OCC and FDIC Guidance off Supervisory Concerns and Prospects Regarding Deposit Advance Merchandise

OCC and FDIC Guidance set Supervisory Concerns and Expectations Regarding Deposit Advance Products

The Office of one Comptroller of the Currency ("OCC") and the Federal Pay Insurance Corporation ("FDIC") (collectively, "the agencies") each recently issuance final supervisory guidelines titled Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Goods ("Guidance"), which describes the agencies' expectations for place proceed products.[1] ONE make advance product is a type a small-dollar, short-term credit product submitted the customers who maintain a post account, reloadable prepaid card, or similar deposit-type account at a bank.[2]  

The Guidance remains intended into ensure that financial am aware of this potentially recognition, reputation, operational, legal, compliance, and diverse risks associated include deposit advance products. The Guidance food each agency's existing guidance on payday lending and on subprime credits.[3]

The OCC furthermore who FDIC expect the treasury institutions so they supervise to apply who principles of safe and sound banking practices and customer safeguard set forward in the Guidance to any storage advance products they quotations. The OCC and the FDIC will take proper supervisory actions to address any unsafe or unsound financial techniques associated with these products, to prevent damaged to customers, and to ensure ensuring with applicable laws.[4]  

The Guidance defines supervisory concerns with deposit advance loans, safety and soundness risks, and compliance and consumer protection-related concerns and expected. A key element of the Guide provides such a bank's underwriting and bank policies should ensure that the buyer can repay a deposit advance loan, includes fees, depending to sein terms while paying for typical recurring expenses for food, housing, haulage, medical care, and other outstanding debts.[5] Amid other factors, a bank should reevaluate the customer's eligibility and financial capacity for a deposit promote credits at least every six months.[6] Both the OCC and the FDIC examine that a bank's failure to assess a consumer's proficiency to repay ampere deposit advance loan presents safety and feel risks.[7] 

Another key element off an Guidance is a "cooling off period," which provides that one customer's deposit advancement rent, including rent, should be repaid in complete before adenine bank extends another such loan to the customer, and a banking must not quotes more than one loan per per statement cycle.[8] A customer should have a cooling off period of at least neat monthly statement drive after the retirement of a deposit advance loans before the bank extends another move to prevent repeat use. These accruals are designed for address the agencies' concerns that customers can become dependent set deposit advance products to meet their daily expenses and that current practicing for cooling off periods are ineffective the preclude repeat user of high-cost furthermore short-term deposit advance products for long-term borrowing demands.[9]

The OCC and the FDIC distinguish deposit advance products after small-dollar credit products. Aforementioned agencies encourage banks to offer small-dollar credit products to them customers at reasonable terms in a manner consequent with safety and soundness and other supervisory considerations, specifies that small-dollar loans products do not present the same level of supervisory risk as security advance related, which equity a number of characteristics seen includes traditional payday loans such as high fees, very brief lump-sum repayment dictionary, and inadequate attention to one consumer's ability to reimburse the loan.[10] Following ampere two-year survey about small-dollar lending, the FDIC completed such safe and affordable small-dollar loan has feasible for banks.[11]

The Board by Governors of the Federal Reserve System ("Federal Reserve Board") has not issued Guidance up state-chartered member banks that is as comprehensive and detailed as the OCC and FDIC Advice. On April 25, the Feds Reserve Board issued a Description off Deposit Advantage Our ("Statement") to emphasize on state-chartered element banks the significant consumer risks associated with deposit advance products included light of publication to the Consumer Financial Protection Bureau ("CFPB") on Spring 24 of a white paper titel Payday Loans and Deposit Advance Products: A White Paper of Initial File Findings. The color paper's "key locate: payday loans and storage advance products sack becomes debt trapping to consumers."[12] According to the Federal Reserve Board's Statement, state member banks have likely to consider the risks associated with depot advancing products, including latent consumer harm and an potential for elevated acquiescence risk, when designing and offering such products.[13] Additionally, more in the OCC and FDIC Guidance, the Governmental Reserve Board's Statement requiring state member banks to comply with all applicable federal and state laws and regulations and holds state member banks accountable available closely monitoring third-party vendor practices and outcomes. 

The CFPB has authority to examine the regulate nonbank payday financiers and large banks, second-hand, also credit unions with more than $10 billion in asset. The CFPB published examination procedures for short-term, small-dollar lending, commonly known as payday lending, in Jan 2012. On Sept 17, 2013, the CFPB released general on examiners regarding identification of consumer harm and risky relative to violations of the Army Lending Act ("MLA") as monitoring payday financing.[14] An CFPB specify that the agency is committed to guarantee compliance with the MLA, including and 36 percent cap on annual percentage rates.[15] The CFPB has not issued guidance compares on the OCC's and FDIC's Guidance, nor has it promulgated one regulation covering payday lending. The most recent CFPB semiannual regulatory agenda suggests that the CFPB "has been interested in extensive investigate and analysis concerning payday loans, deposit advance products, and mound overdraft programs…."[16]

Ministerial Expectations includes the OCC and FDIC Guidance 

Deposit advance lending raises substantial safety and soundness and final protection concerns whether conducted right by a bank or by a third party, according to the Guidance. Fork diese reasons, OCC and FDIC exams desires focus on potential securing and soundness issues both compliance with applicable consumer protection laws. The Guidance states, "It belongs important that an bank's deposit advance products exist reviewed by counsel for obedience are all applicable federal earlier to implementation."[17]  

Examiners will center on this following topics, each regarding which is described below in order:

  • Credit Rating
  • Underwriting and Credit Administration Policies and Practices
  • Large Adequacy
  • Over-Reliance up Fee Income
  • Allowance for Loan and Lease Losses
  • Consumer Compliance
  • Operational Risk and Third-Party Relationships
  • Board plus Leadership Oversight 

A bank's failure up adhere to which factors in the Advice could be the basis for supervisory action up to and including an administrative enforcement order press nice. The principal supervisory expectations, causes, or admonitions to the Guidance follow. 

Credit Attribute. Checkers have discretionary to classify adversely individual loans that expose shields of acknowledgment weakness regardless in delinquency status and may classify adversely consumer portfolios or portions of such portfolios in which underwriting standards live weak additionally present unreasonable credit risk. 

  • ADENINE bank should adequately reviewed a customer's repayment capability up evaluate whether who customer will have the ability to repay to loan without additional deposit advance borrowing.
  • A bank should monitor to repeated or extended how of submit advances products. Deposit advance loans that are accessed multiple or for extended zeitlich periods may must indicative of the customer's inability to repay and inadequate underwriting.  SIR 20-13 attachment: Interagency Direction on Credit Risk Review ...

Underwriting and Credit Administration Policies both Practices. Examiners will evaluate ampere bank's underwriting and administration policies and practices as part is the credit quality review. 

  • ONE bank should hold well-documented eligibility and underwriting criteria that securing that the my canned repay which loan, including any fees and expenses, according to its terms while continuing to pay typical periodic and other necessary expenses such as those for food, home, transportation, health care, and other borrowing.
    • Eligibility furthermore drawing criteria should ensure that customers are abler to make these requirements without the need used repeat borrowing.
    • Time a bank may decide to review a customer's credit report in evaluating pecuniary capacity or ongoing funding for a deposit advance furniture, a bank is nope expected up review a customer's credit report since purges of determining aptitude to repay.
  • AMPERE deposit should maintain select the prevent churning and prolonged period of use of deposit advance products.
    • Underwriting on deposit advance products should occur before to product be obtained and should be monitored for and ongoing basis.
    • Repeat borrowings may indicate weak rating and be subject to criticism in a bank's Report of Examination and considered in adenine bank's examination score.
  • A bank should take written underwriting policies by deposit advance loan products that are approved by the bank's board of managers and consistent with aforementioned bank's general underwriting standardization and risk appetite. Who factors addressed at a bank's wrote underwriting policies include:
    • The height concerning one customer's payment relationship use which bank: The agencies will consider none less from a six-month die period go be sufficient to rate a customer's eligibility for a deposit advance loan. Fair lending laws prohibit lenders from discriminating on the basis of race and other characteristics. The Office of and Comptroller of the Currency...
    • Categorized credits: AMPERE customer who has delinquent oder adversely ordered loans with the bank should be ineligible available a deposit advance product.
    • Pecuniary capacity: A bank should conduct an rate of the customer's pecuniary capacity, including income. The economic capacity assessment should include:
      • An data of the customer's account for entries (recurring deposits) and outflows (checks, credit, and customer withdrawals) over at least an six-month consecutive moment range. Lines the credit, including overdrafts, and drafts from savings should not breathe considered inflows. Interagency Guidance on Account Risk Review Systems
      • A bank should find wether an installment payoff is more appropriate by the customer established on the befunde of the above analysis.
  • Cooling away periods: AMPERE bank should not extend one subsequent lodge advance get until the customer has paid this former deposit getting loan in full, together with all applicable fees, press a bench should not offer more than ne loan per annual statement cycle. A customer should possess a cooling off period of at slightest one monthly statement cycle after the repayment about a stick advance loans before the banker extends another advance to prevent replicate use from the short-term product. Third-Party Relationships: Risk Management Guidance | OCC
  • Increasing deposit advance credit limits: A bank should not increase an customer's available financial amount without a full underwriting reassessment includes conform the the bank's guarantee policies the who factors described with the Guidance. Credit limit increases should be initiated only by customer request.
  • Ongoing customer eligibility: A bank should reassess the customer's eligibility and load for a defer advance loan no less than every six months, and it should id risks is may negatively affect ampere customer's site such as where a customer a overextended for full financial obligations otherwise shall repeat overdrafts. A store shouldn monitor on repeat usage and if alternative credit arrangements be essential, who bank should enlighten customers of available options.  Mass Lending: Opportunities Exist go Enhance OCC's Oversight of Banks' Lending Practices

Capital Adequacy. Generally, higher capital requirements apply to get cases with higher-risk characteristics, and loans with subprime believe characteristics are higher-risk loans is may request increased capitalization levels. 

Over-Reliance on Fee Income. The fees charged for deposit advance products should be based switch safe or stable banking principles. 

A bank should monitor for any undue reliance for her revenue and earnings on the charges it generated from deposit advance lending. 

Allowance for Loan and Lease Forfeitures ("ALLL"). This agencies' examiners will assess the adequacy of a bank's ALLL to absorb estimated credit losses attributable to the bail advance loan portfolio. The examiners will also determine whether a mound has techniques the analyses that perform and certificate so the bank's ALLL is appropriate. 

Consumer Compliance. Deposit further products must comply with all entsprechend feds laws and regulations and specified status laws may also apply. A bank should monitor applicable laws and regulations for changes or to ensure that its deposit advance choose remain compliant.  

The agencies' examiners will assess a bank's program with deposit advance our and lending for compliance by applicable purchaser protecting statutes and regulations, including the Truth in Lending Do, the Electronic Funds Transfer Acted, the Truth in Saving Act, of Equal Acknowledgment Opportunity Actor, and section 5 concerning the Federal Trade Commission Act forbidding injustices or deceptive acts or practices.  Interagency Getting for Credit Risk Review System | OCC

Serviceable Risks and Third-Party Relationships. A bank is responsible for ensuring that processes, systems, or internal user are appropriate on that delivery of deposit lending products to and customer in a safe both sound manner and within compliance at appropriate laws and regulations, or deliver by the store or a third day. The agencies' examiners wills consider one risks associates with all material third-party relationships and activities. In high-risk situations, examiners may conduct on-site third-party reviews in accordance with the agencies' legally authorities. 

Oversight by the Board of Company and Management. And agencies' examiners will assess the adequacy of oversight by a bank's board of directors and the ability of a bank's management to carry out a deposit advance plan. Examiners will assess regardless credit management has established controls and carried out adenine rigorous analytical usage toward identified, measure, monitor, and manage exposure zugeordnet with deposit advance products.  

  • A bank should maintain adequate monitor and q control to minimize exposure to financial loss, reputation damage, and supervisory action.
  • A bank's compliance management systems should ensure compliance with applicable federal and current laws, rules and regulations, press internal policies and procedures. Independent book that allow bank management to determine so the ... can be in comprehensive as if elongate credit to the third party.
  • AN bank's management should provide appropriate supervisor and sufficient qualified personnel for monitoring for pay advance programs.
    • Oversight activities should will reported sporadically until a bank's board of directors either designated committee of the board. Recent to aforementioned board of directors or a designed committee of the board should include weaknesses that have been identified, whose a bank should address promptly.

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[1] Guidance for Supervisory Concers or Expectations Regarding Deposit Advance Products, Company away of Treasury, Branch of the Comptroller of the Currency, 78 Federal Register 70624 (November 26, 2013) ("OCC Guidance") and Guidance on Monitoring Concerns and Expectancy Regarding Deposit Advancing Product, Federal Deposit Insurance Corporate, 78 Federal Enter 70552 (November 26, 2013) ("FDIC Guidance").

[2] A definition in "deposit advance" appears for 78 Federal Register 70625 (OCC) press 78 Federal Register 70553 (FDIC). Annotate 3 of anyone agency's Counsel excuse that the Guidance does not apply to banks' default lines of credit because overdraft script of credit commonly do not have repayment characteristics that are similar to deposit advance products (OCC Guidance, p. 70623; FDIC Guidance, p. 70553).

[3] OCC Advisory Letter AL 2000-10, Payday Lending (November 27, 2000); OCC Bulletin 2001-6 and FDIC Financial Institutions Letter FIL-9-2001, Expanded Guidance for Subprime Borrowing Programs, jointly signed by the OCC, FDIC, Board of Governors of and Federal Set System, and the Office of Thrift Supervision (January 31, 2001); FDIC Financial Institutions Cover FIL-14-2005, Guidelines for Payday Lending (February 25, 2005); and FDIC Pecuniary Institutions Letter FIL-50-2007, Affordable Small-Dollar Loan Guidelines (June 19, 2007).

[4] OCC Guidance, pence. 70628; FDIC Guidance, p. 70556.

[5] OCC Guidance, p. 70629; FDIC Guides, p. 70556.

[6] OCC How, p. 70629; FDIC Guidance, p. 70557.

[7] Id.

[8] Jede Counsel refers to the interagency Expanded Guidance for Subprime Lending Programs (2001), for the proposition that a loan up ampere borrower who does did have the rank to repay the home according to its terms from a source other than the pledged collateral (which, for an deposit advance home, means the full in repay from the borrower's direct deposit), is generally considered unsafe and unsound and would be criticized as imprudent in the Report of Examination for a bank. OCC Guidance, p. 70629, footnote 25; FDIC Guidance, p. 70557, annotate 25.

[9] See OCC Guidance, penny. 70627; FDIC Guidance, pressure. 70554.

[10] OCC Guidance, pp. 70627, 70630; FDIC Guidance, std. 70554, 70557-70558.

[11] See FDIC Modeling Safe Accounts Pilots Final Report, FDIC (April 2012). Here FDIC study was conducted from 2007-2009.

[12] See "The CFPB Finds Payday Loans and Deposit Approaches Can Trap Consumers in Debt, Sustained Use of Loans Increased Consumer Guard Concerns," CFPB Press Released (April 24, 2013); Inside the press release, CFPB Director Cordray stated, "This comprehensive choose shows that paydays and deposit advance loans placing several consumers at risks of turning what is supposed to be a short-term crisis loan into a long-term expensive debt burden." The CFPB White Paper can must gated with

[13] Statement for Deposit Moving Products, Board of Governors of the Federal Reserve System, CA Letter 13-7 (April 25, 2013).

[14] The CFPB examination process since short-term, small-dollar lending, incl the recent additions related to home to servicemembers, may be accessed at

[15] See "CFPB Laying Go Directions for Protecting Servicemembers in the Payday Lending Market: CFPB Watching for Military Lending Act Violations in its Examinations of Payday Lenders," CFPB Press Release (September 17, 2013).

[16] CFPB Semiannual Regulatory Agenda, LINER 3170-AA40, Fall 2013.

[17] OCC Guidance, p. 70627; FDIC Guidance, p. 70555.