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Update on OCC Guidance for Debit Products

Adam Rust's picture

Posted June 9, 2011

First, the OCC has clarified that the June 8th guidance from the OCC ("Deposit-Related Consumer Credit Products") is intended only for debit cards attached to a traditional deposit account.

Prepaid is not covered by this guidance. Still, a person at the OCC intimated that a similar guidance is forthcoming for prepaid debit cards.

Comments made for the June 8th guidance can still include thoughts about how prepaid should be folded into the new scheme.

Banks offering checking account advances are really creating a planned overdraft option. The banks currently offering the specific type of credit governed by this guidance are Fifth Third, Wells Fargo, and US Bank. Each has developed a program that allows checking account customers to arrange for a short-term advance. The prices have settled at $1 in fees for every $10 advanced, with the term ending upon the next direct deposit.

Prepaid debit cards that offer credit are offering a short-term loan as well, but in an environment with a far more shallow relationship. This is only one of the distinctions, of course, and it certainly seems right for the OCC to treat the two separately. Many prepaid customers close their accounts in short order, whereas most consumers with bank accounts tend to stay for at least a year or so. The length of time matters if only because it adds some security to the arrangement.

It's a mistake to look at today's prepaid market, which is controlled by FDIC and OTS-regulated institutions, and ignore the opinion of the OCC.

To review: none of the high-volume prepaid card issuers are supervised by the OCC. The FDIC is the primary regulator for Bancorp Bank (NetSpend), Urban Trust, Columbus Bank & Trust, Discover, New Millennium, and Horizon SSB. Bonneville Bancorp, which stands to become an issuer of Green Dot cards, is also an FDIC-regulated institution. Bancorp is one of the largest players in prepaid.

The OTS supervises MetaBank, Block Bank, and Security Savings. The Federal Reserve oversees M&T Bank.

The OCC is the primary regulator of Capital One, Bank First, Inter National Bank and Palm Desert National Bank. Inter National did partner with NetSpend, but that relationship has been curtailed.

The exception are relationships between SunTrust and US Bank with NetSpend. Neither can claim to have a big share of NetSpend's cards, but each has a foothold.

This is going to change, because the OTS is about to be folded into the OCC. Several of the OTS thrifts are major players in prepaid, and when their accounts are added to those issued by SunTrust and US Bank, the OCC suddenly has a very wide footprint in prepaid. Even if the OCC has yet to offer guidance on prepaid, their opinion will have expansive weight.

The OCC says it will hold legacy-OTS institutions to the same standards as its current members. That is interesting. The OTS issued a directive to MetaBank last fall that forced the Iowa lender to pull its i-advance credit product. What will happen with that going forward? It could be another instance of the well-adapted maxim about leaving things behind -- which in this instance would go like this: what happens with the OTS stays with the OTS.

With specific application to MetaBank, the question is wide open. Certainly, no broad opinion about the application of credit on prepaid ever came from the OTS.

"We just said that there were some things about MetaBank that bothered us," said one OTS official."

Urban Trust's prepaid overdraft bears watching, too. Urban Trust charges 15 percent of the sum of any overdraft, up to a maximum of $36 per overdraft, and they impose no limit on the total number of overdrafts. Although it has been aggressive in taking a stand on overdraft for traditional checking accounts, the FDIC hasn't stepped in to address the Urban Trust iteration of overdraft on prepaid. One might go so far as arguing that the Urban Trust overdraft is essentially a credit product masquerading as overdraft.

The OCC is going to ask banks to develop reasonable costs for the checking account advances.

Prepaid: The First Shot between the OCC and the CFPB?

There is another turf battle shaping up between the OCC and the CFPB. The CFPB will have rulemaking authority over banks with more than $10 billion in assets. All but a few of those institutions are under the OCC. The fact that the OCC is issuing guidances on deposit-related products at this time hints at the likelihood that the OCC isn't going to give up lightly.

The credit-on-debit question is an interesting place for an early battle. The only banks offering credit-on-debit are Wells Fargo, US Bank, and Fifth Third. These are big banks and all will be under the CFPB. Yet the OCC is staking out its claim to say how those banks should operate here.