Alert April 30, 2013

Federal Banking Agencies Issue Proposed Guidance on Deposit Advance Products

The OCC and the FDIC issued proposed guidance highlighting concerns with deposit advance loan products. The guidance follows a report by the CFPB on consumer use of payday loans and deposit advances. While neither of the agencies have issued new rules for the offering of deposit advances, each agency’s guidance defines the elevated risk to financial institutions and consumers called out by the CFPB in its report, as including both safety and soundness supervisory risks as well as litigation and reputational risks. Reflecting the findings of the CFPB report, the agencies each note that, similar to payday loans, deposit advance loans bear a number of high-risk features, including high fees, very short, lump sum repayments often in advance of the customer’s other bills, and are routinely offered without due regard to the "fundamental and prudent banking practices" necessary to determine the customer’s ability to repay the loan while meeting other necessary financial obligations.

The guidance suggests that deposit advance loan products may bring a greater potential for harm to consumers while also presenting institutions with elevated safety and soundness, legal compliance, and consumer protection risks. The agencies identify several categories of risk: credit risk, legal risk, third-party risk and consumer protection. For example, the guidance concludes that borrowers who obtain deposit advance loans “may have cash flow difficulties” or “insufficient credit histories that limit other borrowing options,” thus imposing credit risk. This credit risk posed by such borrowers is amplified by repeated or continuous provisions of credit to high-risk individuals. The OCC’s guidance in particular notes that higher capital requirements will generally apply to loan portfolios that exhibit higher-risk characteristics, thereby potentially increasing the cost to an institution of offering deposit advance loans.

Despite these admonitions, the guidance neither calls for an outright ban on deposit advance loans nor does it announce the promulgation of new rules to govern their issuance. Instead, the guidance offers a number of specific recommendations intended to lessen the risks posed by deposit advance loans to consumers and institutions. Among the most significant of the recommendations, financial institutions are advised to: (1) review account histories of frequent users of the deposit advance product to ensure that the relationship is of sufficient duration to verify the regularity of a customer’s direct deposits; (2) mandate a “cooling off period” of at least one monthly statement cycle between deposit advances and (3) implement an ongoing review of credit eligibility on a customer-by-customer basis at least every six months.

The FRB also issued a statement on deposit advance products that largely mirrors the issues addressed in the OCC and FDIC guidance.