The FDIC has issued final guidance for state chartered banks regarding deposit advance products. We previously mentioned the proposed guidance and discussed applicable risks in connection with our first of two blog entries regarding changes to Missouri law that may now make deposit advance products more appealing.
Although the FDIC generally does not discourage the use of this type of product, as we have previously warned, the FDIC is clear that such products present a variety of credit, reputation, operational, compliance, and other risks to banks. The guidance emphasizes that banks must comply with safe and sound banking practices.
Specifically, banks must assess a customer’s repayment ability without the need repeated use of deposit advance products. A bank must have underwriting criteria for these products clearly documented, consistent with the bank’s general underwriting policies. The Guidance provides that banks should reevaluate a customer’s eligibility before increasing credit limits and, in all circumstances, should reevaluate eligibility every six months. Banks should not offer more than one loan during a monthly period and must provide a “cooling-off period” of at least one month before extending another advance to a customer. Because of the risks associated with deposit advance products, the FDIC provides that higher capitalization may be required and warns that banks must not be overly-dependent on fees earned from these products. Additionally, banks offering deposit advance products must provide sufficient management oversight and quality control to minimize risks and must ensure that all consumer protection laws and regulations are followed.
For those of you familiar with the proposed guidance, the final guidance largely adopts the proposed guidance with a few amendments. The final guidance clarifies that it is not necessary for banks to obtain credit reports to comply with eligibility and underwriting expectations. Further, the final guidance clearly states that it is applicable to all deposit advance products regardless of whether the products are structured as loans, lines of credit, or otherwise. The guidance explicitly states that it is not intended to impact any state usury laws. Finally, the guidance reiterates that banks should not makes loans that consumers cannot repay, and banks must make this determination by assessing each customer’s ability to repay, taking into account the customer’s other necessary expenses such as food, housing, transportation, and healthcare.
If your bank offers, or is considering offering, short term deposit advance products, we recommend that you carefully review the FDIC Final Guidance and proceed with caution.