The OCC and the FDIC have each issued proposed guidance, and the FRB has issued a written statement highlighting concerns with deposit advance loan products (‘the “Guidance”) (Available here is the OCC version of the Guidance, and available here is the FDIC version of the Guidance.) The Guidance reflects a report by the Consumer Financial Protection Bureau (“CFPB”) regarding the use of payday loans and deposit advances in which the CFPB concluded that the products present an elevated risk both to financial institutions and their customers. While none of the OCC, FDIC or FRB (collectively, the “Agencies”) has issued new rules for the offering of deposit advances, the Guidance defines this elevated risk as including both safety and soundness supervisory risks and litigation and reputational risks. The Guidance presents a two-sided message to banking organizations: on the one hand, it amounts to an unambiguous admonishment to financial institutions that offer deposit advance loans that such products must be monitored carefully, while on the other it encourages financial institutions to continue “to respond to customers’ small-dollar credit needs.” At the very least, institutions that offer deposit advance products should be aware of their increasing profile in the minds of regulators and the evolving legal and regulatory landscape.
Deposit advances are a type of short-term, small dollar loan product offered to a bank’s existing customers whose deposit accounts reflect recurring direct deposits. The product permits a customer to take out a loan against future deposits, typically paychecks, which is then repaid automatically when the next direct deposit enters the account. Reflecting the findings of the CFPB’s report, the Agencies each note that, similar to payday loans, deposit advances 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. The Guidance concludes that borrowers who obtain deposit advance loans “may have cash flow difficulties” or “insufficient credit histories that limit other borrowing options.” The measure of 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.
Legal Risk. Each of the Agencies identify increased risks of consumer class action litigation and regulatory enforcement actions associated with deposit advance lending products.
Third-Party Risk. The Agencies are aware that a number of institutions rely upon third-party service providers to administer deposit advance products. As with other aspects of their operations, financial institutions remain responsible and liable for compliance with all laws and regulations applicable to their activities, including those administered by third parties.
Consumer Protection. As noted above, the CFPB and the Agencies identify deposit advance loans as, potentially high-risk products for consumers, citing their high fee structure and preemptive means of collection directly from deposit accounts. Additionally, the Guidance notes that, despite their small-dollar size, deposit advance loans potentially remain subject to a broad spectrum of federal and state laws and regulations governing extensions of credit, including the Truth in Lending Act, the Electronic Fund Transfer Act, the Truth in Savings Act, the Equal Credit Opportunity Act, and others. The Guidance also specifically references the Federal Trade Commission Act’s prohibition on “unfair or deceptive acts.”
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:
- 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. The Agencies suggest six months as a minimum time period;
- mandate a “cooling off period” of at least one monthly statement cycle between deposit advances; and
- implement an ongoing review of credit eligibility on a customer-by-customer basis at least every six months.
The Agencies also announced that supervisory examinations will bring an increased focus on compliance with consumer protection laws and adherence to safe and sound banking practices in the administration of deposit advance products.
Comments on the OCC’s Guidance and on the FDIC’s Guidance are due by May 30, 2013.