Posted: Oct 11, 2018
Comments: 0
Author: Lou Grilli

U.S. Bank becomes the first financial institution subject to OCC supervision to offer “deposit advance products” a.k.a. Payday Loans. Should credit unions step up to help the community?

U.S. Bank, the country’s largest regional bank, began taking advantage of a roll-back of OCC regulations that prohibited banks from offering deposit advance products. According to the LA Times, a U.S. Bank customer with a checking account open for more than 6 months, and a direct deposited paycheck can apply online and if approved, be granted a loan of between $100 and $1,000, within minutes. Repayment, which must be within three months, comes with an interest rate of $12 per $100 borrowed, which calculates to nearly a 71% annualized interest rate. U.S. Bank is just the first of what is expected to be a wave of banks providing competition to payday lenders. What changed to bring this on?

Late 2013, both the OCC and the FDIC issued guidance that effectively precluded banks from offering deposit advance products. A deposit advance product is defined as a small-dollar, short-term loan or line of credit that a bank makes available to a customer, and which is to be repaid from the proceeds of the next direct deposit. The problem with this type of loan is that people with little or no savings, faced with financial hardship, will not likely be able to pay back the loan amount without still needing the proceeds from the next paycheck. This forces the borrower into a cycle of paying back and reborrowing. The OCC intended to keep banks out of the predatory lending business, as these payday loans typically carry high rates and high risk of non-repayment. But the reality of keeping banks out of this line of business was the swelling of lenders popping up to service this need for short-term cash loans, a demand that continues to grow today. Realizing that banks are a more responsible way to serve this market, on October 5, 2017, the OCC rescinded its prior guidance, stating “As a practical matter, consumers who would prefer to rely on banks and thrifts for these products may be forced to rely on less regulated lenders and be exposed to the risk of consumer harm and expense.” The OCC doubled-down on this guidance, on May 24, 2018 issuing its Core Lending Principles for Short-Term, Small-Dollar Installment Lending, Bulletin 2018-14, in which it states that it “encourages banks to offer responsible short-term, small-dollar installment loans, typically two to 12 months in duration with equal amortizing payments, to help meet the credit needs of consumers.”  The bulletin is intended “to remind banks of the core lending principles for prudently managing the risks associated with offering short-term, small-dollar installment lending programs.”

What’s missing so far in this story is where credit unions fit in. One of the 7 cooperative principles for credit unions is social responsibility – credit unions strive for social justice by committing to strengthening their communities and helping people of modest means. It could be argued that credit unions are better positioned in their communities to serve the demographic that finds itself needing payday loans. Many credit unions offer microloans for individuals. Most low-income neighborhoods have a disproportionately high number of predatory lending services, such as payday lenders. In response, credit unions that serve those communities have applied for Community Development Financial Institution (CDFI) certification to help provide their members with additional financial education services and lending opportunities by mitigating fee assessments to those of low-income standing.

Loan Type

Loan Amount

Interest and Fees

Credit Card Cash Advance (includes 3% transaction fee)



U.S. Bank “Simple Loan”



Payday Loan (multiple loans over three months at CA maximum allowable rates)



One of the simplest ways for a credit union to address the needs of customers needing fast cash, without starting a microloan program or applying for CDFI certification, is through cash advances on low credit limit cards. Going back to the U.S. Bank example, the LA Times points out that a credit card cash advance, assuming the member can qualify for a card, offers the lowest interest and fees over a three-month period.

While the rollback of prior banking regulations makes the Payday Lending Market accessible to banks, credit unions, being community-based financial institutions, have always had the opportunity to address this need by lending to members and potential members through low credit line credit cards ($1000 is a reasonable floor). According to CNN, 40% of Americans can’t cover a $400 emergency expense. A short-term unsecured loan may solve a one-time solution, but a credit line extended to a member can help them improve their financial well-being, getting them through many peaks and valleys while building a longer-term relationship with the member who someday will qualify for a credit line increase and access to additional services.

To learn more about servicing your members’ needs, growing your card portfolio, and to make your credit union more profitable, contact the experts at Trellance,

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Lou Grilli

Lou GrilliLou Grilli

Lou is the AVP of Product Development & Thought Leadership at Trellance. In this role, he is responsible for managing the organization’s product portfolio, as well as providing leadership on industry trends related to data analytics and payments.

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