WASHINGTON — For all the anticipation that preceded the Consumer Financial Protection Bureau's final small-dollar lending rule, a picture of how the rule will affect banks and credit unions is still quite hazy.

The regulation opens the door for depository institutions to offer certain installment loans, with terms of over 45 days, as a result of the CFPB's exclusion of those loans from tough underwriting requirements targeted at shorter-term payday loans.

But now the onus falls on banks and credit unions to structure products that get the exemption, while banks must weigh the impact of a separate Office of the Comptroller of the Currency decision to rescind its opposition to payday advances. The rule also seemed to drive a wedge between large and small banks, by granting the latter an exemption even for some shorter-term loans.

Payday advance storefront
While payday lenders face a tough underwriting requirement for short-term credit under the CFPB rule, banks and credit unions have more flexibility to structure longer-term products not subject to the same requirement. Bloomberg News

Meanwhile, the prospect of implementing the rule over the next 21 months faces this added challenge: Leadership of the CFPB could swing toward a more industry-friendly chief somewhat soon, leaving open the possibility that the rule could be rewritten before it becomes effective.

“If it were opened up again I would think it would be more expansive" in what it allows, "not more restrictive," said Michael Emancipator, senior regulatory affairs counsel at the National Association of Federally-Insured Credit Unions.

The CFPB rule established a tough new underwriting process for short-term payday and other small-dollar loans to gauge borrowers' ability to repay. But banks joined with the Pew Charitable Trusts to urge the CFPB to exclude certain longer-term, small installment loans that met other safe criteria. Those loans were subject to the same underwriting requirements as payday loans in the CFPB proposal, but the final rule gave banks and credit unions more flexibility to offer those products.

But even supporters of installment lending options indicated that the work had just begun.

"Bank and credit union regulators must now create the clear guidelines these lenders need in order to make small installment loans safely and profitably," Nick Bourke, director of Pew's consumer finance project, said in a statement Thursday.

How banks offer longer-term installment loans in compliance with the CFPB rule is just the beginning of the uncertainty.

The rule also seemed to create a disparity in the small-dollar options for large depository institutions versus small. The bureau created a carve-out for community banks and credit unions by allowing them to make up to 2,500 loans — including shorter-term loans otherwise subject to ability-to-repay requirements — that are exempt from the rule as long as an institution derives no more than 10% of its revenue from the loans.

“If you need short-term financial assistance, you can still go to a community bank. Yet the larger bank just across the street cannot offer that same product because they are too big,” said Richard Hunt, president and chief executive of the Consumer Bankers Association. “If the product is as bad as CFPB states, isn’t it the responsibility of the CFPB to ‘protect’ all consumers?” he added.

Others said the caps on loans and revenue will limit larger banks' small-dollar credit options.

“Banks need flexibility to come up with new creative programs but ... for a large bank" the caps imposed by the CFPB are "a drop in the bucket,” said Joe Lynyak, a partner at Dorsey & Whitney.

Yet the reaction from small-bank supporters not surprisingly was more positive.

“We’re really pleased that the bureau recognizes that community banks really provide a safe and sound alternative to payday lending," said Lilly Thomas, senior regulatory counsel at the Independent Community Bankers of America. "They fill a need for their communities and the members of their community, in a safe and sound manner.”

Also complicating matters was the OCC's announcement Thursday, which took CFPB officials by surprise, about rescinding its 2013 guidance on deposit advance products. That guidance had had the effect of forcing banks to stop offering deposit advances.

The OCC ruling theoretically expands the small-dollar credit options for federally chartered institutions. But it is still unclear if national banks plan to resort to offering the same products that were originally banned by the OCC guidance, an installment loan option seemingly endorsed by the CFPB and Pew, or both.

It is also not clear whether the Federal Deposit Insurance Corp., which had joined the OCC in 2013 to restrict deposit advances for its institutions, would follow suit in rescinding the guidance. The Trump administration has not yet named a nominee to succeed FDIC Chairman Martin Gruenberg after his term expires, but one person rumored for the job is Jelena McWilliams, chief legal counsel at Fifth Third Bank.

"The OCC ought to, broadly speaking, share the same view as the FDIC and the CFPB," said Aaron Klein, a fellow at the Brookings Institution.

But perhaps the biggest uncertainty facing the future of small-dollar credit regulatory policy, and financial institutions trying to implement the policy, is the future of the CFPB itself. The bureau's director, Richard Cordray, is widely speculated to be considering stepping down soon to run for governor of Ohio.

That would allow President Trump to nominate a more pro-industry director, willing to reopen the rule even before institutions have to comply with it.

“The 21-month implementation is longer than originally proposed and could lead to the next CFPB director attempting to alter the rule prior to it becoming fully effective,” said Isaac Boltansky, an analyst at Compass Point Research & Trading.

Lalita Clozel contributed reporting to this article.

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