Banks Aren’t Rushing to Offer Deposit Advance Loans

By Jeff Bater

Banks that previously offered deposit advance products aren’t rushing to reenter the market following a policy shift last month by federal regulators.

Last month, the Office of the Comptroller of the Currency (OCC) voided 2013 guidance that had prompted six banks to pull out of the deposit advance market amid fears of regulatory scrutiny by examiners. In light of the reversal, one of the six—U.S. Bancorp—is “looking at a number of different products in that category and that may be something we’d pursue over the next few quarters,” Chief Executive Officer Andy Cecere said in an Oct. 18 earnings call.

The other banks aren’t following suit. Fifth Third Bank and Wells Fargo remain non-committal while Regions Bank has no plans to reintroduce a deposit advance product. The Bank of Oklahoma and First Citizens Bancshares didn’t respond to requests for comment.

Continued uncertainty over the Consumer Financial Protection Bureau’s (CFPB) new regulations of short-term, small-dollar loans—issued the same day as the OCC’s Oct. 9 action—means banks are unlikely to resume offering deposit advances any time soon, David Pommerehn, associate general counsel and vice president at the Consumer Bankers Association (CBA), told Bloomberg Law.

“That doesn’t really provide a whole lot of solace for banks that might want to jump in just because the OCC rescinded their guidance,” Pommerehn said. “You’re not going develop a platform or do the work that is necessary to offer that product when you know the CFPB rule would essentially kill it in the future.”

Portrayed as Payday Loans

The bigger risk is reputational, since deposit advance loans are often portrayed as payday loans, which Pommerehn says isn’t the case.

Deposit advances are lines of credit offered to bank customers as a feature of an existing account. Advances are repaid automatically when the next qualifying electronic deposits are made to the consumer’s account.

Deposit advance customers have a pre-existing relationship with the bank providing an advance on their next paycheck, which means the lender has a better sense of what customers can afford, Pommerehn said.

Deposit advance loans had mandatory cooling-off periods and banks offered the advances at rates lower than rates charged by payday lenders, Pommerehn said, adding that some banks were offering installment options for deposit advance customers who couldn’t pay off the debt.

But a 2013 CFPB analysis found both payday and deposit advance lenders don’t do enough to determine whether a prospective borrower could pay back the debt.

Borrowing costs for deposit advances are high, The Center for Responsible Lending said in a 2013 study. The fees and the brief term of the products translate to an annual percentage rate (APR) ranging from 225 percent to 300 percent, according to CRL.

The CRL found that borrowers took out multiple loans annually and carried debt at least part of six months a year. The median number of loans was 13.5, but the average was far higher, 19, because more than one-third of borrowers had more than 20 loans.

One Less Cook in the Kitchen

The OCC said its withdrawal of its guidance on deposit advances was necessary because its continuation would subject banks to “undue burden” as they prepare to implement the CFPB’s payday rule. “If the CFPB wants to regulate in that area, there’s no reason to have two cooks in that kitchen,” Acting Comptroller Keith Noreika told reporters at a conference Oct. 19 in Washington.

Jeremy T. Rosenblum, partner at Ballard Spahr LLP, told Bloomberg Law he interpreted the OCC’s action as inviting banks “back in” to the deposit advance market. He said banks can structure the advance products within the CFPB rule’s parameters or shape offerings as longer-term credit over a period exceeding 45 days, “at which point they’re totally outside the rule.”

U.S. Bancorp has been the only bank to express a strong interest in reentering the market. A spokesman for Fifth Third Bank said it is reviewing the matter and hasn’t decided “what small-dollar lending product we’ll end up with.” A Wells Fargo spokesman was also non-committal.

Regions Bank said it currently has no plans to reintroduce a deposit advance product. “It’s clear that consumers have a need for small-dollar loans and we continue to consider how to best meet the financial needs of our customers and communities in a prudent way,” a spokeswoman said.

Jaret Seiberg, an analyst at Cowen & Company, said traditional deposit advance products probably don’t work within the current regulatory regime. Still, the OCC’s withdrawal of the 2013 guidance is meaningful.

“It removes a road block that would have prevented banks from returning to this market if the CFPB changes the payday rule,” he wrote in a research note.

Republican lawmakers, successful in overturning the CFPB’s arbitration rule using the Congressional Review Act (CRA), could try to erase the payday rule in similar fashion. The term of the current agency head, Richard Cordray, expires July 2018. A new CFPB director appointed by President Donald Trump could alter the rule, but would have to follow the Administrative Procedure Act. “It’s very difficult to publish a rule, then go back and rescind or amend that,” Benjamin Diehl, special counsel at Stroock & Stroock & Lavan, told Bloomberg Law. “The two most likely courses are either banks looking to innovate with new products that would comply with the payday rule but that might otherwise have been prohibited under the guidance, or seeing what happens in Congress under the CRA.”

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com

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