FINANCIAL REGULATION

With Volcker Rule in Rearview Mirror, FDIC Chair Says Fintech, Small-Dollar Lending on Her Agenda

Jelena McWilliams is considering a rule on ‘true lender’ doctrine

Chairman of Federal Deposit Insurance Corp. Jelena McWilliams listens during a Financial Stability Oversight Council meeting October 16, 2018 at the Treasury Department in Washington, D.C. (Alex Wong/Getty Images)
June 26, 2020 at 5:39 pm ET

With bank regulators closing the chapter on Volcker rule changes, Federal Deposit Insurance Corp. Chairman Jelena McWilliams is turning her attention to financial technology and small-dollar lending, which she said could help underbanked and unbanked consumers access the banking system. 

Banking regulators this week finalized some changes to the Volcker rule that allow banks to invest in venture capital funds and  removed the interaffiliate margin requirement for swap trades. In an interview with Morning Consult on Friday, McWilliams said that, at least for the time being, the agency has no plans to make further changes to the Volcker rule and other regulations created as a response to the financial crisis.  

“I think we’re in a good place. We need to let this play out,” she said. 

Now, with Brian Brooks, the new acting head of the Office of the Comptroller of the Currency, promising to address some of the big questions in the fintech industry, McWilliams is also considering taking up these issues. 

On one key fintech issue — the “true lender” doctrine — McWilliams said the FDIC plans to craft a rule that would be designed to help clarify when a bank is the “true lender” on a fintech loan and when a bank is acting as a false front to allow a fintech company avoid a state’s interest rate limits on online lenders. 

Brooks, in a June 11 webinar at the Online Lending Policy Institute, also said that the OCC will soon propose a rule on the “true lender” doctrine. 

In addition to fintech, McWilliams also said that she’s “not done” with issues concerning small-dollar lending at banks. 

At the start of the coronavirus pandemic, the OCC, Federal Reserve, FDIC and other regulators released guidance allowing banks to provide small-dollar loans, a reversal from 2013 guidance from the FDIC and OCC that had discouraged the practice. Currently, payday lenders often serve the needs of low-income consumers who have little or no credit at a bank, but advocacy groups say payday lenders can trap consumers in a cycle of high-interest debt. 

McWilliams said more can be done to encourage banks to enter the small-dollar market, which she said could help consumers avoid going outside the banking system to get a loan.

Banks still don’t stand to make a lot of money from small-dollar loans, McWilliams said, and regulators could still do more to make it less risky for banks to offer these loans. She declined to give specific steps regulators could take. 

McWilliams said small-dollar loans could be used to attract new customers, who usually cost banks a large amount of money to draw them from other banks. 

“How do we get consumers, especially the ones who dropped out of the banking system, to understand the value proposition of being in it?” McWilliams said.

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