Just one hour after the Consumer Financial Protection Bureau (CFPB or Bureau) issued its Final Rule for Payday, Vehicle Title and Certain High-Cost Installment Loan (CFPB Rule), the Office of the Comptroller of the Currency (OCC) rescinded its "Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products" (OCC Guidance), issued in November 2013. The OCC Guidance addressed safe and sound banking practices and consumer protection in connection with deposit advance products (DAP). With this step, and the CFPB's action the same day, life has become more complicated for banks.
What is a DAP?
The OCC Guidance described a DAP as "a small-dollar, short-term loan or line of credit that a bank makes available to a customer whose deposit account reflects recurring direct deposits. The customer obtains a loan, which is to be repaid from the proceeds of the next direct deposit."
In the CFPB Rule, the Bureau discusses DAPs and compares them to payday loans, finding many similarities. According to the CFPB, DAPs "generally involved a line of credit offered by depository institutions as a feature of an existing consumer deposit account with repayment automatically deducted from the consumer's next qualifying deposit." The CFPB also noted that "DAP fees, like payday loan fees, did not vary with the amount of time that the advance was outstanding but rather were set as dollars per amount advanced." Typically, the average "DAP usage was 12 days yielding an effective APR of 304%."
OCC Statement on Rescission
In announcing the Rescission of the OCC Guidance, Acting Comptroller Keith Norieka explained that "in ways, the Guidance may even hurt the very consumers it is intended to help, the most marginalized, unbanked and underbanked portions of our society." He also noted that "the continuation of the OCC's Guidance would subject national banks and federal savings associations to potentially inconsistent regulatory direction and undue burden as they prepare to implement the requirements of the CFPB's final rule."
A CFPB white paper published in April 2013 found that payday loans and DAPs were similar and concluded that consumers were more likely to be harmed than helped by these products. The OCC Guidance was issued seven months later and prescribed actions that national banks should take to avoid harming consumers when offering a DAP. These actions were so difficult to implement that, according to the discussion in the CPPB Rule, "following the issuance of the FDIC and OCC Guidance, banks supervised by the FDIC and OCC ceased offering DAP." Norieka's observance that the Guidance "hurt the very consumers it is intended to help" focused on elimination of a source of consumer funding that was useful to many consumers.
Comptroller Norieka also is correct in concluding that maintaining the Guidance "would subject national banks and federal savings associations to potentially inconsistent regulatory direction and undue burden." Under the official interpretations in the CPFB Rule, DAPs are considered a covered loan under section 1041.3(b). That section states that a DAP is a covered loan if it is "a loan or advance [that] is substantially repayable within 45 days of consummation or advance if the lender has the right to be repaid through a sweep or withdrawal of any qualifying electronic deposit made into the consumer's account within 45 days of consummation or advance."
What's a Bank to Do?
If DAPs are similar to payday loans, are national banks now free to offer them without any regulation by the OCC and no oversight from the CFPB so long they comply with the exclusionary provisions of the CFPB Rule by making fewer than 2,500 loans a year and deriving less than 10% of their revenue from such loans? Will the elimination of the onerous provisions described in the OCC Guidance now free banks to offer payday-type loans and not be covered by the provisions of the CFPB Rule, assuming it makes commercial sense to offer this product to so limited a number of customers?
Banks beware! Just because the OCC Guidance has been rescinded and a bank might be excluded from the CFPB Rule if its DAP offerings fall within the numerical ceilings, the OCC will still hold banks accountable in examinations for compliance with all prudential and consumer laws and regulations. As the Comptroller warned:
"In providing deposit advance products and other short-term, small-dollar loans, banks should be guided by basic principles of prudent underwriting and risk management as well as fair and inclusive treatment of customers. Banks should consider the following core principles that are reflected in existing OCC Guidance when offering short-term, small-dollar loan products:
- All bank products should be consistent with safe and sound banking, treat customers fairly, and must comply with applicable laws and regulations.
- Banks should effectively manage the risks associated with the products they offer, including credit, operational, compliance, and reputation.
All credit products should be underwritten based on reasonable policies and practices, including guidelines governing the amounts borrowed, frequency of borrowing, and repayment requirements."
Whereas under the OCC Guidance, banks were provided specific parameters in making DAPs, now they will be judged by the subjectivity of their banking examiners as to whether or not a loan was made under the "basic principles of prudent underwriting and risk management as well as fair and inclusive treatment of customers." It is questionable whether this change will be sufficient to encourage banks once again to extend small-dollar credit to those who need it most, particularly with the constraints imposed by the CFPB Rule, forcing a choice between keeping the numbers of loans down or compliance with all the requirements that will apply to payday lenders.