On April 25 the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) proposed for public comment supervisory guidance to institutions subject to their jurisdictions (i.e., state-chartered, non-member FDIC-insured institutions, as well as national banks and federal thrifts, respectively) that offer or may consider offering deposit advance products. The proposal is intended “to ensure that banks are aware of a variety of safety and soundness, compliance, and consumer protection risks posed by deposit advance loans,” according to the FDIC.
The proposal “details the principles that the FDIC expects financial institutions to follow in connection with deposit advance products in order to effectively mitigate potential legal, reputational, consumer protection, compliance, and credit risks. The proposal discusses supervisory expectations for the use of deposit advance products, including underwriting and credit administration policies and practices. The proposal supplements existing FDIC guidance on payday loans and subprime lending.” While “encouraging” institutions that offer such loans to continue to do so, the FDIC made it clear that “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, banks need to be aware of these products’ potential to harm consumers, as well as elevated safety and soundness, compliance, and consumer protection risks.” In a similar vein, the OCC stated that it “will closely review the activities of banks that offer or propose to offer deposit advance products, through direct examination of the bank, examination of any third party participating in such transactions under an arrangement with the bank, and, where applicable, review of any licensing proposals involving this activity. These examinations will focus not only on safety and soundness risks, but also on compliance with applicable consumer protection laws.”
Among other things, the proposal sets forth certain underwriting criteria that institutions will be expected to follow:
- 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 FDIC will consider sufficient duration to evaluate a customer’s deposit advance eligibility to be no less than six months.
- Classified Credits: Customers with any delinquent or adversely classified credits 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. 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:
- 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.
- After conducting the above-described analysis, determine whether an installment repayment is more appropriate.
- Cooling-Off Period: Each deposit advance loan 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. 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.
- Increasing Deposit Advance Credit Limits: The amount of credit available to a borrower 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 borrower.
Ongoing Customer Eligibility: As part of the underwriting for this product, a bank should, no less than every six months, reevaluate the customer’s eligibility and capacity for this product. Additionally, the bank should identify risks that could negatively affect a customer’s eligibility to receive additional deposit advances. For example:
- Repeated overdrafts (establish/set a certain number during a specified number of months).
- Evidence that the borrower is overextended with respect to total credit obligations.
Although it issued a statement in support of heavier regulation for deposit advance loans, it is unclear at this time whether the Federal Reserve will follow the FDIC and OCC proposed guidelines. The proposed guidance is expected to be published soon in the Federal Register, with a 30-day comment period.