National banks now have the backing of a key regulator to ramp up offering short-term, small-dollar installment loans, according to a May 23 bulletin from the Office of the Comptroller of the Currency.

The guidance encourages banks to offer installment loans to consumers with nonprime credit scores and higher debt-to-income ratios, but who still have the ability to make payments. Such loans differ from payday loans in that they typically have payback periods ranging from two to 12 months with equal amortizing payments.

The bulletin is intended to be the signal national banks have been waiting for to return to...