I’m struggling with the joint-issued Guidance by the OCC and FDIC on Deposit Advance Loan Products. They cite that the Guidance is necessary to protect banks who issue these products, and to protect consumers. But I can easily see that the new requirements can cause harm to both parties.
So that we’re all on the same page, I’m talking about a small, short-term loan provided by a financial institution to customers who generally have recurring direct deposits and the loan is typically based on a fee structure rather than an interest rate. The customer’s next deposit is used to pay off the loan. A service for consumers who need it, generally less expensive than alternative payday loans, plus presents fee income for financial institutions. Win, win? Well, not according to the OCC and FDIC.
The Guidance could all but eliminate the possibility of a consumer who really needs this service from receiving it; the people who need a financial boost quickly to avoid costly overdraft fees, returned payments due to insufficient account balances, and who want to avoid costly interest rates often applied to payday loans. (Inner monologue: Have you ever looked at the interest rates on payday loans? I did a quick Google search and found Utah’s average payday loan interest is 473.52%. Some states charge interest rates based on your monthly gross income, and in my hometown Missouri - well, we won’t even go there.)
Ok, I accept that there are possibly some banks whose programs are excessive in fees or who intentionally market the product in a way to just increase revenue, but for the most part my observation is that this is generally a valuable customer service – unfortunately, one that may be seeing its end.
Let’s think this through – who do you think would most likely need a small, short-term loan to cover a difficult financial time:
Joe – a 22 year old college student who just paid tuition and payday from his full-time job isn’t for another week. He doesn’t have a credit card and his job is his only source of income. Joe has had two overdrafts on his account in the past year.
Wilma – a 76 year old retiree whose vehicle needs a repair. Her SSI direct deposit doesn’t post for another 2 weeks and this is her only form of income.
Mike – a 50 year old Hedge Fund Manager with a $5,000 savings account and two CD’s.
If you voted for Joe and Wilma, then we’re on the same page. The problem is that both will likely find it difficult to gain the deposit advance loan now that the OCC and FDIC have issued their Guidance.
You see, now Joe and Wilma’s banks have to conduct a credit verification and analyze the customer’s financial status, especially the customer’s ability to repay a loan without needing to borrow repeatedly from any source, including re-borrowing (revolving) the bank loan, to meet their living expenses. Sorry Wilma, but I think that eliminates you from consideration.
The Guidance also states that the bank should re-evaluate the customer’s eligibility no less often than every six months and identify risk that could negatively affect the customer’s eligibility, such as repeated overdrafts. Sorry Joe – you’re out.
So consumers who seek these services, to pay a smaller, one-time fee to reduce the likelihood of overdrafts, returned tuition checks, and the ability to pay for a car repair – the ones who likely need these services the most, are likely going to be denied based on the new criteria.
Hey Mike – need a loan? You’re likely the only one who qualifies (and likely the one who doesn’t use these products to begin with).
There are obviously a number of requirements we didn’t cover here. EPCOR members are encouraged to review News You Can Use on December 10th for a deeper analysis on the requirements.