The FDIC and OCC have issued proposed guidance to depository institutions that offer or may consider offering deposit advance credit products, commonly referred to as payday loans. The proposals released concurrently on April 15 would caution banks about a variety of safety and soundness, compliance and consumer protection risks posed by deposit advance loans. The proposed guidance describes the principles that the FDIC and OCC each expect depository institutions to follow in connection with deposit advance products in order to manage risks related to payday lending, including legal, reputational, consumer protection, compliance and credit risks. The proposal also discusses supervisory expectations for the use of deposit advance products, including underwriting and credit administration policies and practices. The proposal defines deposit advance products as a type of small-dollar, short-term credit product offered to consumers with a deposit account, reloadable prepaid card or similar deposit-related vehicle at a bank whereby the bank provides a credit feature that allows the consumer to take out a loan in advance of the consumer’s next direct deposit based on the consumer’s history of recurring deposits. The proposed guidance encourages banks to continue to offer these products, consistent with safety and soundness and other supervisory considerations. The proposal supplements existing FDIC and OCC guidance on payday loans and subprime lending. Comments on the proposed guidance are due by May 30, 2013.

Nutter Notes: The proposed guidance notes that payday loans typically have high fees, are repaid in a lump sum in advance of the consumer’s other bills, and that lenders often do not employ fundamental and prudent banking practices to determine the consumer’s ability to repay the loan and meet other necessary financial obligations. The proposed guidance recognizes the need for safe, affordable and sustainable small-dollar credit products among consumers but warns banks to be aware that deposit advance loans can pose safety and soundness, compliance and consumer protection risks. Such loans should be underwritten with consideration of the consumer’s ability to repay the loan without needing to borrow repeatedly to meet necessary expenses, according to the proposed guidance. For example, the proposed guidance recommends that banks consider implementing repeat usage controls that provide a “cooling off” period during which the consumer cannot take out a deposit advance, or reduce the consumer’s credit limit. If structured properly, according to the proposed guidance, small-dollar loans should provide a safe and affordable means for borrowers to transition away from reliance on high-cost debt products. Examiners reviewing deposit advance l.ending activities will assess credit quality, including underwriting and credit administration policies and practices, and the adequacy of capital, reliance on fee income, and adequacy of the allowance for loan and lease losses, according to the proposed guidance. The FDIC and OCC said that they encourage banks to continue to offer these products, consistent with safety and soundness and other supervisory considerations.