There is an interagency Community Reinvestment Act Q&A (all regulators of banks and thrifts) due next Monday that asks for comments on how the CRA might be updated to accommodate for changes in retail banking. The focus is on how new technologies might be relevant to an exam.
There has been a lot of innovation in retail banking in the last few years. But to me, the question is less about how the "hows" have evolved, and more about how the "whos" have diversified. It is no longer the case that the look and feel of retail banking is a homogenous product. Whereas the branch was once the be-all-and-end-all of customer interaction, it is now only one element in a broader portfolio of services. With that change, new types of banks have emerged which interface outside of the branch model. I'm thinking mainly of prepaid card issuers, although the question would also apply to internet checking run by a national bank out of a single branch (most famously, ING).
Prepaid is a "virtual branch" model whose scale is growing every year. Many prepaid issuers have billions in deposits at this point, and there is no reason why most wouldn't have consumers in every state. A typical CRA exam insists on examining banks in three categories: lending, investment, and services. Well, prepaid cards do not come with credit. If they offer any of those services, it tends to only occur in the MSA where they have a branch. Unfortunately, doing so often means that they have to create separate lines of business. Why should an institution that draws 80 percent of its deposit from prepaid have to show that it can make mortgage loans? What real benefit goes to those consumers in Mahwah when their deposits are used to make community development grants for a tax credit project in Iowa?
Asking banks to make loans on deposits that are generated from prepaid card accounts comes with problems. Compared to traditional transaction accounts, deposits on prepaid cards tend to have short lifetimes. Money goes in and then goes out very quickly. Moreover, there are very few instances when dollars are deposits into savings accounts. In dissenting with the approval of Green Dot's acquisition of Bonneville Bank, Fed Governor Elizabeth Duke said that it wasn't a safe and sound practice to take such a high percentage of deposits from one line of business.
Here is a short review of the contradictions:
- Deposits from prepaid: 82 percent ($1.11 billion on June 30th, 2014)
- Its assessment area is limited to four areas: Brookings, South Dakota; Central Iowa, Northern Iowa, and Sioux Falls; South Dakota.
- They have 11 branches in 5 counties. They keep the deposits from their prepaid accounts in Sioux Falls.
The interesting thing about MetaBank's CRA exam is that regulators have effectively taken its prepaid deposits out of the equation in their evaluation of their lending activities. Essentially, the examination is unsure of how to account for the MPS deposits. The examiner notes that a typical loan-to-deposit ratio for a bank of MetaBank's size is 81 percent. MetaBank's LTD ratio is 24 percent, but "MetaBank's loan-to-deposit ratio is significantly impacted by the MPS division....The level of MPS deposit balances is more volatile than traditional thrift institution deposit products and present elevated liquidity risks for funding loan products."
Green Dot Bank:
- Deposits: $509.7 million
- All deposits (prepaid and retail) are held at its single branch in Provo, Utah.
- The great majority of those deposits are from Green Dot prepaid cards. Bonneville Bank had only $29.6 million in deposits at the time when it was acquired by Green Dot. Green Dot transferred $276 million in deposits from accounts held on its branded accounts that were at the time issued by GE Capital Bank. Green Dot Bank accepted approximately $150 million in deposits from Synovus in November 2012.
When Green Dot submitted its application to buy Bonneville Bank, the Fed considered the possibility that the acquisition would harm competition. But rather than ask what level of concentration existed among prepaid card issuers, it reviewed the concentration of deposits within Utah. The Fed noted that Green Dot Bank would hold less than 1 percent of deposits in Utah. This seems like the right formula but the wrong inputs. A better question - and one that deserves to be asked now - is what level of concentration exists among the institutions that hold deposits on prepaid cards. There are four large issuers: Bancorp, Block, Green Dot, and MetaBank. I am certain that each holds more than one percent of the entire market, and I expect that at least two hold more than 15 percent of all GPR deposits.
Green Dot Bank had a CRA exam in 2012. As far as I can tell, it has not been released to the public by the Federal Reserve. In the period since then, Green Dot has been implementing a program outlined by its Strategic Plan. In that plan, they said that they would commit to putting staff on boards of local non-profits, they that would make a few loans in the Provo area, and that they would write a few grants.
All deposits held in a non-retail branch in Wilmington, Delaware.
The bank makes loans from office in Philadelphia and runs automobile leasing programs in Florida and Maryland. It has a diverse prepaid card line with hundreds of partnerships. For the purposes of the CRA, it is examined as a large bank.
The traditional CRA exam works better for Bancorp than with some of the other prepaid issuers. Bancorp has a sizable portfolio of business, commercial real estate, and lines of credit. At the end of 2011, they had $1.7 billion in loans on their books. Thus, it makes some sense when Bancorp works on a affordable housing project.
But that doesn't mean that Bancorp's CRA exam went smoothly. They received a "low satisfactory" on lending and an "needs to improve" on services. The exam noted that "Bancorp has never been a traditional, branch-centered residential mortgage lender." Most of their mortgage lending is for home equity lines of credit. To the extent that they have HMDA-reportable loans, the most common segments are through partnerships with builders or for investment properties. They did not make any HMDA-reportable mortgage loans in low-income census tracts during 2011.
Most importantly, there was no mention in the exam of any CRA activities for holders of prepaid cards.