Weekly Fintech Focus

  • Bank regulators issue long-awaited guidance on offering small-dollar, short-term loans.
  • CFPB issues small-dollar lending no-action letter template.
  • CFPB provides guidance to people receiving pandemic relief on prepaid cards.
  • FinCEN issues guidance on COVID-19-related financial crimes.
  • Plaid announces the launch of a bank API development program to give banks, especially small banks, control over account data sharing with fintechs.
  • Libra Association hires former FinCEN director to be its general counsel.
  • FIS survey documents change in consumer banking behaviors from COVID-19.
  • Cashwire and Workday team up for automatic wire transfers.

Bank Regulators Issue Small-Dollar Lending Guidelines

Following an interagency statement in March that urged financial institutions to offer responsible small-dollar, short-term loans to consumers, federal banking regulators issued long-awaited guidance about offering small-dollar loans for consumer and small business purposes to consumers in light of the needs for short-term credit created by the current pandemic. The regulators’ research showed that 20% of U.S. households reported their income varied “somewhat” or “a lot” from month-to-month and roughly the same percentage of U.S. adults reported using alternative financial services like small-dollar loans through non-bank financial institutions. Further, research showed that 37% of U.S. adults would borrow, sell something, or not be able to pay if faced with a hypothetical $400 expense—and this was before the pandemic.

The guidance lays out a set of core lending principles for small-dollar, short-term loans to help financial institutions offer loans with “shorter-term single payment structures” safely and responsibly. Specifically, the regulator’s core lending principles include:

  • Loan products are consistent with safe and sound banking, treat customers fairly, and comply with applicable laws and regulations.
  • Financial institutions effectively manage the risks associated with the products they offer, including credit, operational, and compliance.
  • Loan products are underwritten based on prudent policies and practices governing the amounts borrowed, frequency of borrowing, and repayment requirements.

Since 2013, banks ceased offering certain small-dollar, short-term loans called deposit advances. In 2017, the OCC rescinded the guidance that prohibited deposit advances, and now the FDIC announced plans to rescind its version of the deposit advance guidance and rescind a financial institutions letter that encouraged banks to make loans at a rate no greater than 36%. Despite this roll back, the old version of deposit advances will likely not exist under this new guidance, as the new guidance encourages loans that are affordable and will be repaid successfully without reborrowing or rollovers.

The new guidance issued this week is not limited to deposit advances, however, and addresses many forms of lending from open-end lines of credit to longer-term installment loans. The guidance provides that:

  • Loans should be in amounts and repayment terms that align with underwriting criteria, promote fairness, support affordability and successful repayment.
  • Loans should be priced in a way that complies with state and federal law and with returns that reasonably reflect the bank’s risk and costs.
  • Loans should be underwritten using data sources that enable lending to non-mainstream customers and those impacted by the pandemic and other disasters. New technologies and automation can also help banks to underwrite loans at lower costs.
  • Marketing and disclosures for such loans should comply with consumer protection laws and be customer-friendly, clear, and conspicuous.
  • Loan servicing processes should assist customers to successfully repay these loans while avoiding debt cycles through rollovers or reborrowing. This includes timely and reasonable workout strategies or restricting single payment loans or open-end loans into installment loans.

CFPB Issues Small-Dollar Lending No-Action Letter Template

Just after the federal banking regulators (FDIC, OCC, and the Fed) issued guidance on making short-term, small-dollar loans, the Consumer Financial Protection Bureau (CFPB) took action to provide a path forward for similar types of loans. The CFPB announced that it was rolling out a new aspect of its no-action letter program, providing a no-action letter (NAL) template, which permits entities like service providers or trade associations to develop and have approved a NAL template that serves as the foundation for NAL applications from companies providing the type of service on the NAL template. One of these NAL templates relates to insured depository institutions offering small-dollar loans, and was issued in response to a NAL template application submitted by the Bank Policy Institute.

Under the NAL template for small-dollar loans, a bank would be permitted to offer a fixed-term, amortizing small-dollar installment loan paid back in fixed minimum payment amounts, or an open-end line of credit linked to a customer’s associated deposit account repaid in fixed minimum payments. The loans cannot exceed $2,500, and the repayment term must be more than 45 days but less than one year. The loan may not have balloon payments or permit rollovers, nor could the bank provide a borrower with a new loan to repay an outstanding balance on a prior loan. Underwriting of the loan must include the consumer’s transaction activity in his/her bank account—i.e., “cash flow” underwriting. Funds for the loan must be disbursed into the borrower’s deposit account within 3-5 business days of loan approval. The loan must be serviced by the bank and not a third party.

CFPB Provides Information on Receiving Pandemic Relief Funds on Debit Cards

For approximately 4 million eligible recipients, payments for pandemic relief will start arriving for some on prepaid debit cards. We previously discussed the CFPB’s interpretive rule last month regarding this type of distribution of relief funds. Now, the CFPB has released some informational videos about receiving and using these debit cards.

FinCEN Issues Guidance for Financial Institutions on COVID-19 Medical Scams

The Financial Crimes Enforcement Network (FinCEN) issued the first in its series of installments of guidance aimed at financial institutions regarding crimes related to the COVID-19 crisis. The guidance provides nearly two dozen red flag examples of illicit activities but notes that no single flag is dispositive.

FinCEN also identified a few common scams that are circulating in the economy, including: (1) fraudulent cures, tests, vaccines, and services, (2) non-delivery scams, and (3) price gouging and hoarding of medical supplies. To illustrate how the scams were carried out, FinCEN also provided a brief case-study overview of each the common scams discussed.

Industry Developments

Plaid Launches Service for Banks to Share Data with Fintechs

Plaid has been known for enabling fintechs to get access to consumer bank account data. This week, Plaid is launching Plaid Exchange, which will enable banks, especially small banks, to develop APIs to share account data with third parties. Plaid Exchange will significantly lower costs and the time necessary for a bank to bring an API solution to market and will put the bank in control of which data is shared and how.

Libra Association Hires Former FinCEN Director as General Counsel

The Libra Association hired Robert Werner to be its general counsel. Previously, Mr. Werner was the director of FinCEN and founder of GRH Consulting. He also served as the director of the Office of Foreign Assets Control (OFAC).

Mr. Werner stated that he is “grateful for the opportunity to join the Libra Association, as we work to transform the global payments landscape to empower billions of people.”

FIS Survey Shows Changes in Consumer Banking Behaviors from COVID-19

FIS surveyed 1,030 American consumers on how they conduct banking and payment activities during the COVID-19 outbreak and found that the pandemic has accelerated the digital transformation of banking and commerce. More than 45% of banking participants stated that they changed how they interact with their bank since the pandemic began, remaining consistent across all generations, with 31% of the participants also stating that they would continue to use online and mobile banking in the future.

Other findings from the survey include:

  • 40% of participants said they will shop online more in the future than in-store
  • 38% said they will rely on food delivery services and take-out more often
  • 65% said they cannot meet financial obligations for longer than 6 months (74% of Millennials and 76% of Gen Xers)

Notably, FIS stated that the survey findings are consistent with internal data that FIS has seen within its own client base. FIS also stated that it documented a two-fold surge in first-time users of mobile bank apps as well.

CashWire and Workday Team Up for Automatic Wire Transfers

IntegriDATA announced the new integration between its CashWire system and Workday Financial Management that will speed up B2B payments by allowing automatic generation of wire transfers. Under the new integration, Workday invoices go into the payment step of their workflow and then a corresponding wire is created with CashWire, complete with vendor details and invoice attachments included. Thereafter, the invoice’s status is updated until the payment is executed, at which point the system automatically closes the invoice.