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The issue of serving so-called "underbanked" borrowers has taken on a new urgency since regulators began cracking down on payday and certain other low-dollar, high-interest loans, prompting fears of a credit crunch for low-income consumers. The FDIC is looking at banking by mobile phone and other possible solutions as a way of bridging the gap.
April 24 -
The regulator of federal credit unions is promising to take steps to curtail high-cost, short-term loans, in the wake of tough action by banking regulators.
May 17 -
Two federal regulators — the FDIC and the OCC — issued guidance on deposit-advance products that establish strict underwriting standards for payday loans offered by banks and any related third-party vendor.
April 25
WASHINGTON It's rare to see any financial regulator these days praise an institution for offering products similar to payday loans.
But that's exactly what National Credit Union Administration Chairman Debbie Matz did last week when she commended a credit union in Ohio for offering small-dollar advances and other products for struggling depositors as it was seeking a significant charter expansion to reach 1.8 million people.
Her comments highlighted a key difference between the banking and credit union sectors, where many bankers feel their regulators are actively chasing them away from deposit advance products.
"I particularly like the planned target marketing into communities where the poverty rate is greater than 15%. Low-income residents will benefit from the services and products they have, which I think are really unique in some cases," Matz said at an April 24 meeting where the board unanimously approved Columbus, Ohio-based CME Federal Credit Union's expansion to serve eight counties. For example, "they offer small micro loans as alternatives to predatory payday loans for members who need access to short -term cash."
It likely helped that CME Federal Credit Union has a history of serving the underbanked with specialized products like a deposit account for young members, where the credit union rounds up transactions to the nearest dollar and puts the remainder in a savings account. But observers say if the roles were reversed and it involved a bank, federal bank regulators would likely be skeptical of any charter approval.
"I doubt very much whether any of the federal banking regulators in this environment would ever give a bank charter to a lender specializing in payday-like products," said Alan Kaplinsky, who heads the consumer financial services group at Ballard Spahr.
To be sure, one key difference between the industries is the yield banks and credit unions are seeking. Banks say added regulations make these products largely unprofitable, while that is less of an issue for non-profit credit unions.
Still, many banks have pulled back from deposit advance products partly because of heightened regulations after two banking agencies tightened rules on such products last year. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. released guidelines last April that set restrictions on deposit-advance products such as the number of times it can be rolled over.
At the same time, the Federal Reserve Board issued a statement cautioning banks about such products. The Consumer Financial Protection Bureau, meanwhile, has performed studies on payday-type loans and is expected to propose new rules for them later this year.
The OCC and FDIC guidance "prompted most banks in that space to get out of it, even though the regulators would like a product to be offered," Kaplinsky said. "But it would be a product that the banks couldn't make any money on."
The NCUA, too, has raised concerns about deposit-advance products. Last year, Matz told American Banker that she was clamping down on three federal credit unions that were found to be making high-cost, short-term loans. But in an interview last week, Matz said regulators need to encourage the development of short-term credit products within a safe framework in order to ensure consumers do not have to turn to less regulated payday lenders.
"By and large, the credit unions that are involved in alternatives to payday lending are much less costly to the consumer and have restrictions in place so that they [consumers] don't get into that cycle of debt that they do when they go into a traditional payday lender," Matz said. "So I do feel comfortable saying at the board meeting that I'm pleased that [CME Federal Credit Union] is offering an alternative to payday lending because in all likelihood, it's being done in a way that really responds to the negative aspect of payday lenders."
The NCUA has put restrictions in place, including saying such loans can be for no more than $1,000, cannot be rolled over, cannot extend beyond a six-month term and have an interest rate no higher than 28%. Matz said approximately 500 federal credit unions are offering such a product.
The FDIC and OCC guidelines, meanwhile, say the customer must show a financial capacity to pay the funds bank and already have a relationship with the bank for at least six months. They also require a "cooling off period" of at least one monthly statement cycle before another advance can be offered. Customers with any delinquent or adverse credits are "ineligible" for such products, the bank regulators said.
The FDIC has also promoted a pilot program designed to foment the creation of a deposit advance product for underbanked consumers, but it has not been widely adopted by banks.
Overall, credit unions appear to see their regulator as more accepting of payday-type products than bankers do. Some said bank regulators should ease up on the issue so that they do not create a competitive disparity between small banks and credit unions.
"There is certainly a competitive reality between credit unions and banks and I think what we're all trying to do is be responsive to the range of credit and cash management needs" in the respective communities, said Richard Riese, Senior Vice President for the Center for Regulatory Compliance at the American Bankers Association. "So whenever one competitor is enabled to afford a product that others have an interest in, and our members are precluded from providing a response, it harms consumers and creates barriers for the industry to be responsive to the needs of the members of their community."
Not all bankers feel they are disadvantaged, however. Some suggested that it's difficult to make a profit on deposit advance products so competing in that space would be too risky.
"It wouldn't bother me" if a credit union expanded into this space, said Joe Goyne, chairman and president at $272 million-asset Pegasus Bank in Dallas. "It's difficult for a community bank or credit union to do these on a one-off basis because I know what the costs are to get into it" and "structurally, it's totally different than how a bank is set up."
Bankers have struggled with the product partly because it is costly to do without having the high volumes needed to make a profit or charging triple-digit percentage yields, which regulators and policymakers are opposed to.
"In more case than not, credit unions are not really making money on these," said Mary Dunn, the deputy general counsel of the Credit Union National Association.
Still, Dunn is hoping that some of the industry pullback on deposit-advance products will ease once the CFPB issues rules for the entire sector.
"Even among credit unions, there may be some uncertainty as to what the CFPB is planning in the payday regulatory space," Dunn said. "That is why some credit unions and banks won't initiate or expand if in this space if they don't know what's going to happen" so "everybody may be keeping their powder dry."
