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...