The Consumer Financial Protection Bureau (CFPB) made big waves, and generated a lot of headlines, with news last week that the final draft of its short-term loan regulations had finally dropped like an anvil onto the heads of the short-term lending industry, particularly on segments dealing with products like payday and title lending.
By the CFPB’s own estimates, the regulations will reduce the number of short-term loans in the U.S. by more than half. Industry estimates project a drop in loan volume that will close the doors of more than 80 percent of short-term lenders in the U.S., most of which are smaller “mom and pop” operations. And, while that news — and the rush on both sides of the issue to begin sharpening their sticks in preparation for the next round of ugly feuding over it — certainly merited the level of interest it received, it did mean a separate, very interesting, piece of news was almost entirely unnoticed or reported (a mere footnote in the more headline-grabbing payday lending drama).
About an hour after the CFPB dropped its new rules on this topic, the Office of the Comptroller of the Currency (OCC) changed its own rules — and in a pretty notable way.
In 2013, the OCC had steered smaller banks rather sharply away from offering deposit advance products (DAPs), because DAPs were regarded by most regulators as banking’s version of a payday loan. The OCC has apparently reconsidered that guidance, perhaps motivated by the CFPB’s new rules.
“Today, I approved rescission of the OCC’s guidance regarding deposit advance products, effective immediately,” said acting Comptroller of the Currency Keith Noreika, adding that the new payday lending regulations “necessitates revisiting the OCC guidance.”
So, what is the revision, and what does it mean for everyone?
A Brief History of Small Banks, DAPs, the CFPB and the OCC
DAP loans are officially defined by the OCC 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.”
Until around 2013, DAPs were offered as a mainstream banking competitor to payday loans. Their main competitive advantage was twofold: They were faster, and one’s bank could instantly verify those direct deposits. But in 2013, the CFPB released a whitepaper that said DAP loans were so similar to their payday cousins as to have all of the flaws normally associated with such lending products.
“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,” said the CFPB. That fee structure, according to the CFPB paper, meant that payday loans and DAPs were both more likely to harm than help consumers.
Seven months later, and in response to the CFPB report, the OCC released its own “Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance.” Within it, the OCC prescribed actions national banks should take to avoid harming consumers when offering a DAP. The Federal Deposit Insurance Corporation (FDIC) issued mirror guidance for state chartered banks under their supervision, but those rules were found to be so costly and complicated in their implementation that banks simply gave up offering the products.
Such has been the case since late 2013.
The CFPB Has a Change of Heart about DAP
A funny thing happened to the CFPB on its way to publishing those draft regulations on short-term lending: It seems to have had a change of heart about bank-based, short-term lending. In fact, when announcing the short-term lending rules, CFPB executive director Richard Cordray called out a special carve-out for community banks and credit unions, provided they make fewer than 2,500 short-term loans each year and collectively account for less than 10 percent of total lending revenue.
“We have no intention of disrupting lending by community banks and credit unions,” Cordray said. “They have found effective ways to make small-dollar loans that consumers are able to pay without high rates of failures.”
But they aren’t, and they don’t. Mr. Cordray must have forgotten that short-term lending by community banks and credit unions had all but dried up because of the CFPB’s rules and the OCC’s guidance in 2013.
The OCC Rule Change
Follow the bouncing regs. The new CFPB rules, released last week, have a carve-out for small banks to pick up some of the short-term lending needs of consumers. And, in prepared remarks, those rules even suggest they have been doing that all along, via DAPs.
In 2013, the CFPB said that DAPs were harmful to consumers. The OCC issued guidance to banks to make them “less harmful.” Those requirements proved to be friction-filled and costly, and most, if not all, banks shut down their DAP programs.
In 2017, though, the OCC noted the 2013 guidance offered by the OCC “hurt the very consumers it is intended to help” and reversed it. Acting director of the OCC, Keith Noreika, said the guidance was overly focused on the elimination of a source of consumer funding useful to many consumers, and that the latest rules out of the CFPB were bound to create confusion for lenders.
“The OCC is concerned that banks are able to serve consumers’ needs for short-term, small-dollar credit,” he said, offering small, federally chartered banks principles they should follow to design “innovative, short-term, small-dollar loan products.”
That, Noreika said, should be guided by basic principles of prudent underwriting, risk management and compliance, as well as fair and inclusive treatment of customers. But, it might release new guidance for the segment in the future.
Confused? More importantly, though, will the rule reversal change anything? Hard to say, but so far experts say “no.” After all, the carve-out in the CFPB rule is narrow, and not many banks are small enough to thread the needle the CFPB has offered. The OCC guidance — while less restrictive than what it follows — is considered vague, and most experts think many smaller banks and credit unions will continue to avoid the segment rather than risk a costly compliance error. Also, the OCC only controls federally chartered banks. The FDIC controls the regulation of state-chartered banks, and so far they’ve offered no rule change or any indication of one coming in the future.
All of the newfound sympathy for the hardship of the payday loan customers — and tacit admission on both the CFPB’s and OCC’s part that the CFPB is turning off a huge and useful tap — is both interesting and a puzzle. Is it just coincidence that the OCC relented? Or is there more than meets the rules and regulatory eye?
There will be more to this story, so stay tuned.