OCC Pushes Forward with Short-Term High-Cost Loans

In testimony before Congress on Thursday, the Deputy Comptroller of the Currency asserted the OCC’s support of more short-term small dollar loans by their national banks.

Barry Wides (who is a nice guy) spent most of his time extolling efforts by member banks to provide credit through secured credit cards, overdrafts, and short-term installment loans.

Poor people are exactly the ones that banks are moving off their rolls lately with monthly checking account fees of $10 and new restrictions on bank services.

Poor people are also the folks most likely and least able to use this kind of credit. The OCC cited a 2008 study by the Consumer Federation of America that reported that one-third of low-income households have less than $500 in life savings.

Somehow their conclusion from that study is that these people need to spend more on credit.

While Wides talked about other products, the unsaid issue here surrounds a final rule proposed in July. The OCC asked for comments on how banks might make low-dollar loans. Some national banks have decided to create a new business product that writes high cost short term loans. The new products have met with pushback from states. The final rule could be an opportunity by the OCC to use its pre-emption authority to place the loans by force into those states.

At this point, four banks are offering these loans. Pricing varies, but no iteration charges less than $1.50 for an advance of $20 over a period of up to 35 days. The mechanics are somewhat complicated – a checking account holder can take an advance against a future direct deposit with the provision that the outstanding debt will be collected against that payment. This means that the 35 day term is something of a mirage. In reality, few customers will hold the advance for that long. Most people are going to take an advance when they “run out of month.” No data has been released (and none will) but I would bet that the average term is more in the order of seven days.

The rub to most people is that these loans are being made to people that are likely to be putting a thumb in their financial dike. AOL Money says that Wells’ direct deposit advance is a “good way to go broke,” and that using a loan should be a sign that “you are teetering very close to disaster.”

One party that should find this particularly aggravating is MetaBank, an Iowa thrift whose i-advance loan on prepaid debit cards was shut down by the OTS last year. The terms of the i-advance were identical to those of the banks – $2 for a $20 loan, collected against your next direct deposit. That was really no different than the products being put forward by the national banks. Fifth Third’s Early Access charges $1 for every $10 advanced. US Bank’s Checking Account Advance charges $2 for every $20.

Underneath the statement from the OCC is an attempt to carry water for their national banks. The OCC is funded entirely by contributions from member banks, even though it is a part of the Department of Treasury. In DC, lobbyists operate on a similar model.

The CFPB wants to establish rulemaking authority over these loans. By proposing a final rule, as the OCC did this summer, they may beat the CFPB to the quick.