What a difference a charter makes. According to the American Banker, the NCUA is encouraging credit unions to make payday loans while the FDIC, OCC, and FRB, together with the Department of Justice, are throttling banks in order to choke off payday lenders from access to vital banking and payment processing services. Sure, the FDIC would like FDIC-insured banks to make small-dollar loans to the underbanked. There's a bit of a problem with the FDIC's approach. They want those loans made on terms that don't permit the banks to make a sufficient profit to justify the risk.
As the article's author, Rachel Witkowski, notes, it's not only the fact that the NCUA's chief, Debbie Matz, has recently spoken favorably of credit unions getting involved in small-dollar lending that makes the loans more attractive to credit unions than to banks. Credit unions are non-profit mutual entities and not shareholder-owned. They don't have as much pressure to make sure they don't devote resources to unprofitable products. In addition, because credit unions don't pay income taxes, they have can make money at rates and terms that don't produce the same after-tax net yield to banks.
An additional negative factor for banks versus credit unions is that the NCUA restrictions on these loans are less onerous than those imposed by the OCC and FDIC.
The NCUA has put restrictions in place, including saying such loans can be for no more than $1,000, cannot be rolled over, cannot extend beyond a six-month term and have an interest rate no higher than 28%. Matz said approximately 500 federal credit unions are offering such a product.
The FDIC and OCC guidelines, meanwhile, say the customer must show a financial capacity to pay the funds bank and already have a relationship with the bank for at least six months. They also require a "cooling off period" of at least one monthly statement cycle before another advance can be offered. Customers with any delinquent or adverse credits are "ineligible" for such products, the bank regulators said.
Not exactly a level playing field, is it?
A number of commercial bankers are just fine with this disparity in treatment.
Not all bankers feel they are disadvantaged, however. Some suggested that it's difficult to make a profit on deposit advance products so competing in that space would be too risky.
"It wouldn't bother me" if a credit union expanded into this space, said Joe Goyne, chairman and president at $272 million-asset Pegasus Bank in Dallas. "It's difficult for a community bank or credit union to do these on a one-off basis because I know what the costs are to get into it" and "structurally, it's totally different than how a bank is set up."
And in a curious bit of backhanded support for her boss, the NCUA's Deputy General Counsel opined that even credit unions may not be jumping all over this "competitive advantage" any time soon.
"In more case than not, credit unions are not really making money on these," said Mary Dunn, the deputy general counsel of the Credit Union National Association.
It must be great to be in a regulated business where your regulator is encouraging you to do more business where the odds are greater than 50% that you won't really make any money. Most banking executives wouldn't be able to relate.