The Center for Financial Services Innovation recently released a manual outlining guiding principles for financial institutions and other lenders seeking to develop or implement small-dollar credit lending programs.
According to the CFSI, in 2012, consumers spent $41.2 billion on small-dollar credit products such as payday loans, overdraft protection, deposit advance and auto title loans.
“Well-designed credit products have the potential to help people turn a momentary credit need into an opportunity to improve their financial well-being,” CSFI said in the guide. “Voluntary standards for quality in the small-dollar credit marketplace can facilitate innovation by providing a roadmap for lenders who seek to meet consumers’ credit needs in a responsible and sustainable way.”
The guide is based on four core principles: embracing inclusion while responsibly expanding access, building trust by developing products that deliver clear and consistent value, promoting success by driving positive consumer behaviors and creating opportunities for upward mobility.
The guide stresses sound underwriting practices to determine with confidence a borrower’s ability to repay, including the borrower’s relationship with the financial institution, outstanding debt and information on income and expenses.
Payment structuring suggestions in the guide include allowing reasonable grace periods, balancing the loan and length of repayment to ensure payments are affordable and setting default minimum payments to include principal and interest to encourage borrowers to pay more than the minimum payment.
Additionally, the guide encourages lenders to avoid relying on penalty fees and interest rates to drive profit, suggesting instead that lenders should incentivize and reward positive borrower behaviors by lowering costs and/or increasing benefits over time.
The guide also recommended that lenders disclose the full cost of the loan in simple, easy-to-understand language to allow borrowers to make better and more informed financial decisions.
“CFSI’s vision for the future of the small-dollar credit marketplace is that consumers will have a variety of high-quality options that meet their small-dollar credit needs and support them on a path to long-term financial health,” CFSI said. “For this vision to become reality, lenders will need to develop and pilot new models for delivering small-dollar credit that meet the standards outlined in this guide.”
A full copy of the guide can be found on the CFSI website.