Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products, 70552-70558 [2013-28306]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 78, Number 228 (Tuesday, November 26, 2013)]
[Notices]
[Pages 70552-70558]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-28306]


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FEDERAL DEPOSIT INSURANCE CORPORATION


Guidance on Supervisory Concerns and Expectations Regarding 
Deposit Advance Products

AGENCY: The Federal Deposit Insurance Corporation (FDIC).

ACTION: Final guidance.

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SUMMARY: The FDIC 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: Luke H. Brown, Associate Director, 
Supervisory Policy, (202) 898-3842; Rae-Ann Miller, Associate Director, 
Risk Management Policy, (202) 898-3898; Surya Sen, Section Chief, 
Supervisory Policy, (202) 898-6699; Ardie Hollifield, Senior Policy 
Analyst, Supervisory Policy, (202) 898-6638; or Louis Bervid, Senior 
Examination Specialist, Risk Management Policy, (202) 898-6896.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The Federal Deposit Insurance Corporation (FDIC) is issuing the 
Guidance to clarify the FDIC's application of principles of safe and 
sound banking practices and consumer protection in connection with 
deposit advance products. The Guidance details the FDIC's supervisory 
expectations in connection with any deposit advance product offered by 
FDIC-supervised financial institutions (banks) to address potential 
credit, reputation, operational, and compliance risks. The FDIC 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 FDIC 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 FDIC 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 FDIC received over 100 official comments on the proposal.\1\ 
After consideration of all such comments, the FDIC 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,'' 78 FR 
25268 (April 20, 2013).
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    Several commenters stated they believed the FDIC 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 FDIC 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 FDIC, 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

[[Page 70553]]

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 FDIC 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 FDIC 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 FDIC 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 FDIC-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 
customers from taking out loans they cannot repay.

IV. Guidance

    The text of the Guidance follows:

FDIC Guidance on Supervisory Concerns and Expectations Regarding 
Deposit Advance Products

    The Federal Deposit Insurance Corporation (FDIC) is issuing this 
``Guidance on Supervisory Concerns and Expectations Regarding Deposit 
Advance Products'' (Guidance) to FDIC-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 FDIC's existing guidance 
on payday loans and subprime lending.\2\ Although the FDIC 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\ FDIC Financial Institutions Letter FIL-14-2005, ``Guidelines 
for Payday Lending,'' (Guidelines for Payday Lending) (February 25, 
2005); FDIC Financial Institutions Letter FIL-50-2007, ``Affordable 
Small-Dollar Loan Guidelines,'' (June 19, 2007); and FDIC Financial 
Institutions Letter FIL-9-2001, ``Expanded Guidance for Subprime 
Lending Programs'' (Subprime Lending Guidance), jointly signed by 
the Office of the Comptroller of the Currency (OCC), the Board of 
Governors of the Federal Reserve System (Board), the FDIC, and the 
Office of Thrift Supervision (OTS) (January 31, 2001).
    \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

[[Page 70554]]

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 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 FDIC 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 of Governors of the Federal Reserve (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 FDIC 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 FDIC 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

[[Page 70555]]

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\
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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.
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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.
    Third-Party Risk: Banks remain responsible for compliance with all 
applicable laws and regulations, including the activities of a third 
party.\7\ The FDIC 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 FDIC FIL 44-2008, ``Guidance for Managing Third-Party 
Risk'' (June 6, 2008).
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    Legal 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 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\ The 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 FDIC 
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\ Joint Board and FDIC Guidance on ``Unfair or Deceptive Acts 
or Practices by State-Chartered Banks'' (March 11, 2004).
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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

[[Page 70556]]

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 (concerns 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 FDIC 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 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 FDIC 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

[[Page 70557]]

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.
    Adequacy of the Allowance for Loan and Lease Losses (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 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 
FDIC'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 FDIC.
    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 FDIC 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. The 
FDIC's 2007 Affordable Small-Dollar Loan Guidelines (Guidelines) 
encourage banks to offer small-dollar loan products that have 
affordable, reasonable interest rates with no or low fees and payments 
that reduce the principal balance of the loan.\26\ The Guidelines 
indicate that if structured properly, small-dollar loans can provide a 
safe and affordable means for customers to transition from reliance on 
high-cost debt products. The FDIC conducted a two-year case study from 
2007 to 2009 that demonstrated that safe and affordable small-dollar 
lending is feasible for banks and resulted in a

[[Page 70558]]

template of important elements for such lending.\27\ The FDIC 
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 FDIC 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.
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    \26\ See FDIC Financial Institutions Letter FIL-50-2007, 
``Affordable Small-Dollar Loan Guidelines,'' (June 19, 2007).
    \27\ FDIC, ``FDIC Model Safe Accounts Pilot Final Report,'' 
(April 2012).

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    Dated at Washington, DC, this 21st day of November, 2013.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2013-28306 Filed 11-25-13; 8:45 am]
BILLING CODE 6714-01-P