[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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