In the New Look CFPB, Deposit Advance Products Attempt a Rebirth
Deposit Advance Products (DAPs) are a form of short term credit offered by banks and credit unions that allow existing account holders to borrow small sums of money to be repaid automatically upon direct deposit of the account holder’s paycheck on a future date. Back in 2013, the Consumer Financial Protection Bureau (CFPB) reported that DAPs could serve as a less risky option to payday loans. At its peak, DAPs totaled more than $6.5 billion in advances to more than 1.5 million unique borrowers.
In general, the CFPB found that to qualify for a DAP, a consumer would need a long-standing account with a financial institution, along with frequent, recurring direct deposits above a certain threshold. From there, the DAPs would function similar to a line of credit, with the consumer receiving almost instant approval and typically charged a flat fee per amount borrowed.
Since repayment is more contingent upon the account holder’s next deposit, repayment dates can fluctuate (although many institutions will auto-debit the amount owed if no deposit is made within 35 days) and annual percentage rates (APR) are difficult to calculate. The CFPB noted that DAPs were often capped at $500 or 50% of the total for the last direct deposit. Considering its unique structure, DAPs do not typically fall under state laws regulating payday and other small dollar loans.
In 2013, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued guidance on DAPs. The FDIC warned that DAPs placed the banks in compliance, operational, and reputational risk. The FDIC expressed concern that DAPs mimicked many of the dangerous properties of payday loans and may create long-term debt issues, even though the products were intended to bridge short-term funding matters. The threat from federal bank regulators of reputational risk associated with DAP, and the significant changes required to alter DAP programs, led many banks to abandon the practice.
The OCC’s stance on DAPs changed last year when the CFPB published its rule on Payday, Auto Title, and Certain High Cost Installment Loans (Small Dollar Rule). The OCC rescinded its guidance on DAP and encouraged banks to “offer responsible products that meet the short-term, small-dollar credit needs of consumers.”
The House Financial Services Committee has taken the OCC’s reversal one step further by advancing a bill this week that would exempt credit unions and banks from the provisions of the Small Dollar Rule. House Republicans have promoted the bill as a way to give consumer more access to short term loans. The OCC’s change in heart regarding DAPs, coupled with the House bill exempting banks from the Small Dollar Rule, may usher in a renewed place in the market for deposit advance bank loans.