[Federal Register Volume 78, Number 228 (Tuesday, November 26, 2013)]
[Notices]
[Pages 70624-70630]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-28361]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket ID OCC-2013-0005]
Guidance on Supervisory Concerns and Expectations Regarding
Deposit Advance Products
AGENCY: Office of the Comptroller of the Currency, Treasury (OCC).
ACTION: Final guidance.
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SUMMARY: The OCC is issuing final supervisory guidance entitled
``Guidance on Supervisory Concerns and Expectations Regarding Deposit
Advance Products'' (Guidance), which addresses safe and sound banking
practices and consumer protection in connection with deposit advance
products.
FOR FURTHER INFORMATION CONTACT: Robert Piepergerdes, Director for
Retail Credit Risk, (202) 649-6220; Kimberly Hebb, Director for
Compliance Policy, (202) 649-5470; Kenneth Lennon, Assistant Director
for Community and Consumer Law, (202) 649-6350; Office of the
Comptroller of the Currency, 400 7th Street SW., Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
I. Introduction
The Office of the Comptroller of the Currency (OCC) is issuing the
Guidance to clarify the OCC's application of principles of safe and
sound banking
[[Page 70625]]
practices and consumer protection in connection with deposit advance
products. The Guidance details the OCC's supervisory expectations in
connection with any deposit advance product offered by OCC-supervised
financial institutions (banks) to address potential credit, reputation,
operational, and compliance risks. The OCC expects a bank to apply the
principles set forth in this Guidance to any deposit advance product it
offers.
II. Description of Guidance
A deposit advance product is a small-dollar, short-term loan or
line of credit that a bank makes available to a customer whose deposit
account reflects recurring direct deposits. The customer obtains a
loan, which is to be repaid from the proceeds of the next direct
deposit. These loans typically have high fees, are repaid in a lump sum
in advance of the customer's other bills, and often are not subject to
fundamental and prudent banking practices through which a bank can
determine the customer's ability to repay the loan and meet other
necessary financial obligations.
The OCC continues to encourage banks to respond to customers'
small-dollar credit needs; however, banks should be aware that deposit
advance products can pose a variety of credit, reputation, operational,
compliance, and other risks. The OCC is issuing the Guidance to ensure
that any bank offering these products does so in a safe and sound
manner and does not engage in practices that would increase these
risks.
III. Comment Letters Received
The OCC received over 100 official comments on the proposal.\1\
After consideration of all such comments, the OCC is issuing the
Guidance substantially as proposed, but with certain amendments. The
amendments to the Guidance are meant to provide further clarification
of certain provisions, including those raised by the commenters.
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\1\ See ``Proposed Guidance on Deposit Advance Products;
Withdrawal of Proposed Guidance on Deposit-Related Consumer Credit
Products,'' 78 FR 25353 (April 20, 2013).
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Several commenters stated they believed the OCC issued the Guidance
to address consumer protection issues, not safety and soundness
concerns. Additionally, some commenters stated the Guidance would
create new rules and regulations within the consumer protection arena,
which the OCC does not have the jurisdiction to promulgate. The
Guidance, like other supervisory guidance issued by the prudential
banking regulators, highlights supervisory expectations based on
applicable laws and regulations. It is intended to make a bank aware of
the risks related to deposit advance products and provide guidelines to
follow, based on safety and soundness principles, if it offers, or is
considering offering, deposit advance products. The Guidance, in part,
is also designed to help a bank understand which specific consumer
compliance laws and regulations may be applicable to these types of
loans.
Many commenters also questioned whether guidance relating to a
determination of a customer's financial capacity and the level of
effort necessary to complete such an analysis may be overly burdensome.
The OCC, however, believes analyzing recurring deposits (inflows) and
checks/credits/customer withdrawals (outflows) over at least a six-
month period is appropriate because it would afford a bank the
opportunity to use readily available information to determine whether
the customer has the ability to repay the loan without needing to
borrow repeatedly from any source, including re-borrowing, to meet
necessary expenses. When determining the appropriate credit limit for a
customer, there is no expectation in the Guidance that the bank do any
additional analysis of inflows and outflows to determine ability to
repay other than the specific transactions occurring within the account
being used to repay the deposit advance product. However, as a matter
of policy, a bank may consider other factors in determining overall
eligibility for the product, including performance related to other
accounts at the bank.
Several commenters also expressed concerns that this Guidance would
have a ``chilling effect'' on the overall small-dollar, short-term
credit market, and potentially drive consumers to illegal and/or
unregulated lenders. However, the OCC is aware of a number of banks
offering affordable small-dollar loans at reasonable terms to their
customers.
Certain other commenters expressed concerns with the underwriting
requirements as they relate to classified credits. Specifically,
commenters interpreted the proposal to mean it was necessary to look
outside of their bank (e.g., obtaining a credit report) to determine
whether the customer had any delinquent or adversely classified
credits, and was therefore ineligible for their product. This was never
the intent of the Guidance. The OCC has added language to clarify that
the eligibility and underwriting expectations described in the Guidance
do not require the use of credit reports.
A number of other commenters questioned whether the Guidance would
be applicable to deposit advance products that are designed to resemble
``lines of credit'' given that the proposal uses the term ``loan.'' To
address this concern, language has been added to state that the
Guidance is applicable to all deposit advance products regardless of
how the extension of credit is structured.
Some commenters, primarily state regulatory agencies, raised the
concern that the Guidance would preempt applicable state laws,
including usury laws, and potentially limit the ability of states to
regulate these types of products. This was never the intent of the
Guidance. Therefore, to address these concerns, the OCC has added a
footnote to the section on Compliance and Consumer Protection Related
Concerns clarifying that the Guidance does not impinge on state usury
laws, to the extent they are applicable.
Commenters also raised concerns about banks using the proceeds of
certain government benefits (e.g., Social Security) in determining a
customer's ability to repay a deposit advance loan. The commenters
suggested that, because government benefits are ``designed to cover
basic living expenses,'' the Guidance should discourage a bank from
using proceeds from these benefits to determine a customer's ability to
repay deposit advance loans. The Guidance does not distinguish between
types of inflows, but more generally cautions a bank against making a
loan that cannot be repaid to any customer, including Social Security
and other government benefit recipients.
A related concern raised by commenters had to do with the impact of
the ``cooling off'' period. For example, the commenters felt a required
cooling off period might result in some customers obtaining larger
advances than they might otherwise, because their access to additional
advances would be delayed by the cooling off period.
The Guidance makes clear that an OCC-supervised bank is expected to
assess the customer's ability to repay a loan while allowing the
customer to continue to meet typical recurring and other necessary
expenses such as food, housing, transportation, and healthcare, as well
as other outstanding debt obligations. Additionally, the bank's
underwriting criteria should ensure the appropriate deposit advance
limit is established and that customers can meet these criteria without
needing to borrow repeatedly. The underwriting standards detailed in
the Guidance, along with the cooling off provision, should prevent
[[Page 70626]]
customers from taking out loans they cannot repay.
IV. Guidance
The text of the Guidance follows:
OCC Guidance on Supervisory Concerns and Expectations Regarding Deposit
Advance Products
The Office of the Comptroller of the Currency (OCC) is issuing this
``Guidance on Supervisory Concerns and Expectations Regarding Deposit
Advance Products'' (Guidance) to OCC-supervised financial institutions
(banks) that offer deposit advance products. The Guidance is intended
to ensure that banks are aware of the significant risks associated with
deposit advance products and supplements the OCC's existing guidance on
payday loans and subprime lending.\2\ Although the OCC encourages banks
to respond to customers' small-dollar credit needs in a responsible
manner and with reasonable terms and conditions, deposit advance
products pose a variety of credit, reputation, operational, and
compliance risks to banks.\3\
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\2\ OCC Advisory Letter AL 2000-10, ``Payday Lending'' (November
27, 2000); OCC Bulletin 2001-6, ``Expanded Guidance for Subprime
Lending Programs'' (Subprime Lending Guidance) (January 31, 2001),
jointly signed by the OCC, the Board of Governors of the Federal
Reserve (Board), the Federal Deposit Insurance Corporation (FDIC),
and the Office of Thrift Supervision (OTS).
\3\ This Guidance does not apply to banks' overdraft lines of
credit. Overdraft lines of credit typically do not have repayment
characteristics similar to deposit advance products.
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Background: A deposit advance product is a type of small-dollar,
short-term credit product offered to customers maintaining a deposit
account, reloadable prepaid card, or similar deposit-related vehicle at
a bank. The bank provides a credit feature that allows the customer to
obtain a loan in advance of the customer's next direct deposit. The
deposit advance is based on the customer's history of recurring
deposits. Typically, the advance is offered as an open-end line of
credit.\4\ While the specific details of deposit advance products vary
from bank to bank, and also may vary over time, those currently offered
incorporate some or all of the characteristics described below.
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\4\ This Guidance applies to all deposit advance products,
regardless of whether the deposit advance product is structured as
open- or closed-end credit.
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Cost: The cost of the deposit advance is typically based on a fee
structure, rather than an interest rate. Generally 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 $20 with a
fee of $10 per every $100 advanced. The cost of the deposit advance can
be more expensive than other forms of credit, such as a credit card or
a traditional line of credit.
Eligibility, Loan Limits, and Ability to Repay: Typically, a
customer is eligible for a deposit advance if the deposit account has
been open for a certain period of time and the customer receives
recurring deposits. Banks typically require a minimum sum to be
directly deposited each month for a certain period of time in order for
the customer to be eligible for a deposit advance loan. Currently, some
banks permit a recurring deposit as low as $100.
The maximum dollar amount of the advance is typically limited to a
percent or amount of the recurring monthly deposit. For example, some
banks permit the deposit advance to be the lesser of $500 or 50 percent
of the scheduled direct deposits from the preceding statement cycle,
rounded up to the nearest $10. The advance limit does not include the
fee associated with the advance. In addition, some banks will allow the
advance even if the customer's account is currently overdrawn. Some
banks also permit a customer to exceed the advance limit, at the bank's
discretion.
Typically, the bank does not analyze the customer's ability to
repay the loan based on recurring debits or other indications of a need
for residual income to pay other bills. The decision to advance credit
to customers, based solely on the amount and frequency of their
deposits, stands in contrast to banks' traditional underwriting
standards for other products, which typically include an assessment of
the ability to repay the loan based on an analysis of the customer's
finances.
Repayment: Repayment is generally required through an electronic
payment of the fee and the advance with the next direct deposit.
Typically, the bank is paid first before any other transactions are
paid. In some cases, a bank will apply a time limit on how soon it will
take the fee and the advance from the direct deposit, but the time
limit is minimal, usually one or two days. If the first deposit is
insufficient to repay the fee and the advance, the repayment will be
obtained from subsequent deposits. If the deposits are insufficient to
repay the fee and the advance within a certain time period, typically
35 days, then the bank executes a forced repayment by sweeping the
underlying deposit account for the remaining balance. Unlike a payday
lender, the bank has automatic access to the underlying deposit
account. In some cases, customers may be able to access program
features that allow for a longer repayment period than 35 days;
however, this is not usually allowed.
If the deposit account funds are insufficient to repay the fee and
the advance, then the account goes into overdraft status. Some banks
will charge an overdraft fee based on the deposit advance overdrawing
the account. Other banks will only charge overdraft fees based on any
subsequent transactions that overdraw the account.
Although the deposit advance limit is based on an amount or
percentage of the monthly deposit, the repayment can be based on a
shorter time period. For example, if a customer receives direct
deposits of $500 every other Friday from her employer, her monthly
direct deposit would be $1000. Under the typical bank's advance limit,
she could receive an advance of $500 with a fee of $50. If she obtains
the deposit advance on the Thursday before her payday, then the bank
will obtain repayment on Friday. The bank will take the entire $500
paycheck. In addition, the customer will still owe $50 in principal
because the deposit was only sufficient to pay the $50 fee and $450 in
principal. Assuming the customer has no other source of income, the
customer will need to rely on savings to pay bills until the next
paycheck. At the next paycheck, the bank will take the remaining $50 in
principal and the customer will have $450 to pay all outstanding bills.
Some banks have implemented alternative repayment methods that
provide more flexibility to the customer. For example, some banks will
permit repayment to extend through to the second direct deposit if the
first direct deposit falls below a specific dollar threshold. In
addition, some banks allow payment by mail rather than electronic
transfer, but may charge a fee for this option. Finally, some banks
offer an installment loan option, but may also charge an additional fee
or may only offer this option if the customer cannot repay the advance
and fee from the monthly deposits.
Repeat Usage Controls: Banks often have repeat usage limits that
trigger a ``cooling off'' period during which the customer cannot take
out a deposit advance, or the credit limit is reduced. For example,
some banks may prevent an advance for 35 days if the customer has used
the service at least once each month in the previous six-month period.
However, the customer can resume use of the product after the 35-day
period is completed. Other banks may prevent an advance for one full
billing cycle if the customer borrows the entire amount of the advance
each
[[Page 70627]]
month in the previous six months. However, the customer can avoid this
limit by taking out something less than the maximum advance.
Marketing and Access: Banks market deposit advance products as
intended to assist customers through a financial emergency or to meet
short-term needs. These advances, however, are typically not included
with the bank's list of available credit products, but are instead
listed as a deposit account ``feature.'' Customers are alerted to the
availability of the products by a reference on their account statements
or a ``button'' or hot link on their personal accounts' Web pages, but
it is not clear that the customers are made equally aware of less
expensive alternatives.
Supervisory Concerns With Deposit Advance Loans
Although the OCC encourages a bank to respond to customers' small-
dollar credit needs, deposit advance products pose supervisory risks.
These products share a number of characteristics seen in traditional
payday loans, including: High fees; very short, lump-sum repayment
terms; and inadequate attention to the consumer's ability to repay. As
such, a bank needs to be aware of these products' potential to harm
consumers, as well as elevated credit, reputation, operational, and
compliance risks.
The combined impact of both an expensive credit product and short
repayment periods increases the risk that customers may end up using
what is marketed as a short-term credit product that results in debt
over an extended period of time. Specifically, deposit advance
customers may repeatedly take out loans because they are unable to
fully repay the balance in one pay period while also meeting typical
recurring and other necessary expenses (e.g., housing, food, and
transportation). Customers may feel compelled to take out another loan
very soon thereafter to make up for the shortfall. This is similar to
the practice of ``loan flipping,'' which the OCC, the FDIC, and the
Board have previously noted to be an element of predatory lending.\5\
Though deposit advance products are often marketed as intended for
emergency financial assistance, and as unsuitable for meeting a
customer's recurring or long-term obligations, the OCC believes the
product's design results in consumer behavior that is frequently
inconsistent with this marketing and is detrimental to the customer.
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\5\ Subprime Lending Guidance, jointly signed by the OCC, the
Board, the FDIC, and the OTS (January 31, 2001).
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To address concerns that certain customers become dependent on
deposit advance products to meet their daily expenses (as evidenced by
their repeated borrowings), certain lenders now require customers who
have taken out a specified number of deposit advance loans within a
certain time frame to wait for a specified period before they are
eligible to take out a new loan. However, the OCC is concerned these
cooling off periods can be easily avoided and are ineffective in
preventing repeated usage of these high-cost, short-term loans, for
longer-term borrowing needs.
Weak underwriting increases the risk that the customer's account
may become overdrawn and result in multiple overdraft fees when
subsequent transactions are presented for payment. Some banks assess
overdraft fees when the automatic repayment of the deposit advance loan
causes the associated account to reflect a negative balance.
Safety and Soundness Risks
Credit Risk: Customers who obtain deposit advance loans may have
cash flow difficulties or blemished or insufficient credit histories
that limit other borrowing options. The high aggregate cost of numerous
and repeated extensions of credit that may be a consequence of this
product further increases credit risk. Lenders that offer deposit
advance loans typically focus on the amount of the customer's monthly
deposit for underwriting purposes. Failure to consider whether the
income sources are adequate to repay the debt while covering typical
living expenses and other debt payments presents safety and soundness
risks.
Numerous and repeated extensions of credit to the same individual
may be substantially similar to continuous advances and subject the
bank to increased credit risk. While re-aging, extensions, deferrals,
renewals, and rewrites of lending products can be used to help
customers overcome temporary financial difficulties, such practices, if
repeated, can cloud the true performance and delinquency status of the
portfolio.\6\ Further, a bank should ensure customers do not use
deposit advances to make payments on other loans at the bank, as this
could mask a lack of repayment ability and delinquencies on other loans
at the bank.
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\6\ See ``Federal Financial Institutions Examination Council's
Uniform Retail Credit Classification and Account Management
Policy,'' 65 FR 36903 (June 12, 2000). This policy is addressed more
fully in the ``Credit Quality'' section of this Guidance. See also
OCC Bulletin 2000-20, ``Uniform Retail Credit Classification and
Account Management Policy'' (June 20, 2000).
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Relying on the amount of the customer's incoming deposits without
consideration of expected outflows does not allow for a proper
assessment of the customer's ability to repay the loan and other
necessary expenses. This failure to properly assess the customer's
financial capacity, a basic underwriting principle, increases default
risk.
Reputation Risk: Reputation risk is the risk arising from negative
public opinion. Deposit advance products are receiving significant
levels of negative news coverage and public scrutiny. This increased
scrutiny includes reports of high fees and customers taking out
multiple advances to cover prior advances and everyday expenses.
Engaging in practices that are perceived to be unfair or detrimental to
the customer can cause a bank to lose community support and business.
Operational Risk: Banks remain responsible for compliance with all
applicable laws and regulations, including the activities of a third
party.\7\ The OCC is aware of banks working with third parties to
develop, design and service the deposit advance product. The existence
of third-party arrangements may, when not properly managed,
significantly increase banks' reputation, compliance, and, operational
risks. Some of the risks are associated with the underlying activity
itself, similar to the risks faced by a bank directly conducting the
activity. Consequently, third-party arrangements may expose the bank to
regulatory action and may impact the bank's ability to establish new or
service existing customer relationships.
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\7\ See OCC Bulletin 2013-29, ``Third-Party Relationships: Risk
Management Guidance'' (October 30, 2013).
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Compliance Risk: The significant risks associated with deposit
advance lending products may subject banks to the risk of litigation--
both from private lawsuits and regulatory enforcement actions.
Compliance and Consumer Protection Related Concerns
Deposit advance products must comply with all applicable federal
laws and regulations, some of which are outlined below. In some
circumstances, certain state laws may be applicable.\8\ It is important
that a bank's deposit advance products be reviewed by counsel for
compliance with all applicable laws prior to implementation.
Furthermore, although
[[Page 70628]]
the guidance below outlines federal laws and regulations as of the date
this Guidance is published, applicable laws and regulations are subject
to amendment. In addition, statutes and regulations will have different
applications depending on how a deposit advance product is structured.
A bank offering deposit advances should carefully consider whether and
how these laws and rules will apply to the particular version of the
deposit advance product it is providing. Accordingly, a bank should
monitor applicable laws and regulations for revisions and to ensure
that its deposit advance product is fully compliant. Federal laws and
regulations applicable to deposit advance products include the
following:
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\8\ This Guidance has no bearing on state usury laws or existing
federal laws regarding usury. See 12 U.S.C. 85, 1831d(a).
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The Federal Trade Commission Act (FTC Act): Section 5 of the FTC
Act prohibits unfair or deceptive acts or practices (UDAP).\9\ The OCC
enforces this section pursuant to its authority in Section 8 of the
Federal Deposit Insurance Act, 12 U.S.C. 1818.\10\ An act or practice
is unfair where it: (1) Causes or is likely to cause substantial injury
to consumers; (2) cannot be reasonably avoided by consumers; and (3) is
not outweighed by countervailing benefits to consumers or to
competition. Public policy may also be considered. An act or practice
is deceptive if: (1) There is a representation, omission, or practice
that misleads or is likely to mislead a consumer; (2) the consumer's
interpretation is reasonable under the circumstances; and (3) the
misleading representation, omission, or practice is material.
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\9\ 15 U.S.C. 45(a) and (n).
\10\ See OCC Advisory Letter 2002-3, ``Guidance on Unfair or
Deceptive Acts or Practices'' (March 22, 2002).
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Deposit advance products may raise issues under the FTC Act
depending upon how the products are marketed and administered. Any FTC
Act analysis will be dependent on the facts and circumstances in a
particular matter.
The prohibition on UDAP applies not only to the product, but to
every stage and activity, from product development to the creation and
rollout of marketing campaigns, and to servicing and collections. For
example, marketing materials and disclosures should be clear,
conspicuous, accurate, and timely and should describe fairly and
adequately the terms, benefits, potential risks, and material
limitations of the product.
Truth in Lending Act (TILA): TILA and Regulation Z require
creditors to provide cost disclosures for extensions of consumer
credit.\11\ Different rules apply to Regulation Z disclosures depending
on whether the loan is an open- or closed-end credit product. A bank
should ensure the product's disclosures comply with the applicable
requirements. TILA advertising rules for open-end credit require that,
if an advertisement states any periodic rate that may be applied, it
must state the rate as an Annual Percentage Rate, using that term.\12\
Similarly, TILA advertising rules for closed-end credit require that,
if an advertisement states a rate of finance charge, it must state the
rate as an Annual Percentage Rate, using that term.\13\
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\11\ 15 U.S.C. 1601 et seq. TILA is implemented by Regulation Z,
12 CFR Part 1026.
\12\ See 12 CFR 1026.16(b)(1).
\13\ See 12 CFR 1026.24(c).
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Electronic Fund Transfer Act (EFTA): A program that involves the
use of electronic fund transfers must meet the applicable disclosure
and other requirements of EFTA and Regulation E.\14\ EFTA requires
disclosures,\15\ prohibits creditors from mandating that loans be
repaid by ``preauthorized electronic fund transfers,'' \16\ and allows
customers to withdraw authorization for ``preauthorized fund
transfers.'' \17\
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\14\ 15 U.S.C. 1693 et seq. EFTA is implemented by Regulation E,
12 CFR Part 1005.
\15\ See, e.g., 12 CFR 1005.7, 1005.8, and 1005.9.
\16\ See 12 CFR 1005.10(e).
\17\ See 12 CFR 1005.10(c).
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Truth in Savings Act (TISA): A program that involves a consumer's
deposit account must meet the disclosure requirements of TISA and
Regulation DD.\18\ Under TISA, deposit account disclosures must include
the amount of any fee that may be imposed in connection with the
account and the conditions under which the fee may be imposed.\19\ TISA
also prohibits a bank from making any advertisement, announcement, or
solicitation relating to a deposit account that is inaccurate or
misleading or that misrepresents their deposit contracts.\20\ TISA
disclosures enable consumers to make informed decisions about their
deposit accounts at a bank. A consumer is entitled to receive TISA
disclosures at account opening, when the terms of the consumer's
account are changed, and when a periodic statement is sent.
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\18\ 12 U.S.C. 4301 et seq. TISA is implemented by Regulation DD
at 12 CFR Part 1030 for banks and federal savings associations.
\19\ See 12 CFR 1030.4(b)(4).
\20\ See 12 CFR 1030.8.
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Equal Credit Opportunity Act (ECOA): Under ECOA and Regulation B,
creditors are prohibited from discriminating against an applicant on a
prohibited basis in any aspect of a credit transaction.\21\ This
prohibition applies to deposit advance products. The creditor's
discretion, for example in determining the application of eligibility
requirements, loss mitigation options, and fee waivers, may raise fair
lending risk.\22\ Steering or targeting certain customers on a
prohibited basis toward deposit advance products while offering other
customers more favorable credit products may also raise fair lending
risk. Additionally, providing different product terms or conditions and
different servicing or loss mitigation options to similarly situated
customers on a prohibited basis may also violate ECOA.
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\21\ 15 U.S.C. 1691 et seq. ECOA is implemented by Regulation B,
12 CFR Part 1002. ECOA prohibits discrimination on the basis of
race, color, religion, national origin, sex, marital status, age
(provided the applicant has the capacity to contract), the fact that
all or part of the applicant's income derives from a public
assistance program, and the fact that the applicant has in good
faith exercised any right under the Consumer Credit Protection Act.
\22\ See Interagency Fair Lending Examination Procedures (August
2009) at 9-13.
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In addition to the general prohibition against discrimination, ECOA
and Regulation B contain specific rules concerning procedures and
notices for credit denials and other adverse actions. Regulation B
defines the term ``adverse action,'' and generally requires a creditor
who takes an adverse action to send a notice to the consumer providing,
among other things, the reasons for the adverse action.\23\
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\23\ See 12 CFR 1002.2(c) and 1002.9.
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Supervisory Expectations
Deposit advance lending presents significant consumer protection
and safety and soundness concerns, irrespective of whether the products
are issued by a bank directly or by a third party. The OCC 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 all applicable laws. Examinations will
focus on potential safety and soundness issues and compliance with
applicable consumer protection statutes.
Examiners will assess credit quality, including underwriting and
credit administration policies and practices. In addition, examiners
will assess the adequacy of capital, reliance on fee income, and
adequacy of the allowance for loan and lease losses (ALLL). Compliance
with applicable federal consumer protection statutes, management's
oversight, and relationships with third parties will also be assessed.
Credit Quality: The Uniform Retail Credit Classification and
Account
[[Page 70629]]
Management Policy (Retail Classification Policy) establishes guidelines
for classifying consumer loans, such as deposit advance loans, based on
delinquency, but also grants examiners the discretion to classify
individual retail loans that exhibit signs of credit weakness,
regardless of delinquency status. An examiner also may classify
consumer portfolios, or segments thereof, in which underwriting
standards are weak and present unreasonable credit risk.
Deposit advance loans often have weaknesses that may jeopardize the
liquidation of the debt. Customers often have limited repayment
capacity. A bank should adequately review repayment capacity to assess
whether a customer will be able to repay the loan without needing to
incur further deposit advance borrowing.
Deposit advance loans that have been accessed repeatedly or for
extended periods of time could be evidence of inability to repay and
inadequate underwriting. A bank should monitor for repeated or extended
use, as will be discussed in greater detail in the discussion of
underwriting expectations below.
Underwriting and Credit Administration Policies and Practices: As
part of the credit quality review, examiners will assess underwriting
and administration policies and practices for deposit advance loan
products. Eligibility and underwriting criteria for deposit advance
loans, consistent with eligibility and underwriting criteria for other
bank loans, should be well documented in the bank's policy. The
criteria should be designed to assure that the extension of credit,
including all associated fees and expenses, can be repaid according to
its terms while allowing the customer to continue to meet typical
recurring and other necessary expenses such as food, housing,
transportation, and healthcare, as well as other outstanding debt
obligations. Additionally, criteria should ensure that customers can
meet these requirements without needing to borrow repeatedly. Banks
should maintain appropriate criteria to prevent churning and prolonged
use of these products. Underwriting for deposit advance products should
occur prior to opening such accounts and should be monitored on an
ongoing basis. Repetitive deposit advance borrowings could indicate
weak underwriting and may be criticized in the Report of Examination
and then taken into account in a bank's ratings, as appropriate.
Bank policies regarding the underwriting of deposit advance loan
products should be written and approved by the bank's board of
directors, and be consistent with the bank's general underwriting
standards and risk appetite. Factors a bank should address in its
written underwriting policies for deposit advance products include the
following:
The Length of a Customer's Deposit Relationship With the
Bank. A bank should ensure that the customer relationship is of
sufficient duration to provide the bank with adequate information
regarding the customer's recurring deposits and expenses in order to
prudently underwrite deposit advance loans. The OCC will consider
sufficient duration to evaluate a customer's deposit advance
eligibility to be no less than six months.
Classified Credits. Customers with delinquent or adversely
classified credits with the bank that is offering the deposit advance
product should be ineligible.
Financial Capacity. In addition to any eligibility
requirements, the bank should conduct an analysis of the customer's
financial capacity including income levels.\24\ Underwriting
assessments should consider the customer's ability to repay a loan
without needing to borrow repeatedly from any source, including re-
borrowing, to meet necessary expenses. The financial capacity
assessment should include:
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\24\ While a bank may choose to obtain and review a customer's
credit report for the purposes of assessing financial capacity or
ongoing eligibility, obtaining a customer's credit report to assess
ability to repay is not expected pursuant to this Guidance.
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[cir] An analysis of the customer's account for recurring deposits
(inflows) and checks/credit/customer withdrawals (outflows) over at
least six consecutive months. Lines of credit of any sort, including
overdrafts, and drafts from savings should not be considered inflows.
In reviewing a customer's transactions to determine deposit advance
eligibility, the bank should consider the customer's net surplus or
deficit at the end of each of the preceding six months, and not rely on
a six-month transaction average.
[cir] After conducting the above-described analysis, determine
whether an installment repayment is more appropriate.
Cooling Off Period. Each deposit advance loan, along with
all applicable fees, should be repaid in full before the extension of a
subsequent deposit advance loan, and a bank should not offer more than
one loan per monthly statement cycle.\25\ A cooling off period of at
least one monthly statement cycle after the repayment of a deposit
advance loan should be completed before another advance may be extended
in order to avoid repeated use of the short-term product.
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\25\ The Interagency ``Expanded Guidance for Subprime Lending
Programs'' (2001) states that loans to borrowers who do not
demonstrate the capacity to repay the loan, as structured, from
sources other than the collateral pledged, in this case the
customer's direct deposit, are generally considered unsafe and
unsound. Such lending practices should be criticized in the Report
of Examination as imprudent.
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Increasing Deposit Advance Credit Limits. The amount of
credit available to a customer should not be increased without a full
underwriting reassessment in compliance with the bank's underwriting
policies and in accordance with the factors discussed in this Guidance.
Additionally, any increase in the credit limit should not be automatic
and should be initiated by a request from the customer.
Ongoing Customer Eligibility. As part of underwriting for
this product, a bank should, no less than every six months, reevaluate
the customer's eligibility and capacity for this product. Additionally,
a bank should identify risks that could negatively affect a customer's
eligibility to receive additional deposit advances. For example:
[cir] Repeated overdrafts (establish/set a certain number during a
specified number of months).
[cir] Evidence that the customer is overextended with respect to
total credit obligations.
Additionally, a bank should monitor for repeated customer usage,
which may indicate a need for alternative credit arrangements or other
services, and inform customers of these available options when
appropriate.
Capital Adequacy: Higher capital requirements generally apply to
loan portfolios that exhibit higher-risk characteristics and are
subject to less stringent loan underwriting requirements. Loans
exhibiting subprime credit characteristics are higher-risk loans and
may require higher levels of capital.
Over-Reliance on Fee Income: Fees associated with deposit advance
products should be based on safe and sound banking principles. A bank
should monitor for any undue reliance on the fees generated by such
products for its revenue and earnings.
ALLL: Examiners will assess whether the ALLL is adequate to absorb
estimated credit losses within the deposit advance loan portfolio.
Examiners will also determine whether a bank engaged in deposit advance
lending has methodologies and analyses
[[Page 70630]]
in place that demonstrate and document that the level of the ALLL is
appropriate.
Consumer Compliance: A bank should implement effective compliance
management systems, processes and procedures to mitigate risks
appropriately. Examiners will review a bank's program with respect to
deposit advance products for compliance with applicable consumer
protection statutes and regulations, including TILA, EFTA, TISA, ECOA,
and Section 5 of the FTC Act.
Operational Risk and Third-Party Relationships: A bank is
responsible for ensuring that the processes and systems, and the
associated internal controls are appropriate for the delivery of
products to the customer in a safe and sound manner, and in compliance
with laws and regulations, whether performed by the bank or a third
party. In the review of a bank's relationships with third parties, the
OCC's primary supervisory concern is whether the bank is assuming more
risk than it can identify, monitor, and manage. Management should
allocate sufficient qualified staff to monitor for significant third-
party relationships, excessive usage by customers, and excessive risk
taking by the bank. Therefore, examiners will review the risks
associated with all material third-party relationships and activities
together with other bank risks. In certain high-risk situations,
examiners may conduct on-site third-party reviews under specific
authorities granted to the OCC.
Management Oversight: Examiners will assess bank management's
ability to administer a deposit advance program and board oversight of
the program. Furthermore, examiners will determine whether bank
management has established controls and implemented a rigorous
analytical process to identify, measure, monitor, and manage the risks
associated with deposit advance products.
A bank should maintain adequate oversight of deposit advance
programs and adequate quality control over those products and services
to minimize exposure to potential significant financial loss,
reputation damage, and supervisory action. The bank's compliance
management system should ensure continuing compliance with applicable
federal and state laws, rules and regulations, as well as internal
policies and procedures.
Management should provide the appropriate oversight and allocate
sufficient qualified staff to monitor deposit advance programs. Results
of oversight activities--including identified weaknesses that, should
be documented and promptly addressed--should be reported periodically
to the bank's board of directors or designated committee.
Responsible Products To Meet Small-Dollar Credit Needs
The OCC recognizes consumers' need for responsible small-dollar
credit products. A number of banks are currently offering reasonably
priced small-dollar loans at reasonable terms to their customers. If
such loans are structured properly, they can provide a safe and
affordable means for customers to transition from reliance on high-cost
debt products that do not appropriately serve their needs. The OCC
encourages banks to continue to offer these products, in a manner
consistent with safety and soundness and other supervisory
considerations, and encourages other banks to consider offering such
products. Properly managed small-dollar loan products offered with
reasonable terms and at a reasonable cost do not pose the same level of
supervisory risk as deposit advance products. The OCC encourages banks
to develop new or innovative programs to effectively meet the need for
small-dollar credit that do not exhibit the risks associated with
deposit advance products and payday loans.
End of Guidance.
Dated: November 20, 2013.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2013-28361 Filed 11-25-13; 8:45 am]
BILLING CODE 4810-33-P