United States: OCC And FDIC Guidance On Supervisory Concerns And Expectations Regarding Deposit Advance Products

The Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC") (collectively, "the agencies") each recently issued final supervisory guidance titled Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products ("Guidance"), which describes the agencies' expectations for deposit advance products.1 A deposit advance product is a type of small-dollar, short-term credit product offered to customers who maintain a deposit account, reloadable prepaid card, or similar deposit-type account at a bank.2

The Guidance is intended to ensure that banks are aware of the potential credit, reputation, operational, legal, compliance, and other risks associated with deposit advance products. The Guidance supplements each agency's existing guidance on payday lending and on subprime lending.3

The OCC and the FDIC expect the financial institutions that they supervise to apply the principles of safe and sound banking practices and consumer protection set forth in the Guidance to any deposit advance products they offer. The OCC and the FDIC will take appropriate supervisory action to address any unsafe or unsound banking practices associated with these products, to prevent harm to consumers, and to ensure compliance with applicable laws.4

The Guidance describes supervisory concerns with deposit advance loans, safety and soundness risks, and compliance and consumer protection-related concerns and expectations. A key element of the Guidance provides that a bank's underwriting and credit policies should ensure that the consumer can repay a deposit advance loan, including fees, according to its terms while paying for typical recurring expenses for food, housing, transportation, health care, and other outstanding debts.5 Among other factors, a bank should reevaluate the customer's eligibility and financial capacity for a deposit advance loan at least every six months.6 Both the OCC and the FDIC consider that a bank's failure to assess a consumer's ability to repay a deposit advance loan presents safety and soundness risks.7

Another key element of the Guidance is a "cooling off period," which provides that a customer's deposit advance loan, including fees, should be repaid in full before a bank extends another such loan to the customer, and a bank should not offer more than one loan per monthly statement cycle.8 A customer should have a cooling off period of at least one monthly statement cycle after the repayment of a deposit advance loan before the bank extends another advance to prevent repeat use. These provisions are designed to address the agencies' concerns that customers can become dependent on deposit advance products to meet their daily expenses and that current practices for cooling off periods are ineffective at preventing repeat usage of high-cost and short-term deposit advance products for long-term borrowing needs.9

The OCC and the FDIC distinguish deposit advance products from small-dollar credit products. The agencies encourage banks to offer small-dollar credit products to their customers at reasonable terms in a manner consistent with safety and soundness and other supervisory considerations, stating that small-dollar credit products do not present the same level of supervisory risk as deposit advance products, which share a number of characteristics seen in traditional payday loans such as high fees, very short lump-sum repayment terms, and inadequate attention to the consumer's ability to repay the loan.10 Following a two-year study of small-dollar lending, the FDIC concluded that safe and affordable small-dollar lending is feasible for banks.11

The Board of Governors of the Federal Reserve System ("Federal Reserve Board") has not issued Guidance to state-chartered member banks that is as comprehensive and detailed as the OCC and FDIC Guidance. On April 25, the Federal Reserve Board issued a Statement on Deposit Advance Products ("Statement") to emphasize to state-chartered member banks the significant consumer risks associated with deposit advance products in light of publication by the Consumer Financial Protection Bureau ("CFPB") on April 24 of a white paper titled Payday Loans and Deposit Advance Products: A White Paper of Initial Data Findings. The white paper's"key finding: payday loans and deposit advance products can become debt traps for consumers."12 According to the Federal Reserve Board's Statement, state member banks are expected to consider the risks associated with deposit advance products, including potential consumer harm and the potential for elevated compliance risk, when designing and offering such products.13 Additionally, as with the OCC and FDIC Guidance, the Federal Reserve Board's Statement requires state member banks to comply with all applicable federal and state laws and regulations and holds state member banks accountable for closely monitoring third-party vendor practices and outcomes.

The CFPB has authority to examine and regulate nonbank payday lenders and large banks, thrift banks, and credit unions with more than $10 billion in assets. The CFPB published examination procedures for short-term, small-dollar lending, commonly known as payday lending, in January 2012. On September 17, 2013, the CFPB released guidelines to examiners regarding identification of consumer harm and risks related to violations of the Military Lending Act ("MLA") when supervising payday lenders.14 The CFPB indicated that the agency is committed to ensuring compliance with the MLA, including the 36 percent cap on annual percentage rates.15 The CFPB has not issued guidance comparable to the OCC's and FDIC's Guidance, nor has it promulgated a regulation covering payday lending. The most recent CFPB semiannual regulatory agenda indicates that the CFPB "has been engaged in extensive research and analysis concerning payday loans, deposit advance products, and bank overdraft programs...."16

Supervisory Expectations in the OCC and FDIC Guidance

Deposit advance lending raises substantial safety and soundness and consumer protection concerns whether conducted directly by a bank or by a third party, according to the Guidance. For these reasons, OCC and FDIC examinations will focus on potential safety and soundness issues and compliance with applicable consumer protection laws. The Guidance states, "It is important that a bank's deposit advance products be reviewed by counsel for compliance with all applicable laws prior to implementation."17

Examiners will focus on the following topics, each of which is described below in order:

  • Credit Quality
  • Underwriting and Credit Administration Policies and Practices
  • Capital Adequacy
  • Over-Reliance on Fee Income
  • Allowance for Loan and Lease Losses
  • Consumer Compliance
  • Operational Risk and Third-Party Relationships
  • Board and Management Oversight

A bank's failure to adhere to the factors in the Guidance could be the basis for supervisory action up to and including an administrative enforcement order and fine. The principal supervisory expectations, factors, and admonitions in the Guidance follow.

Credit Quality. Examiners have discretion to classify adversely individual loans that exhibit signs of credit weakness regardless of delinquency status and may classify adversely consumer portfolios or portions of such portfolios in which underwriting standards are weak and present unreasonable credit risk.

  • A bank should adequately review a customer's repayment capacity to evaluate whether the customer will have the ability to repay the loan without additional deposit advance borrowing.
  • A bank should monitor for repeated or extended use of deposit advance products. Deposit advance loans that are accessed repeatedly or for extended time periods may be indicative of the customer's inability to repay and inadequate underwriting.

Underwriting and Credit Administration Policies and Practices. Examiners will evaluate a bank's underwriting and administration policies and practices as part of the credit quality review.

  • A bank should have well-documented eligibility and underwriting criteria that ensure that the customer can repay the loan, including all fees and expenses, according to its terms while continuing to pay typical recurring and other necessary expenses such as those for food, housing, transportation, health care, and other borrowing.

    • Eligibility and underwriting criteria should ensure that customers are able to meet these requirements without the need for repeat borrowing.
    • While a bank may decide to review a customer's credit report in evaluating financial capacity or ongoing eligibility for a deposit advance product, a bank is not expected to review a customer's credit report for purposes of determining ability to repay.
  • A bank should maintain criteria that prevent churning and prolonged period of use of deposit advance products.

    • Underwriting for deposit advance products should occur before the product is obtained and should be monitored on an ongoing basis.
    • Repeat borrowings may indicate weak underwriting and be subject to criticism in a bank's Report of Examination and considered in a bank's examination rating.
  • A bank should have written underwriting policies for deposit advance loan products that are approved by the bank's board of directors and consistent with the bank's general underwriting standards and risk appetite. The factors addressed by a bank's written underwriting policies include:

    • The length of a customer's deposit relationship with the bank: The agencies will consider no less than a six-month time period to be sufficient to assess a customer's eligibility for a deposit advance loan.
    • Classified credits: A customer who has delinquent or adversely classified loans with the bank should be ineligible for a deposit advance product.
    • Financial capacity: A bank should conduct an evaluation of the customer's financial capacity, including income. The financial capacity assessment should include:

      • An analysis of the customer's account for inflows (recurring deposits) and outflows (checks, credit, and customer withdrawals) over at least a six-month consecutive time period. Lines of credit, including overdrafts, and drafts from savings should not be considered inflows.
      • A bank should determine whether an installment repayment is more appropriate for the customer based on the results of the above analysis.
  • Cooling off period: A bank should not extend a subsequent deposit advance loan until the customer has paid the prior deposit advance loan in full, together with all applicable fees, and a bank should not offer more than one loan per monthly statement cycle. A customer should have a cooling off period of at least one monthly statement cycle after the repayment of a deposit advance loan before the bank extends another advance to prevent repeat use of the short-term product.
  • Increasing deposit advance credit limits: A bank should not increase a customer's available credit amount without a full underwriting reassessment in accordance with the bank's underwriting policies and the factors described in the Guidance. Credit limit increases should be initiated only by customer request.
  • Ongoing customer eligibility: A bank should reassess the customer's eligibility and capacity for a deposit advance loan no less than every six months, and it should identify risks that may negatively affect a customer's eligibility such as where a customer is overextended regarding total credit obligations or has repeat overdrafts. A bank should monitor for repeat usage and if alternative credit arrangements are needed, the bank should inform customers of available options.

Capital Adequacy. Generally, higher capital requirements apply to loan portfolios with higher-risk characteristics, and loans with subprime credit characteristics are higher-risk loans that may require higher capital levels.

Over-Reliance on Fee Income. The fees charged for deposit advance products should be based on safe and sound banking principles.

A bank should monitor for any undue reliance for its revenue and earnings on the fees it generates from deposit advance lending.

Allowance for Loan and Lease Losses ("ALLL"). The agencies' examiners will assess the adequacy of a bank's ALLL to absorb estimated credit losses attributable to the deposit advance loan portfolio. The examiners will also determine whether a bank has methodologies and analyses that demonstrate and document that the bank's ALLL is appropriate.

Consumer Compliance. Deposit advance products must comply with all applicable federal laws and regulations and certain state laws may also apply. A bank should monitor applicable laws and regulations for revisions and to ensure that its deposit advance products remain compliant.

The agencies' examiners will assess a bank's program for deposit advance products and lending for compliance with applicable consumer protection statutes and regulations, including the Truth in Lending Act, the Electronic Funds Transfer Act, the Truth in Saving Act, the Equal Credit Opportunity Act, and section 5 of the Federal Trade Commission Act prohibiting unfair or deceptive acts or practices.

Operational Risk and Third-Party Relationships. A bank is responsible for ensuring that processes, systems, and internal controls are appropriate for the delivery of deposit lending products to the customer in a safe and sound manner and in compliance with applicable laws and regulations, whether delivered by the bank or a third party. The agencies' examiners will review the risks associated with all material third-party relationships and activities. In high-risk situations, examiners may conduct on-site third-party reviews in accordance with the agencies' legal authorities.

Oversight by the Board of Directors and Management. The agencies' examiners will assess the adequacy of oversight by a bank's board of directors and the ability of a bank's management to carry out a deposit advance program. Examiners will assess whether bank management has established controls and carried out a rigorous analytical process to identify, measure, monitor, and manage risks associated with deposit advance products.

  • A bank should maintain adequate oversight and quality control to minimize exposure to financial loss, reputation damage, and supervisory action.
  • A bank's compliance management system should ensure compliance with applicable federal and state laws, rules and regulations, and internal policies and procedures.
  • A bank's management should provide appropriate oversight and sufficient qualified personnel for monitoring of deposit advance programs.

    • Oversight activities should be reported periodically to a bank's board of directors or designated committee of the board. Reports to the board of directors or a designed committee of the board should include weaknesses that have been identified, which a bank should address promptly.

Footnotes

1. Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products, Department of the Treasury, Office of the Comptroller of the Currency, 78 Federal Register 70624 (November 26, 2013) ("OCC Guidance") and Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Product, Federal Deposit Insurance Corporation, 78 Federal Register 70552 (November 26, 2013) ("FDIC Guidance").

2. A definition of "deposit advance" appears at 78 Federal Register 70625 (OCC) and 78 Federal Register 70553 (FDIC). Footnote 3 of each agency's Guidance explains that the Guidance does not apply to banks' overdraft lines of credit because overdraft lines of credit generally do not have repayment characteristics that are similar to deposit advance products (OCC Guidance, p. 70623; FDIC Guidance, p. 70553).

3. OCC Advisory Letter AL 2000-10, Payday Lending (November 27, 2000); OCC Bulletin 2001-6 and FDIC Financial Institutions Letter FIL-9-2001, Expanded Guidance for Subprime Lending Programs, jointly signed by the OCC, FDIC, Board of Governors of the Federal Reserve System, and the Office of Thrift Supervision (January 31, 2001); FDIC Financial Institutions Letter FIL-14-2005, Guidelines for Payday Lending (February 25, 2005); and FDIC Financial Institutions Letter FIL-50-2007, Affordable Small-Dollar Loan Guidelines (June 19, 2007).

4. OCC Guidance, p. 70628; FDIC Guidance, p. 70556.

5. OCC Guidance, p. 70629; FDIC Guidance, p. 70556.

6. OCC Guidance, p. 70629; FDIC Guidance, p. 70557.

7. Id.

8. Each Guidance refers to the interagency Expanded Guidance for Subprime Lending Programs (2001), for the proposition that a loan to a borrower who does not have the capacity to repay the loan according to its terms from a source other than the pledged collateral (which, for a deposit advance loan, means the capacity to repay from the borrower's direct deposit), is generally considered unsafe and unsound and would be criticized as imprudent in the Report of Examination for a bank. OCC Guidance, p. 70629, footnote 25; FDIC Guidance, p. 70557, footnote 25.

9. See OCC Guidance, p. 70627; FDIC Guidance, p. 70554.

10. OCC Guidance, pp. 70627, 70630; FDIC Guidance, pp. 70554, 70557-70558.

11. See FDIC Model Safe Accounts Pilot Final Report, FDIC (April 2012). This FDIC study was conducted from 2007-2009.

12. See "The CFPB Finds Payday Loans and Deposit Advances Can Trap Consumers in Debt, Sustained Use of Loans Raises Consumer Protection Concerns," CFPB Press Release (April 24, 2013); In the press release, CFPB Director Cordray stated, "This comprehensive study shows that payday and deposit advance loans put many consumers at risk of turning what is supposed to be a short-term emergency loan into a long-term expensive debt burden." The CFPB White Paper can be accessed at http://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf.

13. Statement on Deposit Advance Products, Board of Governors of the Federal Reserve System, CA Letter 13-7 (April 25, 2013).

14. The CFPB examination procedures for short-term, small-dollar lending, including the recent amendments related to loans to servicemembers, may be accessed at http://files.consumerfinance.gov/f/201309_cfpb_payday_manual_revisions.

15. See "CFPB Lays Out Guidelines for Protecting Servicemembers in the Payday Lending Market: CFPB Watching for Military Lending Act Violations in its Examinations of Payday Lenders," CFPB Press Release (September 17, 2013).

16. CFPB Semiannual Regulatory Agenda, RIN 3170-AA40, Fall 2013.

17. OCC Guidance, p. 70627; FDIC Guidance, p. 70555.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Lisa M. Ledbetter
Similar Articles
Relevancy Powered by MondaqAI
Dickinson Wright PLLC
Katten Muchin Rosenman LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Dickinson Wright PLLC
Katten Muchin Rosenman LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions