[Federal Register Volume 78, Number 83 (Tuesday, April 30, 2013)]
[Notices]
[Pages 25268-25273]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-10101]


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FEDERAL DEPOSIT INSURANCE CORPORATION


Proposed Guidance on Deposit Advance Products

AGENCY: The Federal Deposit Insurance Corporation (FDIC).

ACTION: Proposed guidance with request for comment.

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SUMMARY: The FDIC is proposing guidance on safe and sound banking 
practices and consumer protection in connection with deposit advance 
credit products.

DATES: Comments must be submitted on or before May 30, 2013.

ADDRESSES:
     Mail: Written comments should be addressed to Robert E. 
Feldman, Executive Secretary, Attention: Comments, Federal Deposit 
Insurance Corporation, 550 17th Street NW., Washington, DC 20429.
     Delivery: Comments may be hand delivered to the guard 
station at the rear of the 550 17th Street Building (located on F 
Street) on business days between 7 a.m. and 5 p.m.
     Agency Web site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comment on the 
agency Web site.
     Email: You may also electronically mail comments to 
[email protected].
     Public Inspection: Comments may be inspected and 
photocopied in the FDIC Public Information Center, 3501 North Fairfax 
Drive, Room E-1005, Arlington, Virginia 22226, between 9:00 a.m. and 
4:00 p.m. (EST), Monday to Friday.

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 proposing 
supervisory guidance to clarify the FDIC's application of principles of 
safe and sound banking practices and consumer protection in connection 
with deposit advance products. This proposed guidance details the 
principles that the FDIC expects FDIC-supervised financial institutions 
to follow in connection with any deposit advance product to address 
potential reputational, compliance, legal and credit risks. The FDIC 
expects institutions to apply the principles set forth in this guidance 
to any deposit advance product they offer.

II. Description of Guidance

    A deposit advance product is a small-dollar, short-term loan that a 
depository institution (bank) makes available to a customer whose 
deposit account reflects recurring direct deposits. The customer is 
allowed to take out 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 do not utilize fundamental and prudent banking practices to 
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 safety and soundness, 
compliance, consumer protection, and other risks. The FDIC is proposing 
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 credit, compliance, legal, and reputation risks to the 
institution.

III. Guidance

    The text of the proposed Supervisory guidance on deposit advance 
products follows:

FDIC Proposed Guidance on Deposit Advance Products

    The Federal Deposit Insurance Corporation (FDIC) is proposing 
supervisory guidance to depository institutions (banks) that offer 
deposit advance products. This guidance is intended to ensure that 
banks are aware of the significant risks associated with deposit 
advance products. The guidance

[[Page 25269]]

also supplements the FDIC's existing guidance on payday loans and 
subprime lending.\1\ 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 safety and soundness, compliance, and consumer protection 
risks to banks.\2\
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    \1\ 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); 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).
    \2\ This guidance on Deposit Advance Products 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 
take out a loan in advance of the customer's next direct deposit. The 
advance is based on the customer's history of recurring deposits. 
Typically, the advance is offered as an open-end line of credit. 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.
    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 borrower 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 borrowers, 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 borrower'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, borrowers 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 borrower 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 statement 
or a ``button'' or hot link on their personal account Web page, but it 
is not clear

[[Page 25270]]

that the customer is made equally aware of less expensive alternatives.
Supervisory Concerns of Deposit Advance Loans
    Although the FDIC encourages banks 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, banks need to be aware of these products' potential to harm 
consumers, as well as elevated safety and soundness, compliance, and 
consumer protection risks.
    The combined impact of an expensive credit product coupled with 
short repayment periods increases the risk that borrowers could be 
caught in a cycle of high-cost borrowing 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 cycle is referred to as the ``churning'' of loans 
and is similar to the practice of ``loan flipping'' that the OCC, the 
FDIC and the Board, have previously noted to be an element of predatory 
lending.\3\ Though deposit advance products are often marketed as 
intended for emergency financial assistance, and as unsuitable for 
meeting a borrower'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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    \3\ 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 borrowers become dependent on 
deposit advance products to meet their daily expenses (as evidenced by 
their repeated borrowings), certain lenders now require borrowers 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.
    Weak underwriting increases the risk that the borrower'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 Risk
    Credit Risk: Borrowers 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 increase credit risk. Lenders that offer deposit 
advance loans typically focus on the amount of the borrower's monthly 
deposit for underwriting purposes. Failure to consider whether the 
income sources are adequate to repay the debt while covering typical 
living expenses, other debt payments, and the borrower's credit history 
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 
borrowers overcome temporary financial difficulties, repeated re-aging 
credit practices can cloud the true performance and delinquency status 
of the portfolio.\4\
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    \4\ See the Federal Financial Institutions Examination Council 
Uniform Retail Credit Classification and Account Management Policy, 
Federal Register Vol. 65, No. 113, June 12, 2000. This policy is 
addressed more fully in the ``Credit Quality'' section.
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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 borrower'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 borrowers 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.
    Legal Risk: The significant risks associated with deposit advance 
lending products may subject institutions to the risk of litigation--
both from private lawsuits and regulatory enforcement actions.
    Third-Party Risk: Banks remain responsible and liable for 
compliance with all applicable laws and regulations, even for the 
activities of a third party.\5\ 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 institutions' legal, 
operational and reputation risks. Some of the risks are associated with 
the underlying activity itself, similar to the risks faced by a bank 
directly conducting the activity. Other potential risks arise from or 
are heightened by the involvement of a third party, particularly if the 
third party will receive a portion of the fees. Consequently, third-
party arrangements may expose the bank to regulatory action and affect 
the institution's ability to establish new or service existing customer 
relationships.
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    \5\ See FDIC FIL 44-2008, ``Guidance for Managing Third-Party 
Risk'' (June 6, 2008).
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Compliance and Consumer Protection Related Concerns

    Deposit advance products must comply with all applicable federal 
laws and regulations, some of which are outlined below. State laws also 
may be applicable, including usury laws and laws on unfair or deceptive 
acts or practices. It is important that banks have their deposit 
advance products 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. Banks 
offering deposit advances should carefully consider whether and how 
these laws and rules will apply to the particular version of a deposit 
advance product they are providing. Accordingly, banks should monitor 
applicable laws and regulations for revisions and to ensure that their 
deposit advance product is fully compliant. Federal laws and 
regulations applicable to deposit advance products include, but are not 
limited to, the following:

[[Page 25271]]

    The Federal Trade Commission Act (FTC Act): Section 5 of the FTC 
Act prohibits unfair or deceptive acts or practices (UDAP).\6\ The FDIC 
enforces this section pursuant to its authority in Section 8 of the 
Federal Deposit Insurance Act, 12 U.S.C. 1818.\7\ 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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    \6\ 15 U.S.C. Sec. Sec.  45(a) and (n).
    \7\ 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 implemented. 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 fairly and adequately 
describe 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.\8\ Different rules apply to Regulation Z disclosures depending 
on whether the loan is an open- or closed-end credit product. Banks 
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.\9\ 
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.\10\
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    \8\ 15 U.S.C. 1601 et seq. TILA is implemented by Regulation Z, 
12 CFR 1026.
    \9\ See 12 CFR 1026.16(b)(1).
    \10\ 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.\11\ EFTA requires 
disclosures,\12\ prohibits creditors from mandating that loans be 
repaid by ``preauthorized electronic fund transfers,'' \13\ and allows 
borrowers to withdraw authorization for ``preauthorized fund 
transfers.'' \14\
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    \11\ 15 U.S.C. 1693 et seq. The EFTA is implemented by 
Regulation E, 12 CFR 1005.
    \12\ See, e.g., 12 CFR 1005.7, 1005.8, and 1005.9.
    \13\ See 12 CFR 1005.10(e).
    \14\ 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.\15\ 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.\16\ TISA 
also prohibits institutions from making any advertisement, 
announcement, or solicitation relating to a deposit account that is 
inaccurate or misleading or that misrepresents their deposit 
contracts.\17\ TISA disclosures enable consumers to make informed 
decisions about their deposit accounts at depository institutions. 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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    \15\ 12 U.S.C. 4301 et seq. TISA is implemented by Regulation DD 
at 12 CFR Sec.  1030 for banks and federal savings associations.
    \16\ See 12 CFR 1030.4(b)(4).
    \17\ 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.\18\ This 
prohibition applies to deposit advance products. The creditor's 
discretion, for example in the application of eligibility requirements, 
loss mitigation options and fee waivers, may raise fair lending 
risk.\19\ 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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    \18\ 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.
    \19\ 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.\20\
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    \20\ See 12 CFR Sec. Sec.  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 third parties. The FDIC will take 
appropriate supervisory action to prevent harm to consumers, to address 
any unsafe or unsound banking practices associated with these products, 
and to ensure compliance with all applicable laws. Examinations will 
focus on compliance with applicable consumer protection statutes and 
potential safety and soundness issues.
    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. 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, where underwriting 
standards are weak and present unreasonable credit risk.
    Deposit advance loans often have weaknesses that may jeopardize the 
liquidation of the debt. Borrowers often have limited repayment 
capacity. Banks should adequately review repayment capacity to assess 
whether borrowers will be able to repay the loan without

[[Page 25272]]

needing to incur further deposit advance borrowing.
    Deposit advance loans that have been accessed repeatedly or for 
extended periods of time are evidence of ``churning'' and inadequate 
underwriting. Banks 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 can 
be repaid according to its terms while allowing the borrower 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 
borrowers can meet these requirements without needing to borrow 
repeatedly. Institutions 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 on-going basis. Repetitive deposit 
advance borrowings indicate weak underwriting and will be criticized in 
the Report of Examination and then taken into account in an 
institution's rating.
    Bank policies regarding the underwriting of deposit advance loan 
products should be written and approved by the bank's board of 
directors, and 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, but 
are not necessarily limited to, the following:
     The Length of a Customer's Deposit Relationship With the 
Bank. Banks 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:
    [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 customers' transactions to determine deposit advance 
eligibility, the bank should consider the customers' 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 should be 
repaid in full before the extension of a subsequent deposit advance 
loan, and banks should not offer more than one loan per monthly 
statement cycle.\21\ 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.\22\
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    \21\ 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 
borrower's direct deposit, are generally considered unsafe and 
unsound. Such lending practices should be criticized in the Report 
of Examination as imprudent.
    \22\ The FDIC, in its 2005 Guidelines for Payday Lending, 
directs institutions to ensure that payday loans are not provided to 
customers who had payday loans outstanding at any lender for a total 
of three months during the previous 12 months. FDIC-supervised 
institutions should apply this requirement to any deposit advance 
program using for example, state payday lending databases or 
incoming checks or Automated Clearing House transactions to known 
payday lenders.
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     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 their 
underwriting for this product, banks should, no less than every six 
months, reevaluate the customer's eligibility and capacity for this 
product. Additionally, banks 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 borrower is overextended with respect to 
total credit obligations.
    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. 
Institutions should monitor for any undue reliance on the fees 
generated by such products for their 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 banks engaged in deposit advance lending have 
methodologies and analyses in place that demonstrate and document that 
the level of the ALLL is appropriate.
    Consumer Compliance: Banks should implement effective compliance 
management systems, processes and procedures to appropriately mitigate 
risks. 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.
    Management Oversight: Examiners will assess bank management's 
ability to administer a deposit advance loan 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 loans. The bank's

[[Page 25273]]

compliance management system should ensure continuing compliance with 
applicable federal and state laws, rules and regulations, as well as 
internal policies and procedures.
    Banks 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. Management should provide 
the appropriate oversight and allocate sufficient qualified staff to 
monitor deposit advance programs. Results of oversight activities 
should be reported periodically to the financial institution's board of 
directors or designated committee, including identified weaknesses, 
which should be documented and promptly addressed.
    Third-Party Relationships: Because third-party relationships are 
important in assessing a bank's overall risk profile, the FDIC's 
primary supervisory concern in reviewing a bank's relationships with 
third parties 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 borrowers, 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.
Responsible Products To Meet Small-Dollar Credit Needs
    The FDIC recognizes the need for responsible small-dollar credit 
products among consumers. 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 insured institutions 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.\23\ 
The Guidelines indicate that if structured properly, small-dollar loans 
can provide a safe and affordable means for borrowers to transition 
away 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 
template of important elements for such lending.\24\ The FDIC 
encourages banks to continue to offer these products, consistent with 
safety and soundness and other supervisory considerations, and 
encourages other banks to consider offering such products as well. 
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.
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    \23\ See FDIC Financial Institutions Letter FIL-50-2007, 
``Affordable Small-Dollar Loan Guidelines,'' (June 19, 2007).
    \24\ FDIC, ``FDIC Model Safe Accounts Pilot Final Report'', 
(April 2012).

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    Dated at Washington, DC, this 25th day of April, 2013.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2013-10101 Filed 4-29-13; 8:45 am]
BILLING CODE 6714-01-P