 at 2:32 pm

Emerging Trends in Real Estate Finance Webinar

Join the Stinson Leonard Street real estate and financial services attorneys on Wednesday, February 21 for a discussion of the emerging legal trends in real estate finance. We will delve into recent developments regarding subordination agreements, the Colorado Commercial Property Assessed Clean Energy Program and UCC termination statements.

The webinar will wrap up with comedian and motivational speaker, Sam Adams presenting “Laughter Is Good Business” which will offer insights with great stories and helpful tips from his life’s experiences about how to maintain one’s sense of humor while succeeding in your business endeavors.

Program Highlights:

Colorado Commercial Property Assessed Clean Energy (C-PACE) Program
Stinson Partner Jason Maus and guest speaker Thomas Jensen from Global Grid Financial Group will discuss how the C-Pace Program is empowering building owners to modernize building energy infrastructure, lower energy costs, increase building comfort and asset value – with no upfront costs while enjoying positive cash flow. C-PACE projects advance public policy goals to create local jobs and reduce greenhouse gas emissions while creating additional growth in the Denver real estate market.

Recent Development Regarding Subordination Agreements
Perry Glantz and Deborah Bayles will review a recent Colorado Court of Appeals decision regarding a question of first impression concerning the effect of a subordination agreement on lien priorities. Siding with the majority of courts that have faced this question, the Colorado Court of Appeals applied the partial subordination approach to lien subordination analysis. Perry and Deborah will discuss the legal and practical implications of this decision and provide direction to insure your agreements align with your goals.

The World’s Greatest UCC Decision
Barkley Clark will discuss “The World’s Greatest UCC Decision.” The General Motors bankruptcy, dating back to the Great Recession of 2008, has generated an enormous amount of big-buck litigation. An inadvertent filing of a UCC termination statement by the secured lenders appeared to wipe out a $1.5 billion loan collateralized by GM plant assets around the country. Are the plant assets “equipment” or “fixtures” under the UCC? That is the $1.5 billion question.

Laughter is Good Business presented by Sam Adams

View the full agenda.


February 19, 2018 at 11:48 am

CFPB Issues Final Payday Loan Regulations; OCC Rescinds Prior Guidance

Written by: Greg Johnson


The Bureau of Consumer Financial Protection (CFPB) recently issued final regulations regarding short- and long-term loans that have balloon payments (such as payday loans). Lenders will be required to reasonably determine that consumers have the ability to repay the loans.  In addition, for those loans, as well as longer-term loans with an APR greater than 36 percent that are repaid directly from the consumer’s account, lenders will be prohibited from attempting to withdraw payment from a consumer’s account after two consecutive payment attempts have failed due to insufficient funds.

What loans are subject to the new regulation?

The regulation generally applies to a lender that extends credit by making “covered loans”. A “covered loan” is generally closed- or open-end credit extended to a consumer for personal, family, or household purposes, that satisfies one of the following: (1) the maturity date for the loan is within 45 days after the loan is made (“Covered Short-Term Loans”); (2) the consumer is required to repay the entire balance in a single payment more than 45 days after the loan is made or through at least one payment that is more than twice as large as any other payment (or, with respect to multiple advance loans that are structured such that paying the required minimum may not fully amortize the balance by a specified date or time, the amount of the final payment could be more than twice the amount of other minimum payments) (“Covered Longer-Term Balloon-Payment Loans”); or (3) the cost of credit exceeds 36% and the lender is authorized to withdraw payments from the consumer’s account.

Certain types of loans are excluded, including: (i) purchase money security interest loans (credit extended for the purpose of financing a consumer’s purchase of goods when secured by the goods purchased), (ii) home mortgages, (iii) credit cards, (iv) student loans, (v) overdraft services, (vi) wage advance programs, and (vii) certain no-cost advances.

Certain alternative loans are exempt if they satisfy the following requirements: (a) not open-end credit, (b) a term of not less than 1 month and not more than 6 months, (c) the principal is not less than $200 and not more than $1,000, (d) repayable in two or more payments, all of which are equal in amount and in equal intervals, and the loan amortizes completely during the term of the loan, and (e) no charges are imposed other than the rate and application fees permissible for Federal credit unions under applicable National Credit Union Administration regulations (12 CFR 701.21(c)(7)(iii)). The lender must also satisfy certain other diligence and documentation requirements.

Loans made by lenders who, on an annual basis, do not make more than 2,500 covered loans and not more than 10% of revenue derives from covered loans, are exempt.

How does a lender reasonably determine if a consumer will have the ability to repay?

For Covered Short-Term Loans and Covered Longer-Term Balloon-Payment Loans, the lender must reasonably determine that the consumer will have the ability to repay the loan according to the terms of the loan. The lender must determine that, based on estimates of the consumer’s basic living expenses and the calculation of the consumer’s debt-to-income ratio or consumer’s residual income, the consumer can pay all major financial obligations, make all payments under the loan, and meet basic living expenses during specified time periods.

Lenders must obtain certain certifications from the consumer and conduct certain other diligence in order to satisfy verification requirements. Lenders may not make a Covered Short-Term Loans or Covered Longer-Term Balloon-Payment Loans if, during the period in which the consumer has a Covered Short-Term Loan or Covered Longer-Term Balloon-Payment Loan outstanding and for 30 days thereafter, the new loan would be the fourth loan in a sequence of such loans.

A Covered Short-Term Loan that satisfies the following requirements is not subject to this requirement: (w) the principal amount is not greater than $500 (or lesser specified amounts for additional loans of a sequence), (x) the loan amortizes completely during the term of the loan and the payment schedule provides for the lender allocating a consumer’s payments to the outstanding principal and interest and fees as they accrue only by applying a fixed periodic rate of interest to the outstanding balance of the unpaid loan principal during every scheduled repayment period for the term of the loan, (y) no vehicle security is taken for the loan, and (z) the loan is not open-end credit. The lender must also satisfy certain diligence and disclosure requirements.  A lender may not make a Covered Short-Term Loan or a Covered Longer-Term Balloon Payment Loan during the period in which a consumer has an exempt Covered-Short Term Loans outstanding and for 30 days thereafter.

What payment transfers are prohibited?

For all covered loans, a lender may not attempt to withdraw payment from a consumer’s account after two consecutive payment attempts from that account have failed due to insufficient funds. This prohibition does not apply if the lender obtains the consumer’s new and specific authorization to make further withdrawals from the account or if the lender executes a single immediate payment transfer at the consumer’s request, in each case subject to the satisfaction of certain requirements set forth in the regulation.

If the lender is also the account-holder, an account-holding institution’s transfer of funds from a consumer’s account held at the same institution is not prohibited if it satisfies the following requirements: (A) the lender, pursuant to the terms of the loan agreement or account agreement, does not charge the consumer any fee, other than a late fee under the loan agreement, in the event that the lender initiates a transfer of funds from the consumer’s account in connection with the covered loan for an amount that the account lacks sufficient funds to cover; and (B) the lender, pursuant to the terms of the loan agreement or account agreement, does not close the consumer’s account in response to a negative balance that results from a transfer of funds initiated in connection with the covered loan.

Prior to making a withdrawal from a consumer’s account for a covered loan, the lender must provide notice to the consumer in form and content as required by the regulation.

Other requirements of lenders

For each Covered Short-Term Loan and Longer-Term Balloon-Payment Loan, the lender must provide certain information to registered information systems at or prior to the time the loan is made, any updates thereto, and at the time the loan ceases to be an outstanding loan.

A lender making covered loans must develop and follow written policies that are reasonably designed to ensure compliance with this regulation and be appropriate for the size and complexity of the lender and the nature and scope of lending activities.

A lender must retain evidence of compliance with the regulation for at least 36 months after the date on which a loan ceases to be an outstanding loan.

When does the regulation become effective?

The regulation will be effective 21 months after publication of the final rule in the Federal Register.  The full version of the final regulation may be found here.

Rescission of OCC Guidance

In 2013, the Office of the Comptroller of the Currency (OCC) released “Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products” (OCC Bulletin 2013-40). The deposit advance products at issue were the issuance of small-dollar, short-term loans or lines of credit that a national bank makes available to a customer whose deposit account reflects recurring direct deposits.  The OCC outlined its expectations for national banks with respect to these products, which included an assessment of the customer’s ability to repay, cooling off periods after a loan was paid off prior to the making of another loan, and periodic reevaluation of customer’s eligibility.  Purportedly in light of the release of the CFPB regulation, the OCC rescinded its guidance but did caution that the OCC may release guidance in the future.  The OCC’s release may be found here.

October 6, 2017 at 3:34 pm

Older Posts

Enter your email address to follow this blog and receive notifications of new posts by email.

Produced & Maintained By

Stinson Leonard Street Logo


A legal resource for Banking & Financial Services


%d bloggers like this: