[Federal Register Volume 76, Number 110 (Wednesday, June 8, 2011)]
[Notices]
[Pages 33409-33413]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-14093]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket ID OCC-2011-0012]


Guidance on Deposit-Related Consumer Credit Products

AGENCY: Office of the Comptroller of the Currency, Treasury (OCC).

ACTION: Proposed guidance with request for comment.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
proposing guidance on safe and sound banking practices in connection 
with deposit-related consumer credit products. Such products include 
automated overdraft protection and direct deposit advance programs.

DATES: Comments must be submitted on or before July 8, 2011.

ADDRESSES: Because paper mail in the Washington, DC area and at the OCC 
is subject to delay, commenters are encouraged to submit comments by e-
mail, if possible. Please use the title ``Guidance on Deposit-Related 
Consumer Credit Products'' to facilitate the organization and 
distribution of the comments. You may submit comments by any of the 
following methods:
     E-mail: regs.comments@occ.treas.gov.
     Mail: Office of the Comptroller of the Currency, 250 E 
Street, SW., Mail Stop 2-3, Washington, DC 20219.
     Fax: (202) 874-5274.
     Hand Delivery/Courier: 250 E Street, SW., Mail Stop 2-3, 
Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2011-0012'' in your comment. In general, OCC will enter 
all comments received into the docket and publish them on the 
Regulations.gov Web site without change, including any business or 
personal information that you provide such as name and address 
information, e-mail addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not enclose any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this notice by any of the following methods:
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 250 E Street, SW., Washington, DC. 
For security reasons, the OCC requires that visitors make an 
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid 
government-issued photo identification and to submit to security 
screening in order to inspect and photocopy comments.
     Docket: You may also view or request available background 
documents and project summaries using the methods described above.

FOR FURTHER INFORMATION CONTACT: Michael S. Bylsma, Director, Community 
and Consumer Law Division, (202) 874-5750; Grovetta Gardineer, Deputy 
Comptroller for Compliance Policy, (202) 874-4428; or Kevin Russell, 
Director, Retail Credit Risk, (202) 874-5170, Office of the Comptroller 
of the Currency, 250 E Street, SW., Washington, DC 20219.

SUPPLEMENTARY INFORMATION:
    The Office of the Comptroller of the Currency (OCC) is proposing 
supervisory guidance to clarify the OCC's application of principles of 
safe and sound banking practices in connection with deposit-related 
consumer credit products such as automated overdraft protection and 
direct deposit advance programs. This guidance details the principles 
that the OCC expects national banks to follow in connection with any 
deposit-related consumer credit product to address potential 
operational, reputational, compliance, and credit risks. This approach 
provides a high degree of flexibility for banks to structure and 
operate their programs in a prudent and safe and sound manner that 
provides for fair treatment of customers without dictating specific 
product terms. The OCC expects national banks to apply the principles 
set forth in this guidance to any deposit-related consumer credit 
product they offer. Appendixes to this guidance illustrate application 
of these principles to two specific consumer credit products--automated 
overdraft protection products and deposit advance products.
    Pursuant to Title III of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act, effective July 21, 2011, all functions of the 
Office of Thrift Supervision (OTS) and the Director of the OTS relating 
to Federal savings associations is transferred to the OCC.

[[Page 33410]]

As a result, the OCC will assume responsibilities for the ongoing 
examination, supervision, and regulation of Federal savings 
associations. Any final guidance on deposit-based credit products in 
effect for national banks on or after July 21, 2011 will also apply to 
Federal savings associations.

Text of Proposed Guidance

    The text of the proposed Supervisory guidance on deposit-related 
consumer credit products follows:

Supervisory Guidance On Deposit-Related Consumer Credit Products

Purpose

    The Office of the Comptroller of the Currency (OCC) is issuing 
guidance to clarify the OCC's application of principles of safe and 
sound banking practices in connection with deposit-related consumer 
credit products such as automated overdraft protection and direct 
deposit advance programs. This bulletin details the principles that the 
OCC expects national banks to follow in connection with any deposit-
related consumer credit product to address potential operational, 
reputational, compliance, and credit risks. This approach provides a 
high degree of flexibility for banks to structure and operate their 
programs in a prudent and safe and sound manner that provides for fair 
treatment of customers without dictating specific product terms.
    The principles articulated in this guidance are predicated on the 
premise that bankers should provide their customers with products they 
need, and that bankers should not use these products to take advantage 
of their customer relationship. Through its supervisory process, the 
OCC has found that a small percentage, but not an insignificant number, 
of banks are administering deposit-related consumer credit programs 
without proper attention to these risks. In some cases, these program 
weaknesses are strikingly apparent.
    The OCC accordingly expects national banks to apply the principles 
outlined in this bulletin to any deposit-related consumer credit 
product they offer. The OCC expects bankers and examiners to use sound 
judgment and common sense when applying these principles to specific 
programs and products. Appendixes to this bulletin illustrate 
application of these principles to two specific consumer credit 
products--automated overdraft protection products and deposit advance 
products.

Supervisory Principles Applicable To Deposit-Related Consumer Credit 
Products

     Disclosure--Customers should be provided clear and 
conspicuous disclosures prior to enrollment, consistent with applicable 
law, about program costs, terms, and material limitations before they 
are provided a deposit-related credit product. Customers also should be 
provided information about alternative deposit-related credit products, 
if any, offered by the bank.
     Legal compliance--Any deposit-related credit product, and 
the manner in which it is offered or marketed, must comply with 
applicable law, including the prohibition against unfair and deceptive 
practices in the Federal Trade Commission Act.\1\
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    \1\ See OCC Advisory Letter 2002-3, ``Guidance on Unfair or 
Deceptive Acts or Practices,'' (Mar. 22, 2002).
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     Affirmative request--Customers should not be automatically 
enrolled in programs for deposit-related credit products. Enrollment 
should occur only after the customer has received appropriate 
disclosures, has made an affirmative request for the product, and has 
agreed to abide by product terms, including associated fees.\2\ Before 
approving the customer for the product, the bank should have sufficient 
information about the customer to evaluate that the customer meets the 
bank's eligibility standards, as described below. Account materials and 
marketing should not mislead customers about the optional nature of the 
product or otherwise promote routine use or undue reliance on deposit-
related credit products.
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    \2\ Unless otherwise specified in regulation or guidance, banks 
have flexibility in how they obtain a customer's affirmative 
request, including through clear and conspicuous language in an 
application, separate opt-in form, or account agreement whereby the 
customer affirmatively consents to be enrolled in the program and to 
pay any related fees for the service.
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     Program availability and prudent eligibility standards--
Policies and procedures should set forth the eligibility criteria that 
must be met by a depositor to obtain the deposit-related credit 
product. An appropriate degree of analysis should be conducted before 
the request is approved to determine whether the customer will be able 
to manage and repay the credit obligations arising from the product 
appropriately.
     Prudent limitations on product costs and usage--Deposit-
related credit products should be subject to prudent limitations on 
credit extensions, customer costs, and usage. Fees should be based on 
safe and sound banking principles,\3\ and take into account other 
appropriate factors including reputation and strategic risks to the 
bank. For example, a bank should consider the significance of revenue 
from a particular product and monitor for any undue reliance on the 
fees generated by that product for its revenue and earnings.
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    \3\ See 12 CFR 7.4002.
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     Monitoring and risk assessments--The volume of, and 
revenue from, deposit-related credit products and changes in customer 
usage should be regularly monitored to identify risks. Appropriate 
action should be taken to address any risks that are identified 
including excessive usage and nonperformance, such as reassessing a 
customer's creditworthiness; adjusting credit terms, fees, or limits; 
suspending or terminating the credit feature; or closing accounts.
     Management oversight--Bank management should exercise 
appropriate oversight of new products and services, through receipt and 
review of regular reports on product usage, fee income, and legal 
compliance, and through periodic audits. Appropriate oversight includes 
monitoring of third-party vendors that provide services related to the 
product. Bank management should be vigilant in assuring adherence to 
these principles and should take immediate steps to address 
noncompliance and reputation risks.
     Account management and charge-offs--Applicable guidelines 
on account management and charge-offs of uncollectible balances also 
should be followed.

Appendix A

Safe and Sound Banking Practices in Connection with Automated Overdraft 
Protection Programs

    Retail overdraft protection programs have evolved in significant 
ways since the federal banking agencies issued the ``Joint Agency 
Guidance on Overdraft Protection Programs'' in 2005.\4\ With the 
increasing volume of electronic transactions during this period, 
overdraft protection has evolved from a program that functions 
primarily in the context of check-based overdrafts to one that 
functions increasingly in the context of electronic payments-based 
overdrafts. These developments, in turn, have presented new operational 
risks and increasing credit risks posed by customers who use the 
product extensively. The OCC is concerned with

[[Page 33411]]

several practices that have developed during this intervening time, 
including:
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    \4\ 70 FR 9127 (Feb. 24, 2005). http://www.gpo.gov/fdsys/pkg/FR-2005-02-24/pdf/05-3499.pdf
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     Excessive reliance on fee income from overdraft protection 
programs;
     Failure to impose responsible limits on customer costs and 
imposition of fees that cumulatively exceed a customer's overdraft 
credit limit;
     Failure to assess a customer's ability to manage and repay 
overdraft protection before it is made available to the customer;
     Failure to monitor overdraft protection usage to identify 
excessive usage and credit risks and to take steps to address credit 
risks;
     Failure to charge off overdrafts in a timely manner;
     Failure to ensure adequate risk management of overdraft 
protection programs, with appropriate internal audits and compliance 
reviews;
     Failure to monitor and control promotional and sales 
practices for potentially misleading statements; and
     Payment processing intended to maximize overdrafts and 
related fees.
    While certain new rules have been implemented recently affecting 
overdraft protection programs,\5\ the OCC believes additional 
supervisory guidance is warranted to address the heightened safety and 
soundness risks that have arisen over time affecting the broad range of 
retail transactions covered by overdraft protection programs. This 
appendix describes how the OCC will apply the safety and soundness 
principles applicable to deposit-related consumer credit products to 
overdraft protection.
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    \5\ See 12 CFR 205.17 (Regulation E) and 12 CFR 230.11 
(Regulation DD).
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    This appendix updates and expands on the 2005 ``Joint Agency 
Guidance on Overdraft Protection Programs'' (joint agency guidance). 
The OCC expects national banks to develop policies and procedures 
governing automated retail overdraft protection programs that implement 
both this guidance and the joint agency guidance, including the section 
entitled ``Best Practices,'' as applicable.\6\
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    \6\ This joint agency guidance describes the circumstances 
concerning when overdraft protection programs may be subject to 
certain requirements in the Truth in Lending Act and the Equal 
Credit Opportunity Act. This appendix is not intended to affect 
whether or when such laws may apply to a particular program.
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Scope

    All automated overdraft protection plans that cover overdrafts from 
electronic (including ATM, point of sale (POS), preauthorized debits, 
and online banking transactions) and check-based consumer transactions 
are subject to the principles described in this appendix. Ad hoc and 
accommodation payment of overdrafts to an individual customer are not 
addressed in this appendix.\7\
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    \7\ National banks that authorize overdrafts on an ad hoc and 
accommodation basis should control for and manage any related 
reputational and compliance risks.
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Program Availability and Prudent Eligibility Standards

    National banks should adopt policies and procedures concerning the 
availability of overdraft protection that set forth eligibility 
criteria that must be met by a depositor to obtain automated overdraft 
protection. Such policies and procedures should provide that a customer 
must ``opt-in'' to the program, such as by making an affirmative 
request or application to be enrolled in the service and affirmatively 
agreeing to pay any fee that may be imposed for payment of overdrafts 
arising from debits, checks, POS and ACH transactions, as 
applicable.\8\ Account materials and marketing should not mislead 
customers about the optional nature of the program or otherwise promote 
routine use or undue reliance on the program.\9\
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    \8\ Regulation E prohibits financial institutions from assessing 
a fee or charge on a customer's account for paying an overdraft 
resulting from an ATM or one-time debit transaction unless the 
institution has obtained the customer's affirmative written consent. 
12 CFR 205.17(b). For overdraft programs that are not already 
covered by the Regulation E opt-in requirements, such as check-based 
overdrafts, affirmative consent need only be obtained from new 
account holders. Banks have flexibility in how they obtain a 
customer's affirmative request, provided that there is clear 
disclosure of the terms and fees and customer consent.
    \9\ See OCC Bulletin 2010-15, ``Overdraft Protection: Opt-In 
Requirements and Related Marketing Issues.''
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    If not already conducted as part of the initial deposit account 
opening, prudential criteria for enrolling a customer in an overdraft 
protection program should include an initial assessment of the 
customer's risk with respect to overdraft account privileges. The scope 
and rigor of this assessment may vary depending on the credit and 
deposit profile of the customer and other relevant risk factors, but an 
objective should be to determine whether the customer poses undue risks 
as indicated by, for instance, a history of overdrawing an account or 
information suggesting an inability or unwillingness to repay credit.
    A customer should be permitted to ``opt-out'' of program coverage 
at any time after which no additional overdraft fees may be imposed, 
and be provided clear notice of this ability.

Disclosures

    Customers who apply for and obtain overdraft protection should be 
provided sufficient information about a product's costs, risks, and 
limitations when the product is offered to make an informed choice. 
Customers also should be provided information about alternative 
overdraft services and credit products, if any, offered by the bank. In 
addition to receiving cost information, as required by the joint agency 
guidance, customers also should receive disclosure of the following 
information to manage their account prudently:
     Clear disclosure about the order of processing 
transactions and the fact that the order can affect the total amount of 
overdraft fees incurred by a customer.
     Notice when overdraft protection is suspended or 
terminated, and when it is reinstated, as applicable.
    As required by the Truth in Savings Act regulations, banks that 
provide periodic statements to customers must disclose the total dollar 
amount of overdraft fees that have been imposed during the period and 
year-to-date.\10\
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    \10\ 12 CFR 230.11.
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Prudent Limitations

    National banks should establish prudent programmatic limitations on 
the amount of credit that may be extended under an overdraft protection 
program, the number of overdrafts and the total amount of fees that may 
be imposed per day and per month, and any transaction amount below 
which an overdraft fee will not be imposed. These limitations should be 
established taking into account general ability to repay and safety and 
soundness considerations and the order in which the bank processes 
transactions. These limitations should be clearly disclosed to 
customers at the time the product is offered.\11\
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    \11\ Other prudential limitations may include offering a grace 
period of one or more days to allow a customer to return the account 
to a positive balance before any overdraft fee may be imposed.
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    The order in which transactions will be processed also should be 
subject to standards to ensure that transaction processing is not 
solely designed or generally operated to maximize overdraft fee income. 
For example, such standards may provide for processing individual or 
batched items in the order received, by check or serial number 
sequence, or in random order.

Monitoring and Risk Assessments

    Accounts should be subject to monitoring and segmentation by 
customer usage to detect indications of excessive overdrafts (and 
related

[[Page 33412]]

overdraft protection fees) and/or potential changes to repayment 
capacity with respect to the overdraft product. A national bank should 
review and evaluate the account as they deem appropriate, such as in 
the following circumstances:
     The account has incurred overdrafts in excess of the 
overdraft credit limit applicable to the account;
     The account has incurred the daily maximum number of 
overdraft transactions repeatedly during any month, whether or not a 
fee is imposed;
     The account has incurred the daily maximum number of 
overdraft fees repeatedly during any month; and
     The accountholder is exhibiting excessive usage of other 
credit products connected to the account.
    In such circumstances, the bank should determine whether the 
account continues to be viable or whether credit and aggregate fee 
limits need to be reduced, and take appropriate action. Such a 
determination should include a more in-depth analysis of the borrower's 
ability to manage and repay overdraft protection. The customer also 
should be notified of alternatives to overdraft protection, such as 
linked deposit accounts, or other lines of credit.
    If, after account review and making any appropriate changes to an 
account, the account continues to demonstrate excessive overdrafts, 
overdraft privileges should be terminated and, if appropriate, the 
account should be closed.

Management Oversight

    Bank management should receive regular reports on overdraft volume, 
profitability, and credit performance. These reports should segment 
accounts by level of overdrafts to identify excessive overdraft 
protection usage. Management also should receive reports that describe 
the status and outcome of internal reviews and evaluations of accounts 
identified as demonstrating excessive usage.

Charge-Offs

    Overdraft protection should be suspended or terminated when the 
customer no longer meets the eligibility criteria, has declared 
bankruptcy, or is in default on repayment of an overdraft or on any 
other loan with the bank. Overdraft balances should be charged off when 
considered uncollectible, but no later than 60 days from the date first 
overdrawn. If an account has been continually overdrawn for 60 days or 
more, it must be closed and charged off.

Appendix B

Safe and Sound Banking Practices in Connection with Deposit Advance 
Programs

    ``Deposit advance'' products are short-term, open-end lines of 
credit that are generally made available to retail account holders with 
recurring direct deposits. These products typically operate as follows: 
advances under the line of credit are made only upon request by the 
customer and are limited to the amount, or a portion of the amount, of 
the anticipated deposit. Advances are made in fixed dollar increments 
and a flat fee is assessed for each advance. For example, a customer 
may obtain advances in increments of $10 or $20 for $1 or $2 per 
increment borrowed. Multiple advances can be outstanding at any time up 
to any credit limit that has been established. Full repayment typically 
is required during a single deposit cycle--the amount advanced, plus 
the applicable finance charge, is usually repaid when the next direct 
deposit is credited to a customer's account. If a deposit is 
insufficient to repay the advance in full, repayment may be made with 
the next or subsequent deposits.
    There are various practices associated with deposit advance 
products that raise operational and credit risks and supervisory 
concerns, including:
     Failure to evaluate the customer's ability to repay the 
credit line appropriately, taking into account the customer's recurring 
deposits and other relevant information;
     Requiring full repayment of the advance out of a single 
deposit, which reduces the funds available to customers for daily 
living expenses, which can cause overdrafts;
     Steering customers who rely on direct deposits of federal 
benefits payments as their principal source of income to deposit 
advance products;
     Failure to disclose the costs of deposit advances; and
     Failure to monitor accounts for excessive usage and costs.
    This appendix describes how the OCC will apply the safety and 
soundness principles applicable to deposit-related consumer credit 
products to deposit advance products.

Product Availability and Prudent Eligibility Standards

    National banks should adopt policies and procedures that set forth 
eligibility criteria that must be met by a retail depositor to obtain 
the deposit advance service. Such policies and procedures also should 
provide that a customer must ``opt-in'' to the program, by making an 
affirmative request or application for enrollment in the deposit 
advance program and affirmatively agreeing to pay any fee imposed for 
the service.\12\ Account materials and marketing should not mislead 
customers about the optional nature of the program or otherwise promote 
routine use or undue reliance on the product.
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    \12\ Affirmative consent need only be obtained in connection 
with new enrollments in a deposit advance program.
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    Prudential criteria for enrolling a customer in a deposit advance 
program should include risk assessment criteria. Such criteria would 
include an assessment of the customer's willingness and ability to 
repay the advance based on information about the customer's continued 
employment or other recurrent source(s) of income from which the direct 
deposit is derived and other relevant information.
    A customer should be permitted to ``opt-out'' of program coverage 
at any time, after which no future advances may be made or related fees 
imposed, and be provided clear notice of this ability.

Disclosures

    Customers should receive clear and conspicuous disclosures--before 
the customer is enrolled--about key program criteria and limitations, 
costs, and risks. For example, these disclosures would:
     Describe the operation, fees, costs, and any limitations 
on the program;
     Explain that direct deposit advances can be costly and 
inform customers of alternative deposit-related credit products, if 
any, offered by the bank.
     Explain transaction-processing policies for repayment of a 
credit advance including, as applicable, the fact that repayment may 
take priority over the processing of other items such as checks and 
could result in overdrafts or returned items and associated fees;
     Explain how the loan must be repaid if a deposit is 
insufficient; and
     Describe key program features affecting program 
protections, including any rescission or refund policies, cancellation 
policies, and cooling-off periods.

Prudent Limitations

    National banks should establish prudent programmatic limitations 
that generally take into account the amount of the customer's recurring 
direct deposits; the need for a portion of deposited funds to remain 
available to the customer for daily expenses; account usage; and credit 
extended to

[[Page 33413]]

the customer, including other deposit-based loans, if applicable. These 
include limits on:
     The number of periods that back-to-back advances may be 
made before a cooling-off period will be triggered;
     The number of months in which advances may be outstanding;
     The total amount or percentage of any deposit that may be 
advanced in any period; and
     The total amount or percentage of any deposit that may be 
used for repayment of the advance.
    These limits should be adjusted, as appropriate, based on risks 
identified through account monitoring. For example, if a customer's 
direct deposits stop, no further extensions of credit should be 
permitted under the program.

Repayment Terms

    Deposit advances should be permitted to be repaid by direct deposit 
or by separate payment in advance of the date a deposit would be 
debited without any additional fee. When program terms allow for 
substantial advances relative to the regular deposit amount, advances 
should be permitted to be repaid in more than one installment over an 
extended period of more than one month. National banks should not 
permit repayments of deposit advances that would overdraw the account 
or permit additional advances during any periods of account overdraft.

Monitoring and Risk Assessments

    Deposit-advance accounts should be subject to reasonable periodic 
monitoring to ensure that circumstances have not changed that adversely 
affect credit risk and to identify excessive usage. Monitoring should 
include overdraft and returned-item activity in the account. There 
should be appropriate follow up with the customer, if warranted, about 
use of the account, repayment options, and credit alternatives.

Management Oversight

    Bank management should receive regular reports on volume, 
profitability, and credit performance of the deposit advance program. 
These reports should segment accounts by level of line usage to 
identify excessive deposit-advance usage. Management also should 
receive reports that describe the status and outcome of internal 
reviews and evaluations of accounts identified as demonstrating 
excessive usage.

Charge-Offs

    Deposit advances that are not repaid in accordance with the account 
terms should be charged off.

    Dated: June 1, 2011.
John Walsh,
Acting Comptroller of the Currency.
[FR Doc. 2011-14093 Filed 6-7-11; 8:45 am]
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