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Despite favorable ruling, community banks may tread lightly with 'payday' loans

The Consumer Financial Protection Bureau has issued some stricter rules regarding payday loans, and although many community banks are exempt, some in the industry are skeptical the ruling will lead those banks to do more lending in that space.

The CFPB in early October finalized the rule that would impose new protections on payday loans, auto title loans, deposit advance products and certain high-cost installment and open-end loans. Originally proposed in June 2016, the rule requires lenders to conduct a "full-payment test" that would evaluate a borrower's ability to repay the lender while still meeting basic living expenses and major financial obligations.

But the ruling exempts many of the short-term, small-dollar loans that many community banks already engage in from ability-to-repay verification and other new requirements.

Independent Community Bankers of America President and CEO Camden Fine said in a release that the ICBA appreciates that the rule views community banks as responsible lenders that work with their customers to establish loan terms that reflect their customers' financial history and ability to repay.

He said that while ICBA had not fully reviewed the 1,700-page rule, it was clear the CFPB has exempted thousands of community banks from the full-payment test or the principal-payoff option, which was consistent with the ICBA's recommendation. Any lender that makes 2,500 or fewer covered short-term or balloon-payment small-dollar loans per year and derives no more than 10% of its revenue from such loans is excluded from these requirements, Fine said.

"This exemption will enable community banks the flexibility to continue providing safe and sustainable small-dollar loans to the customers who need it most," he said.

Joe Maloney, an analyst at Banks Street Partners said in an interview that most banks in the last few years have become extremely wary of anything that smacks of payday lending. They are reluctant to make those kinds of loans and are often even reluctant to do business with other companies that make those loans. "That's partly because of the advent of the CFPB but also because, really, the whole regulatory corpus has seemed to regard payday lending as unsavory," he said.

Maloney said banks are highly regulated and most of them are not inclined to jeopardize their relationship with their regulators — and thereby put their core businesses at risk — to chase a few marginal dollars from types of risky consumer lending that they perceive as out of favor with regulators. But regulatory attitudes may be changing, and this new rule seems to go out of the way to give banks and credit unions special leeway to offer short-term consumer loans.

"But I still don't see banks rushing into the market to compete with payday and title lenders," Maloney said. "Obviously, there's an argument to be made that banks steering clear of the space ends up making credit less available to consumers and can, ironically, force them into riskier products. For now, the perceived regulatory risk still probably exceeds the potential rewards."

The rule also limits lenders' ability to push distressed borrowers into reborrowing or refinancing the same debt by installing caps on the amount of short-term loans that can be made in succession.

Andover, Ohio-based Andover Bank does not offer payday alternative loans in part because there has not been much demand for such a product, President and CEO Stephen Varckette said in an interview. Instead, the bank offers its customers personal lines of credit that also serve as overdraft protection for their checking accounts. Varckette said it is a popular product with an attractive rate for an unsecured product. The loan amounts typically range from $1,000 to $10,000, he said.

Andover also offers unsecured term loans, unsecured lines of credits and credit cards that are typically used by customers experiencing short-term cash flow issues. "As a community bank, we also try to serve as their financial counselor and potentially suggest additional products and services that may benefit them over the long term," he said.

Varckette said Andover has seen strong asset quality with all lines performing well of late. So, would it consider wading into the payday alternative pool?

"As a community bank, I can see the possibility of us offering alternative, small-dollar loans to our customers at some point in the future," he said. "But I believe payday lending isn't in the customer's best interest, and that type of debt is a symptom for a larger problem."