Last Thursday, the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation proposed guidance on deposit advance loans. The Federal Reserve Board declined to join the OCC and FDIC and instead provided a general warning that such loans need to be thoughtfully structured and lawfully provided. Comments on the OCC and FDIC proposals must be submitted no later than 30 days after their publication in the Federal Register.
The OCC and FDIC claim that they support efforts of banks to satisfy consumer need for small-dollar credit. However, the limits in the proposed guidance (including a prohibition against making more than a single deposit advance loan to a consumer in any two-month period) could have the effect of banning the deposit advance product.
The OCC and FDIC want banks to have written underwriting policies for deposit advance loans that include the following limitations:
• For the bank to be able to evaluate a customer’s deposit advance eligibility, the customer must have had a deposit account with the bank for at least six months.
• Customers with any delinquent or adversely classified credits should be ineligible.
• The bank should analyze the customer’s financial capability, giving consideration to the customer’s ability to repay a loan without needing to borrow repeatedly from any source, including re-borrowing, to meet necessary expenses.
• Each deposit advance loan should be repaid in full before a subsequent loan is made and banks should not offer more than one loan per monthly statement cycle. There should be a cooling-off period of at least one monthly statement after repayment of a loan before another loan is made.
• A customer’s deposit advance credit limit should not be increased without a full underwriting assessment and any increase should not be automatic but should be initiated by a customer’s request.
• The bank should reevaluate the customer’s eligibility and capacity for the product no less often than every six months and identify risks that could negatively affect the customer’s eligibility, such as repeated overdrafts.
The OCC and FDIC proposal came a day after the CFPB released its white paper on payday and deposit advance loans. That white paper contained considerable information about deposit advance loans. The CFPB suggested that there was a strong positive correlation between the incidence of overdrafts and deposit advance loans. However, it did not suggest that deposit advance loans cause overdrafts and did not report whether consumers taking deposit advance loans incurred more overdrafts in months when they used the product than in months when they were unable to obtain such loans due to bank-imposed cooling-off periods. One possible, if not likely, explanation for the correlation between the numbers of overdrafts and deposit advance loans is that consumers in danger of overdrafting their accounts have greater need of deposit advance loans.
As suggested in my prior post, nothing in the CFPB white paper (much less the OCC or FDIC discussion of deposit advance loans) justifies a rule that is tantamount to prohibiting deposit advance loans. Rather, the CFPB, OCC and FDIC seem willing to assume that heavy reliance on high-cost loans necessarily results in consumer injury.
In addition, while the CFPB’s white paper contains a promise of regulation, at least the CFPB has said that it does not intend to act until “further analysis of the short-term, high-cost loan market is complete.” In particular, the CFPB said in the white paper that it plans to “analyze the effectiveness of limitations, such as cooling-off periods, in curbing sustained use and other harms.” We find it surprising that OCC and FDIC chose not to wait until the CFPB completed that analysis before proposing a cooling-off period and other limits on deposit advance loans.
Bottom line: Opponents of advance deposit loans (including the CFPB, OCC and FDIC) have so far failed to make the case on the merits that these loans injure consumers.