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Conflicting regulatory actions could create opportunity in deposit advance

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Conflicting regulatory actions could create opportunity in deposit advance

Banks might want to reconsider deposit advance products.

Conflicting actions from the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency could allow banks to jump back into the fee-heavy, high-risk products. The CFPB on Oct. 5 issued its payday loan rule, which also covers deposit advance products. Within an hour, the OCC rescinded its guidance from 2013 on deposit advance products that had led to a near eradication of the product types among banks.

While banks will still need to abide by the CFPB's payday loan rule when offering deposit advance products, the OCC's rescission could encourage banks to offer the product to compete with nonbanks in the small-dollar credit space. The OCC co-issued the 2013 guidance alongside the Federal Deposit Insurance Corp. A spokesman for the FDIC declined to comment.

"I think it is a big opportunity for national banks and state-chartered banks if the FDIC follows suit," said Jeremy Rosenblum, a partner with Ballard Spahr.

According to the CFPB's final rule, "banks supervised by the FDIC and OCC ceased offering [deposit advance products]" after the 2013 guidance. The Federal Reserve Board never signed onto the final guidance, but the CFPB's rule noted that of two Fed-supervised banks that offered the product, one has eliminated the program and another offers a modified version.

On a call with news reporters, a CFPB lawyer said the regulator was unaware of the OCC's plans. "We got no heads-up on that," said Brian Shearer, an attorney for the CFPB. "I have no other comment."

The OCC, headed by Keith Noreika, an appointee of President Donald Trump, has previously butted heads with the CFPB. In September, Noreika issued a report stating the CFPB's arbitration rule would increase consumer costs.

"This [payday rule] reflects the increasing disharmony between the CFPB and the OCC," said Joe Valenti, director of consumer finance for the Center for American Progress, a liberal-leaning think tank.

The CFPB's Oct. 5 rule requires an ability-to-repay assessment for any payday loan or deposit advance products with a term of 45 days or shorter. The rule also applies to longer-term products if the annual interest rate is greater than 36% and the loan uses a "leveraged payment mechanism" that allows creditors to withdraw funds directly from the borrower's account. The rule also requires a 30-day cooling-off period after a borrower has secured three loans in rapid succession as the CFPB aims to prevent consumers from falling into a high-cost debt cycle.

While the banks' deposit advance products will generally have to abide by the same rules as payday lenders, the OCC's move allows banks to compete at all, and banks could be highly competitive. "The banks have some built-in advantages over the nonbank installment lenders," Rosenblum said.

Further, smaller depositories could be exempt from the rules altogether. The CFPB's final rule offers an exemption for credit unions that abide the "payday alternative loans" parameters outlined by the National Credit Union Administration. And community banks are exempt if they issue 2,500 loans or fewer per year and the revenue from those loans is less than 10% of total revenue.

Valenti and other consumer advocates applauded the CFPB's payday lending rule, while industry groups blasted the rule. Valenti said in a statement that the rule represented "a major step toward ending predatory practices that lead borrowers to disaster." The Community Financial Services Association of America, an industry group that represents the payday industry, said the rule would be "a tremendous blow" to Americans who use small-dollar loans.

Richard Hunt, president and CEO of Consumer Bankers Association, said banks would continue to avoid deposit advance products because of the restrictions in the CFPB rule. "The new rule still makes [deposit advance products] onerous and drives consumers to more costly, less regulated lenders," Hunt said in a statement.

There are other exemptions in the rule. The short-term loans do not need to meet the ability-to-repay test if the lender ensures there is a principal-payoff option, meaning any extensions are only allowed if the borrower pays off at least one-third of the principal. There are also exemptions for some fintech innovations such as some no-cost advances. Elevate Credit Inc., a new fintech focused on nonprime customers, issued a statement applauding the rule, saying "it encourages the kind of innovation we're doing" and would require "minimal or no changes to our business."