I. INTRODUCTION
The Federal Reserve Board (FRB) has issued a policy statement to emphasize the significant consumer risks associated with deposit advance products. State member banks are expected to consider the risks associated with deposit advance products, including potential consumer harm and the potential for elevated compliance risk, when designing and offering such products.
II. BACKGROUND
A deposit advance product is a type of short-term, small-dollar credit product offered by depository institutions to consumers with a deposit account (with recurring direct deposits) or reloadable prepaid card. The depository institution allows a customer to obtain an advance on expected future deposits. Such advances and any associated fees are generally required to be repaid when the next deposit occurs.
III. POTENTIAL RISKS ASSOCIATED WITH DEPOSIT ADVANCE PRODUCTS
The FRB encourages state member banks to respond to their customers’ small-dollar credit needs with products that meet this demand in a responsible manner. However, state member banks should take into consideration the significant risks associated with deposit advance products, including potential consumer harm and the potential for elevated compliance risk when designing such products.
In designing and offering deposit advance products, state member banks must comply with all applicable federal laws and regulations, including but not limited to requirements under the Truth in Lending Act (TILA), the Electronic Fund Transfer Act (EFTA), the Truth in Savings Act (TISA), and the Equal Credit Opportunity Act (ECOA). In addition to these laws, institutions must act in accordance with Section 5 of the FTC Act, which prohibits unfair or deceptive acts and practices (UDAP), and Section 1036 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which prohibits unfair, deceptive, or abusive acts or practices. Depository institutions must also comply with state laws and regulations.
The prohibition against UDAP applies broadly to every stage of the deposit advance product, including marketing, servicing, and collections. The FRB expects institutions to analyze the legal risks of any deposit advance products before offering such products. The FRB expects Federal Reserve examiners to thoroughly review any deposit advance products offered by supervised institutions for compliance with Section 5 of the FTC Act, as well as other applicable laws.
State member banks that rely upon outside vendors to offer deposit advance products remain responsible for compliance with applicable laws and regulations. Inadequate management or oversight of third-party vendors by depository institutions presents additional consumer and compliance risks. In addition, fee sharing or similar arrangements that create an incentive for third party vendors to increase product usage create particular risk in connection with deposit advance products given that they may lead vendors to encourage inappropriate sustained usage of such products by consumers. Accordingly, the FRB expects institutions to develop procedures to closely monitor vendor practices and outcomes. State member banks should mitigate and manage such risks, consistent with applicable regulations and guidance, in connection with the design and marketing of any deposit advance products that they might offer.
IV. CONCLUSION
The Consumer Financial Protection Bureau (CFPB) has issued a white paper in which concerns are raised about the significant costs associated with sustained repeat usage of deposit advance products. In addition, the FDIC and OCC released proposed guidance on “safe and sound banking practices and consumer protection” in connection with deposit advance credit products. As a result, additional regulation of deposit advance loans can be expected.