On May 20, 2020, four of the five primary federal financial regulators issued principles to encourage supervised banks, savings associations, and credit unions to offer responsible small-dollar loans to customers for consumer and small business purposes.
The statement from the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC) and National Credit Union Administration (NCUA) recognizes the important role that responsibly-offered small-dollar loans can play in helping consumers meet their ongoing needs for credit from temporary cash-flow imbalances, unexpected expenses, or income shortfalls, including during periods of economic stress, natural disasters, or other extraordinary circumstances such as the public health emergency created by COVID-19.
The agencies believe that well-designed small-dollar lending programs can result in successful repayment outcomes that facilitate a customer’s ability to demonstrate positive credit behavior and transition into additional financial products. The new interagency principles state that financial institutions can offer small-dollar loans safely and responsibly by offering programs that reflect these (among other) characteristics:
- A high percentage of customers successfully repaying their small dollar loans in accordance with original loan terms, which is a key indicator of affordability, eligibility, and appropriate underwriting.
- Programs could include effectively managed deployment of innovative technology.
- Such programs can be implemented in-house or through effectively managed third-party relationships, such as fintech partners.
- Analysis that uses alternative data sources, such as deposit account activity, to assess a customer’s creditworthiness and to effectively manage credit risk. This analysis may facilitate sound underwriting for credit offered to non-mainstream customers or customers temporarily impacted by natural disasters, national emergencies, or economic downturns.
- Underwriting can also use effectively managed new processes, technologies, and automation to lower the cost of providing responsible small-dollar loans.
“We applaud the four federal financial regulatory agencies for their guidance in providing responsible small-dollar loans, given the urgent need for these types of loans even prior to the onset of the COVID-19 crisis,” said Christopher Leonard, CEO of Velocity Solutions. “We’ve been advocating for these principles at Velocity Solutions for the past several years. We pioneered a new form of short-term, small-dollar lending to provide a vastly less expensive alternative to high-priced loans. Our process automates the underwriting, documentation and funding of these loans using alternative data in the underwriting process, which opens credit accessibility to borrowers that might not otherwise qualify.” Leonard continued, “Velocity’s philosophy encourages fully-amortizing installment loans rather than single-payment loans so that borrowers can get caught up financially and not ensnared in a cycle of debt. And our solution is fully compliant with the guidelines set by the primary federal financial regulatory agencies.”
To learn more about Velocity’s digital lending solutions, and how they are helping financial institutions to provide small-dollar loans to their account holders in accordance with the new interagency guidelines, please visit: https://myvelocity.com/covid19.
About Velocity Solutions, LLC
Founded in 1995 and servicing the transaction accounts of over 30 million consumers and business owners, Velocity Solutions is the leading provider of revenue-driving solutions for community banks and credit unions. Our Velocity Intelligent Platform™ powers all of Velocity’s solutions, using machine-led intelligence that delivers powerful analytics and drives revenue, deposits and loans to our client financial institutions.