WASHINGTON — The world of short-term lending was shaken up Thursday as one regulator issued a rule cracking down on payday loans while another made it easier for banks to offer an alternative product.

The Consumer Financial Protection Bureau finalized its long-awaited rule to rein in short-term, high-interest loans that are typically due in two to four weeks, requiring lenders to do an ability-to-repay test to ensure borrowers can afford such products.

Less than an hour later, the Office of the Comptroller of the Currency surprised the financial services world by making its own move—rescinding guidance that made it more difficult for banks to offer a payday-like product called deposit advance.

Keith Noreika, acting Comptroller of the Currency (left), and Richard Cordray, director of the Consumer Financial Protection Bureau.
Acting Comptroller Keith Noreika (left) said he needed to rescind his agency's deposit advance guidance because of fears it would conflict with the CFPB's payday rule. CFPB Director Richard Cordray said banks were already exempt. Bloomberg News

The dueling moves effectively mean that the CFPB was closing a door in one area, while the OCC opened its own for national banks.

The OCC billed its decision as one intended to avoid duplication with the CFPB’s efforts.

“Today, I approved rescission of the OCC’s guidance regarding deposit advance products, effective immediately,” acting Comptroller of the Currency Keith Noreika said in a press release. The CFPB’s payday rule, he added, “necessitates revisiting the OCC guidance.”

But the CFPB’s payday rule was never directed at banks or credit unions. Indeed, CFPB Director Richard Cordray said Thursday there was a carve-out for community banks and credit unions that make 2,500 or fewer short-term or balloon payment loans per year and derive less than 10% of their revenue from such loans.

“We have no intention of disrupting lending by community banks and credit unions. They have found effective ways to make small-dollar loans that consumer are able to pay without high rates of failures,” Cordray said.

Ultimately, the moves will leave the financial services more fragmented. Payday lenders have already begun making longer term loans, ones that are 45 days or longer, which the CFPB rule does not cover, in response to the final rule. (An earlier proposal would have covered those loans too, but that part was not finalized and the CFPB says it needs to study the issue.)

Nationally chartered banks, meanwhile, are now free again to offer deposit advance products, while state-chartered institutions subject to Federal Deposit Insurance Corp. supervision still face limitations on such loans. The OCC and FDIC acted in concert earlier to rein in deposit advance products, but only the OCC rescinded its guidance on Thursday. It was not immediately clear whether the FDIC would follow suit.

The CFPB and OCC moves come amid tensions between Noreika and Cordray. The acting comptroller has sharply criticized the recent CFPB rule banning mandatory arbitration clauses, releasing a study claiming it is costly for consumers and banks.

On Thursday, CFPB officials said they were not aware the OCC was taking action regarding deposit advance products.

“We got no heads up on that," Brian Shearer, an attorney with the CFPB, told reporters on a conference call.

Following is a guide to the CFPB and OCC rules.

CFPB’s payday rule

Even aside from the OCC’s move, the CFPB’s rule has an unclear future. Payday lenders have preemptively suggested the CFPB was rushing the rule so that Cordray can leave to pursue a bid for governor of Ohio. They are likely to make a legal challenge to the rule.

Republicans are also likely to attempt a repeal of it under the Congressional Review Act, a process that only requires a majority vote.

The next leader of the CFPB could also move to dial back, delay or eliminate the rule at a later point. Cordray’s term expires in July and the Trump administration is likely to move quickly to nominate a successor whenever the CFPB director chooses to depart.

The CFPB said it wrote its rule because it “determined that risky lender practices are pushing borrowers into debt traps or forcing them to cede control of their financial decisions.”

The new payday regulations will require lenders to do an ability-to-repay test to determine if borrowers can make the loan payments while still being able to afford essential living expenses during the life of the loan and 30 days after the highest payment of the loan.

Opponents of the rule contend that it will cut off a liquidity lifeline to consumers who are in need of a quick cash infusion.

The rule does allow for other “less risky” loans that are sometimes offered by community banks and credit unions to forgo the full-payment test.

Under the rule, to assess borrowers’ ability to repay, lenders must do a “full-payment test” to verify someone can afford the loan without taking out more credit. For certain short-term loans, lenders can opt for an alternative “principal-payoff option” for loans repaid more gradually.

Under the full-payment test, a lender must verify a borrower’s income and other expenses. The rule limits the number of short-term loans that can be made in rapid sequence to three.

The principal-payoff option is allowed for short-term loans up to $500 where borrowers can pay back the debt over time. This option is limited to lower-risk credit products. For example, this option is not allowed where the auto title is collateral.

The rule also exempts “payday alternative loans” that are authorized by the National Credit Union Administration.

For loans that are subject to the full-payment test or the principal payoff option, lenders must gather and report information about such loans using “credit reporting systems” registered by the CFPB. Companies must apply to the bureau for the reporting system’s designation.

The rule also includes a measure to prevent the piling up of insufficient funds fees from lenders making repeated attempts to withdraw payments from borrower accounts. The measures apply to short-term loans, balloon-payment loans and any loan with APRs above 36% in which lenders have authorized access to checking or prepaid accounts.

“These protections will give consumers a chance to dispute any unauthorized or erroneous debit attempts, and to arrange to cover unanticipated payments that are due,” the CFPB said in a fact sheet. “This should mean fewer consumers being debited for payments they did not authorize or anticipate, or charged multiplying fees for returned payments and insufficient funds.”

Specifically, lenders must give borrowers written notice before the first payment collection attempt. After two consecutive attempts do not succeed, the lender is barred from making further attempts without authorization from the borrower.

The CFPB said the ability-to-repay protections apply to loans that require all or most of the debt paid at once, including title loans, deposit advances and longer-term balloon payment loans. But the protections against excessive penalty fees apply to a larger slice of the credit market.

OCC’s deposit advance rule

In a Federal Register notice, the OCC argued that the CFPB payday rule includes a number of requirements that would overlap with the OCC’s 2013 guidance, such as underwriting requirements or cooling-off periods.

“Thus, the continuation of the guidance would subject banks to potentially inconsistent regulatory direction and undue burden as banks prepare to implement the requirements of the CFPB’s” payday rule, the OCC said.

The OCC also argued that banks should be given more leeway to offer deposit advance, in order to offer consumers an alternative to “less-regulated lenders.”

“The OCC is concerned that banks are able to serve consumers’ needs for short-term, small-dollar credit,” the notice said.

In lieu of the guidance, the OCC listed three broad principles that banks should follow in regards to what the agency termed “innovative, short-term, small-dollar loan products.” Those principles comprised safety and soundness, risk management and reasonable underwriting. Additionally, the OCC said, its examiners would “continue to assess” banks over these products.

“The OCC will take appropriate action to address any unsafe or unsound banking practice or violations of law associated with these products,” said the notice.

“The OCC may consider issuing new guidance in the future,” Noreika said in the press release.

Lalita Clozel

Lalita Clozel covers fintech regulation, anti-money-laundering, cybersecurity and the Federal Deposit Insurance Corp. in American Banker's Washington bureau.