Banks: Deposit Advance Guidelines Will Help Payday Lenders, Hurt Consumers

WASHINGTON — Two regulators' decision to finalize restrictions for deposit-advance loans is furthering debate over whether banks will lose short-term credit business to unregulated lenders.

The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. issued final guidance on deposit-advance products Thursday that was substantively identical to their April proposal. To the industry's chagrin, the guidelines bar advances to a borrower before a prior one is repaid, and require a one-month "cooling off" period between successive loans to one consumer.

"It's not what the consumers want and it's not what they need. They frankly need to be able to use this product with much greater frequency than that," said Jeremy Rosenblum, a partner at Ballard Spahr. "My question is: Where is the evidence that repeated use on a net basis is bad for consumers? It's just not there, and they didn't bother to look for it. I find that very disturbing."

The guidelines, which the two agencies issued separately for their respective institutions, warn banks of compliance and safety-and-soundness risks from the products, which, they say, resemble traditional payday loans. Banks must enhance their assessment of borrowers' ability to repay deposit advance products, including an analysis of a customer's withdrawal and deposit patterns over a six-month period. One loan must be fully repaid before another is made, and a single borrower cannot receive multiple advances in a monthly statement cycle.

"Analyzing recurring" inflows and outflows "over at least a six-month period is appropriate because it would afford a bank the opportunity to use readily available information to determine whether the customer has the ability to repay the loan without needing to borrow repeatedly from any source, including re-borrowing, to meet necessary expenses," the agencies said.

But release of the guidance drew immediate warnings from industry representatives that consumers who want more frequent short-term credit will likely turn to nonbank payday lenders. Some also fear an unlevel playing field among banks, since state-chartered banks regulated by the Federal Reserve Board are not subject to the same standards of OCC and FDIC institutions.

"Today's guidance will force some bank customers to resort to more costly, less-regulated alternatives for short-term credit," said Nessa Feddis, the American Bankers Association's vice president and deputy chief counsel for consumer protection and payments. "Reducing availability and increasing the price of these short-term, small-dollar products eliminates an important resource that many customers value, particularly those with limited access to other forms of credit."

But in an interview, Comptroller of the Currency Thomas Curry said regulators are not seeking to erase deposit advance loans from the industry, but that banks need to recognize the risks of offering high-cost credit products.

"What the guidance does, I think, is really show these are the material, financial and compliance risk factors that you need to address if you're going to engage in this type of product. It's up to the industry to figure out a way to find a product that fits under that framework," Curry said. He added that a more affordable, small-dollar credit product offered by a bank would not be subject to the same restrictions. "It would be treated and looked at totally differently."

FDIC Chairman Martin Gruenberg echoed that, saying in a press release that the guidance "aims … to encourage institutions to meet the demand for small-dollar loans through affordable products that are prudently underwritten and designed."

Yet observers also focused attention on an apparent difference of approach among the bank regulators, since the two agencies issuing the guidance typically act in concert with the Fed on crafting regulatory restrictions. Even though the central bank followed the OCC and FDIC's April proposal with an advisory that highlights risks from offering deposit advance products, the state-chartered members of the Fed system that offer such loans do not have to follow the more prescriptive measures.

The scope of the guidance, however, is expected to be limited since only a handful of banks today even offer the product. OCC-regulated institutions known to offer it include Wells Fargo (WFC), U.S. Bank (USB), BOK Financial (BOKF) and Guaranty Bank in Milwaukee. Regions Financial (RF) and Fifth Third Bank (FITB) also offer deposit advance products, but they are Fed-regulated and not covered by the guidance.

Feddis said lawmakers enacting the 2010 Dodd-Frank Act, which created the Consumer Financial Protection Bureau, had sought to bring about equal regulatory treatment for institutions offering consumer credit products.

"Today's action will enable the proliferation of different rules for different banks and financial institutions, which is contrary to what Congress intended when it created the CFPB," she said.

The final guidance did include certain amendments, including clarification that banks can limit an inflow-outflow analysis to the account a borrower uses to pay off the loan — as opposed to looking at other accounts as well — and the required enhanced underwriting does not oblige banks to use credit reports. Responding to concerns of state regulators, the two federal agencies also clarified that the guidance is not meant to preempt state usury laws. Yet other provisions remained unchanged.

Under the guidance, the length of a customer's relationship with the bank should be a factor in underwriting, and borrowers that are delinquent on other types of loans should be ineligible from getting a deposit advance. In addition to credit risk of borrowers not being able to repay, the guidance warned of the "reputation risk" institutions face from "negative news coverage and public scrutiny" of deposit advance products, as well as risks from partnering with third parties in the design of the products. It also urged banks to be aware of certain consumer protection laws that could govern a deposit advance loan, such as the Truth in Lending Act and the Electronic Fund Transfer Act.

Consumer advocates, who have warned regulators about banks offering payday loan-like products, were supportive of the final restrictions.

"This is a key step in recognizing the predatory nature of loans with triple-digit interest rates," the Center for Responsible Lending said in a press release.

But Richard Hunt, president and chief executive officer of the Consumer Bankers Association, said the guidance overlooks the need of lower-income consumers for credit who would otherwise go to a less regulated institution if banks stopped offering deposit advance.

"The OCC's decision will severely impact a large percent of Americans living paycheck-to-paycheck, who may not have the means to provide for their families in times of financial hardship," Hunt said. "Without this well regulated and popular product, consumers will be sent into the arms of under regulated, or in some cases unregulated, payday lenders, pawnshops and others outside the traditional banking system looking to make short-term gains off of cash-strapped consumers."

Rachel Witkowski contributed to this article.