Alert November 26, 2013

Federal Banking Agencies Finalize Guidance on Deposit Advance Products

In conjunction with the FDIC, the OCC, finalized guidance highlighting supervisory concerns and expectations for deposit advance products.   The guidance largely mirrors the proposal the agencies published in April 2013.  In the guidance, the OCC addressed criticism that the guidance was intended to address consumer protection issues and not safety and soundness concerns and that the guidance created new rules and regulations that the OCC did not have jurisdiction to promulgate.  According to the OCC, the guidance was intended to “make a bank aware of the risks related to deposit advance products” and to “help a bank understand what specific consumer compliance laws and regulations” are applicable to deposit advance products. 

Noting that deposit advance products “pose supervisory risks” and that the products “share a number of characteristics” with payday loans (i.e., high fees and short repayment terms), the guidance identifies several categories of safety and soundness risks: credit risks, reputation risks, operational risks, and compliance risks. Of note, the guidance states that the significant risks of deposit advance products may subject banks to the risks of litigation and regulatory enforcement actions.

The guidance also sets forth applicable federal law and regulations to include:

  • Section 5 of the Federal Trade Commission Act, which generally prohibits unfair and deceptive acts or practices. The guidance notes that Section 5 of the FTC Act applies not only to the deposit advance product, but to every stage and activity (e.g., product development, marketing campaigns);
  • Truth in Lending Act and its implementing regulation, Regulation Z, which generally requires creditors to provide disclosures when extending consumer credit;
  • Electronic Fund Transfer Act and its implementing regulation, Regulation E;
  • Truth in Savings Act and its implementing regulation, Regulation DD; and
  • Equal Credit Opportunity Act and its implementing regulation, Regulation B.  The guidance notes that steering or targeting certain consumers on a prohibited basis to deposit advance products while offering other consumers more favorable credit products could raise fair lending risks.

The guidance communicates the OCC’s supervisory expectations noting that examinations will focus on potential safety and soundness issues and compliance with applicable consumer protection laws. The guidance provides that the OCC will examine assess the credit quality, including underwriting and credit administration policies and practices, adequacy of capital, reliance on fee income, adequacy of the allowance for loan and lease losses, compliance with applicable federal consumer protection law, management oversight, and third-party relationships.  In particular, the guidance states that supervised entities should have written underwriting policies that address certain factors such as, the length of a consumer’s deposit relationship with the bank, classified credits, cooling off periods, and increasing deposit advance credit limits, among other factors. For example, according to the guidance, supervised entities should require that each deposit advance loan be repaid in full and for a cooling off period of at least one monthly statement cycle after repayment before extending another deposit advance product in order to avoid repeated use.

Finally, the guidance highlights “reasonably priced small dollar loans” as an alternative to deposit advance products. Noting that if structured properly, small dollar loans could be a “safe and affordable means” for consumers.