CBA Letter for the Record - HFSC FI Hearing re Small Dollar

February 11, 2016

 

Dear Chairman Neugebauer and Ranking Member Clay:

 

The Consumer Bankers Association (CBA) commends you for calling today’s timely hearing to examine the short-term, small-dollar credit marketplace and how lenders in this market meet consumers’ need for credit. CBA is the voice of the retail banking industry whose services provide access to credit for consumers and small businesses. Our members operate in all 50 states, serve over 150 million Americans and collectively hold two-thirds of the country’s total depository assets.

 

Bank Small-Dollar Lending

The need for accessible small-dollar, short-term credit liquidity for consumers is evident. According to a recent Bankrate article, “63% of American adults say they are unable to pay an unexpected expense with their savings…"1   A stagnant economy has left consumers with less cushion for emergencies, strained credit scores, and fewer credit options, making access to reasonably priced small-dollar, short-term liquidity products even more important. Various entry-level credit products exist to meet a wide range of these needs, including traditional credit cards, personal loans, and other forms of credit. Unfortunately, many consumers cannot qualify for them.

 

In response to this growing need for short-term credit, and receiving encouragement from our prudential regulators to offer a small-dollar loan product, banks developed deposit advance products (DAP) for consumers who could not qualify for traditional forms of credit.  For many years these products successfully yielded positive reactions from regulators and demonstrated that close working relationships between banks and their regulators can result in services that meet consumers’ needs. Additionally, deposit advance products were carefully designed to ensure strong safeguards at reasonable prices.

 

In late 2013, the Office of the Comptroller of the Currency (OCC)2 and Federal Deposit Insurance Cooperation (FDIC)3 separately finalized restrictive supervisory guidance on deposit advance products that left only one bank offering DAP services remaining in the market.4   While several reasons contributed to their exit from the market, the primary force was the supervisory guidance that was inconsistent with the structure and use of deposit advance products, which provide consumers immediate access to the exact amount of money needed.

 

The Bank Difference

There are differences between bank-offered deposit advance products and the services offered by non-depository lenders. Bank-offered products have built-in controls designed to limit the usage of the product. These controls include limits on loan amounts, automatic repayment through a linked depository account and “cooling” periods, all designed to keep customers from relying too heavily on the product and to ensure the customer’s ability to repay the loan.

 

Consumers who use bank-offered deposit advance products already have a customer relationship  with the bank. Deposit advance is an integrated feature added to the customer’s existing checking account and is not a stand-alone product. These services are only available to established customers who have maintained checking accounts in good standing with regularly scheduled direct deposits for a minimally prescribed period of time. The maintenance of this relationship is of the utmost importance to a bank. Without a positive banking experience, customers would look elsewhere to meet financial needs and banks would not only lose the opportunity to service the customer’s short- term liquidity needs, but also the chance to establish or maintain a long-term banking relationship.

 

Bank-offered deposit advance products offer customers greater account security.  With these products, customers do not have to provide sensitive bank information to third-party financial service providers, opening the door to the possible compromise of sensitive financial information. Accordingly, all personal account information is kept in house, providing a significant security advantage to non-depository services.

 

The banking industry supports clear and conspicuous disclosures for all financial products and services that assist consumers in making informed decisions about managing their finances. Banks that provide deposit advance products adhere to strict disclosure standards and all product terms are made clearly and fully transparent to customers prior to product use. At a minimum, all deposit advance providers are bound by applicable federal laws and the customer is typically required to sign a separate, detailed terms and conditions document to activate a deposit advance line of credit.

 

All depository institutions that offered, or still offer, deposit advance products have limits on the amount a consumer may borrow. Although it varies from bank to bank, advances are generally limited to the lesser of a specific amount or a percentage of the total amount of a customer’s monthly direct deposits. These limits ensure that there is money available to the customer for other monthly expenses after the advance is paid.

 

Additionally, all bank-offered deposit advance products impose a mandatory cooling-off period to ensure customers do not depend on the product to meet their monthly financial needs.  These periods are imposed to ensure deposit advance products are used for the intended purpose, namely, short- term liquidity. To manage the risk that the consumer will become reliant, a customer typically will be able to access a deposit advance product for a limited period of time at the end of which they would be required to repay the outstanding balance or completely stop using the product.

 

Deposit advance products have been criticized for their seemingly high costs when considering the relatively small size of the credit extended. However, in order for any product to be sustainable, it must be delivered in a cost-effective manner for both the provider and the customer. Previous small- dollar lending programs, such as one suggested by the FDIC,5 have not been widely adopted by the industry because the costs to administer the programs outweigh the revenues and, hence, are not sustainable.

 

Furthermore, the expense of providing an open-end line of credit is nearly the same irrespective of the amount outstanding. Most deposit advance products are priced based on a percentage of the amount advanced and do not include additional costs to the consumer such as application fees, annual fees, over-limit fees, rollover or re-write fees and late payment fees.

 

Despite the many consumer protections and benefits built into bank-offered deposit advance products, the OCC and FDIC effectively forced the shutdown of a product that was designed to benefit consumers in need, forcing them into other, more costly alternatives. CBA believes it is contrary to the intent of any regulatory action to force further monetary constraints on the consumers it intends to help. Regulators should be working closely with industry on practical solutions in order to build a foundation to fully support short-term lending needs. We believe this to be especially true for designing products and services that will allow the under-banked and unbanked greater access to mainstream banking opportunities.

 

Upcoming Regulatory Action

Marketplace competition benefits the consumer by driving innovation, product choice and price.  All too often, regulatory constraints placed on an already heavily regulated industry limits consumer choice and access to credit. Currently, the Consumer Financial Protection Bureau (Bureau) is expected to issue a proposed rule that would cover payday loans, certain loans secured with a vehicle title, “high-cost” installment loans, and lines of credit. In an outline, the Bureau breaks down the issue into provisions for “short-term loans” and “long-term loans.”  We encourage them to take a different approach than their prudential counterparts and explore products that are sustainable for banks and will not prohibit the customer’s ability to access and use.

Unfortunately, this does not seem to be their approach. The Bureau’s current outline, published last year in advance of their small business review panel process,6 would make it difficult for any lender to offer affordable, easy to use products.  For example, the Bureau’s current approach provides for overly restrictive underwriting requirements and unrealistic terms of use, including limits on frequency of use and limited loan-to-income ratios.  For short-term loans (45 days or less), lenders would have to verify the consumer’s income, “major financial obligations,” and borrowing history using third-party records. “Major financial obligations” would include such obligations as housing payments, car payments, and child support payments. Using this information, the lender would then have to make a determination whether the consumer has the ability to repay the loan after covering other major financial obligations and basic living expenses. This level of underwriting complexity ignores the cost of providing this type of loan. These are small-dollar loans, not mortgages.Requiring this level of underwriting will only result in pricing out would-be providers. Additionally, consumers cannot wait hours, perhaps days, for an underwriting decision when they have emergency expenses.

 

The current proposal also places arbitrary limits on the frequency with which the borrower can use the product over a certain time period (e.g. two times in a six month period), which will only inhibit the use and push borrowers to pull more money than needed out of fear they will lose access to the product. The same can be said for overly restrictive loan-to-income ratios in the proposal for certain types of loans (5% of gross monthly income). This amount is arbitrary and sets an unnecessarily low limit, as many will have instances where a greater amount is needed.

 

CBA believes consumer protections should be central to any financial product of service.  As described above, we understand the desire to limit frequency of use and loan size; however, these restrictions need to be realistic and applied evenly across all market players to ensure viable and safe consumer options.  The provisions provided for in the current proposal will merely result in steering consumers away from the banking system and succeed in sending them to less or unsupervised alternatives, ultimately limiting choice and competition.

 

CBA is concerned about the Bureau’s overly restrictive approach to regulating small-dollar loan products and recommends the Bureau work closely with other regulators and the banking industry to develop alternative standards that would allow for consumer protection and product sustainability – core elements to the development of responsible credit products. Accordingly, we encourage all involved to reexamine the value of deposit advance products as a useful and safe consumer financial tool.

 

Conclusion

Consumers deserve to have options when seeking a small-dollar loan product though either a bank, credit union or other non-depository lender. CBA’s members stand ready to work the Committee, the CFPB and prudential regulators to find practical and viable solutions for small-dollar credit products. We appreciate the opportunity to comment on today’s important hearing and encourage Congress to work with the various regulatory agencies to promote access to credit.

 

Sincerely,

 

Richard Hunt President and CEO

Consumer Bankers Association