FDIC/OCC Issue Proposed Guidance on Deposit Advance Products
On April 24, 2013, the CFPB released a white paper of initial data findings regarding a study the CFPB conducted into payday loans and deposit advance products.1 Based on its findings, the CFPB concluded that these products were harmful to consumers because they are provided without adequate analysis into an individual’s ability to pay and are used by those individuals for extended periods of time, locking consumers into a cycle of debt. On the heels of this report, the FDIC and OCC each issued identical proposed guidance for their respective regulated institutions regarding the continued and future use of deposit advance products.2 The proposed guidance supplements existing payday loan and subprime lending guidance from both agencies and supplants the OCC’s previous proposed guidance on advance deposits issued on June 8, 2011.
A deposit advance product is a small-dollar, short-term loan that a bank makes available to a customer whose deposit account reflects recurring direct deposits. The customer is allowed to take out a loan, which is to be repaid from the proceeds of the next direct deposit. These loans resemble payday loans insofar as they feature high fees, are repaid in a lump sum in advance of the customer’s other bills and often do not closely scrutinize a customer’s ability to repay the loan and meet other necessary financial obligations.
The Agencies proposed guidance states that their examiners will focus on compliance with applicable consumer protection statutes and potential safety and soundness issues. They also will examine credit quality, including a bank’s underwriting and credit administration policies and practices. Additional considerations and focuses for the Agencies include: over-reliance on fee income; the adequacy of the allowance for loan and lease losses; compliance with federal law and regulations; and the oversight of third-parties.
With regard to specific requirements in the proposed guidance, banks should first be aware that their underwriting and eligibility criteria for deposit advance products should be the same as the criteria used for other bank loans. Further, such criteria should ensure that advance deposit credit can be repaid while allowing the consumer to meet typical recurring and other necessary expenses (housing, transportation, healthcare) as well as other outstanding debt obligations. The Agencies state that a consumer should be able to meet such necessary expenses and other obligations without the need to borrow repeatedly.
With regard to other factors for consumer eligibility, banks should ensure that consumes utilizing advance deposit products have patronized the bank long enough to evaluate their advance deposit eligibility – at least 6-months – and that the consumer does not possess any delinquent or adversely classified credit. Further, banks should analyze a consumer’s ability to repay the advance deposit. Such analysis includes examining the consumer’s income level, inflows (excluding lines of credit), outflows, and the consumer’s net surplus or deficit after the preceding 6-month period.
After a deposit advance is extended, the bank is obligated to monitor the consumer’s continued eligibility at least once every 6-months and identify risks negatively affecting such eligibility. Such risks include the repetitive use of the deposit advance product, the overextension of total credit and overdrafts. Further, prior deposit advances should be fully repaid before another advance is made and a “cooling off” period of one billing cycle should be observed prior to all subsequent advances.
Additional considerations banks should be aware of in light of the Agencies’ proposed guidance include monitoring any undue reliance on fees generated by deposit advances, maintaining appropriate management oversight, including periodic reports to a bank’s board of directors or a designated committee, and oversight of third-party relationships to ensure those third-parties comply in their own right. Banks should also be aware that any loans exhibiting subprime characteristics are considered high risk and will require greater levels of capital.
In sum, the FDIC and OCC proposed guidance places a number of new obligations and considerations on banks with regard to the offering and monitoring of deposit advance products. Adherence to these obligations and considerations should be reflected in a bank’s written policies and procedures with proper oversight and monitoring by the bank to ensure compliance.
1. CFPB, White Paper on Payday Loans and Deposit Advance Products, available at http://www.consumerfinance. gov/reports/white-paper-on-payday-loansand-deposit-advance-products/
2. FDIC, Proposed Guidance on Deposit Advance Products, available at http://www.fdic.gov/news/news/press/2013/ pr13031a.pdf; OCC, Proposed Guidance on Deposit Advance Products, available at http://www.occ.gov/news-issuances/bulletins/2013/bulletin-2013-11a.pdf