Small-dollar loans pushed in coronavirus economy for consumer relief

Most banks stopped making smalls loans after the 2008 financial crisis

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As the federal government and related agencies come together to generate economic relief measures amid substantial economic harm that has resulted from the coronavirus crisis – banks are now being encouraged to offer specific loans to their retail and small business customers.

In a letter to the banking industry on Thursday, agencies, such as the Federal Reserve and the Federal Deposit Insurance Corporation, pushed banks to offer what are known as small-dollar loans to customers subject to coronavirus-related financial need.

“The agencies recognize the important role that responsibly offered small-dollar loans can play in helping customers meet their needs for credit due to temporary cash-flow imbalances, unexpected expenses, or income short-falls during periods of economic stress or disaster recoveries,” the letter read.

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Small-dollar loans -- typically between $300 and $5,000 -- are taken out by consumers to cover expenses during times of financial hardship.

They can be issued in a variety of forms, including open-end lines of credit, closed-end installment lines or appropriately structured single payment loans. They are typically short-term and repaid through a schedule of equal increments.

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Large financial institutions can offer safe, affordable terms for consumers when compared with alternative options like payday lenders. However, they had largely withdrawn from the market after the financial crisis.

In 2018, the Office of the Comptroller of the Currency issued guidance giving regulatory assurance to large financial institutions regarding their ability to offer such loans.

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During an average year, U.S. consumers take out nearly $90 billion in short-term, small-dollar loans, according to the OCC.

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