WASHIINGTON–The Federal Housing Finance Agency has issued a notice of proposed rulemaking that seeks to establish a new regulatory capital framework for Fannie Mae and Freddie Mac (the GSEs). The proposed rule is a re-proposal of a plan originally published in July of 2018. The new proposal is now out for 60-day comment.
Separately, financial institution regulatory agencies, including NCUA, have issued principles for offering small-dollar loans in a responsible manner to meet consumers’ short-term credit needs.
Introducing the new proposal related to capitalizing the GSEs, FHFA Director Mark Calabria said, "This national health crisis has affirmed the importance of the Enterprises' mission to serve the American housing market during good times and bad. When credit dries up, low- and moderate-income households are hurt most. We must chart a course for the Enterprises toward a sound capital footing so they can help all Americans in times of stress. More capital means a stronger foundation on which to weather crises. The time to act is now."
The FHFA said the 2018 proposal remains the foundation of the re-proposal, with enhancements in the new proposal that seek to preserve the mortgage risk-sensitive framework of the 2018 proposal, while increasing the quantity and quality of the GSEs' regulatory capital and reducing the pro-cyclicality of the aggregate capital requirements. Together, the enhancements in the re-proposal ensure the safety and soundness of each GSE, and their ability to fulfill its statutory mission across the economic cycle, in particular, during periods of financial stress. The re-proposal is also a critical step toward responsibly ending the conservatorships.
NAFCU Response
In response to the new FHFA proposal, NAFCU Director of Regulatory Affairs Ann Kossachev said, “As our nation grapples with the economic impact of the coronavirus pandemic, strong capital requirements at the GSEs are as important as ever. The FHFA’s commitment to building a robust regulatory capital framework for the GSEs is an essential first step before releasing them from conservatorship.
“As housing finance reform efforts continue, we encourage the FHFA to work with Congress to ensure credit unions have guaranteed and equal access to the secondary market and receive fair pricing based upon loan quality, not volume. Additionally, we strongly support credit risk transfers and are evaluating the role of such transactions in our review of this rule. NAFCU will continue to engage on this issue, as the housing finance system is of great importance to our nation’s credit unions and their 120 million members.”
Small Dollar Loan Principles
Separately, four federal financial institution regulatory agencies, including NCUA, have issued principles for offering small-dollar loans in a responsible manner to meet consumers’ short-term credit needs. In response, the Pew Trusts said there is both “good and bad” to be found in the principles.
In addition to NCUA, the Federal Reserve, FDIC and the Office of the Comptroller of the Currency issued a statement saying they recognize the role responsibly offered small-dollar loans can play in helping customers 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 said they issued the “Interagency Lending Principles for Offering Responsible Small-Dollar Loans” to encourage institutions to offer responsible small-dollar loans to consumers for consumer and small business purposes.
The full statement can be found here.
Common Characteristics
According to the agencies, responsible small-dollar loan programs generally reflect the following characteristics:
- A high percentage of customers/members successfully repaying their small dollar loans in accordance with original loan terms, which is a key indicator of affordability, eligibility, and appropriate underwriting
- Repayment terms, pricing, and safeguards that minimize adverse customer outcomes, including cycles of debt due to rollovers or reborrowing; and
- Repayment outcomes and program structures that enhance a borrower’s financial capabilities.
The announcement followed a March 26 joint agency statement that encouraged banks, savings associations, and credit unions to offer responsible small-dollar loans to consumers and small businesses in response to COVID-19.
Response from Pew Charitable Trusts
In response, the Pew Charitable Trusts issued a statement praising parts of the new guidance, but warned that it does “not do enough to protect the millions of struggling Americans who otherwise turn to high-cost credit such as payday or vehicle title loans.”
In its statement, Pew noted the regulators’ position provides clarity for more banks to offer small-dollar installment loans or lines of credit at scale if they meet strong consumer protection standards. But Pew also expressed concern that the FDIC’s additional move to rescind prior guidance—which warned against harmful single payment loans—could open the door for some banks to issue deposit advance loans with three-digit APRs.
Saying it has conducted extensive research and had numerous conversations with regulators and bankers, Pew has recommended standards for what it said are new, scalable, and consumer-friendly small installment loans from banks.
Good News, Bad News
“The good news is that today’s announcement paves the way for banks to offer safe and affordable small installment loans and lines of credit at scale,” said Alex Horowitz, senior research officer with Pew’s consumer finance project. “The bad news is that the bank regulators’ action puts millions of consumers at risk of financial harm by rescinding guidance that warned against single payment deposit advance loans. Regulators must clearly prohibit deposit advance products, and banks should not expose consumers to balloon payment loans.
“So now banks have a critical choice to make. Today’s action makes it easier for banks to do right by their consumers and offer affordable small installment loans,” Horowitz continued. “But it also makes banks responsible for rejecting deposit advances, three-digit APRs, and partnerships with payday lenders.
“If banks begin offering affordable small installment loans in line with the strong safety standards recommended by Pew, millions of borrowers will remain in the banking system and save billions of dollars in interest and fees every year.”