One of the primary reasons that I enjoy the client alerts put out by the financial services lawyers at Ballard Spahr is that they don't merely summarize relevant laws, regulations, and guidance, they actually offer a point of view, sometimes a "pointed" point of view, about the subject matter. Their "pointed" views were recently on display in an alert about the FDIC and OCC's recent "guidance" about deposit advance loans. Entitled "OCC and FDIC Follow Through on Threat To Kill Deposit Advance Loans," it's worth a read.
As the author notes, the guidance "may make it impossible for banks they supervise to continue offering these products on a large-scale basis, if at all." Here's why:
- 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, banks should not offer more than one loan per monthly statement cycle, and a cooling-off period of at least one monthly statement after repayment of a loan should be completed before another loan is made. We read these requirements to effectively impose a limit of six deposit advances per year.
- 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 risk that could negatively affect the customer’s eligibility, such as repeated overdrafts.
In addition to the foregoing roadblocks, as the author also correctly observes, there's the obvious fact that the OCC and FDIC simply "don't like" deposit advance loans, notwithstanding that they're perfectly legal and that there's a need for them. If either of those agencies is your primary federal regulator, then you can rest assured that if you continue to drink from the well of deposit advance lending, the water will gradually acquire the taste akin to that of a watering hole into which a dead goat has been dropped.
To me, the following paragraph of the alert separates this alert from the pack.
Apparently, the OCC and FDIC believe that a cost/benefit analysis of the impact of deposit advances on consumers is unnecessary. Rather, the OCC and FDIC assume that repeated use of deposit advances injures consumers and then effectively rule that the perception of consumer injury is enough to effectively ban the product. Although the guidance will have the effective force of a formal rule, the FDIC and OCC consciously decided not to follow the rule-making procedures of the Administrative Procedures Act. This decision could expose the guidance to legal attack, assuming a bank or a trade group would have the temerity to initiate litigation against the OCC and FDIC.
Ballard Spahr better be on its toes. They may receive an anonymous threatening email from a cockroach embedded within one of those agencies who will make not-so-veiled threats of retaliation. Then again, cockroaches only curry in the dark, so I suppose Ballard Spahr could always shine a light on them and freeze them in place.
The author concludes with faint praise for the CFPB, that being that while everyone expects "The Sheriff" to eventually arrest deposit advance loans, at least it's going through the formal rule-making process in order to achieve the foregone conclusion. To me, whether they run you over with a dump truck or an M1A2 Abrams tank, you're still squashed.
What the guidance demonstrates is the validity of the view of many, that the federal banking regulators (with the apparent exception of the Federal Reserve, at least thus far) that they will decide what types of consumer loans are "appropriate" from a social engineering viewpoint and ban those they find don't meet their subjective views of "appropriate," regardless of their legality, regardless of the need for such loans, and regardless of the desires of consumers for the availability of such loans. What the guidance may also demonstrate is that the eventual commercial bank charter of choice is state bank along with Fed membership.