In updated examiner guidance and examination procedures issued last week, the Office of the Comptroller of the Currency (OCC) directs its examiners to assess whether the overdraft protection and other deposit-related consumer credit programs of national banks and federal savings associations comply with “supervisory principles” that include major new consumer protection requirements. We find this odd for several reasons:

  • The newly articulated supervisory principles are sweeping, but the OCC did not give notice or seek comment on them, nor did it provide a delayed effective date. This contrasts with the prior action taken by the OCC and the Federal Deposit Insurance Corporation in issuing consumer-oriented deposit advance “guidance.”
  • Even more broadly than the prior OCC/FDIC deposit advance guidance, the new principles address consumer protection concerns that fall within the jurisdiction of the Consumer Financial Protection Bureau and are likely being considered by the CFPB as part of its expected overdraft rulemaking for all depository institutions. This time, however, the OCC has acted alone, without any similar action by either the FDIC or the Federal Reserve Board, the agency that supervises bank holding companies and state banks that are members of the Federal Reserve System.
  • The OCC has not issued a press release or otherwise indicated that it has taken a major new policy initiative.

The OCC’s new “Deposit-Related Consumer Credit” booklet replaces its “Check Credit” booklet issued in March 1990. It is intended for use by OCC examiners in examinations of a bank’s deposit-related consumer credit (DRCC) products. DRCC products are described as “small-dollar, unsecured credit products that are related to a consumer’s deposit account” and generally take the form of “check credit,” “overdraft protection services,” or “deposit advance products.” (“Check credit” includes credit provided through an overdraft line of credit, the cash reserve method (i.e., a transfer of funds from an existing credit line to a customer’s demand deposit account made at the customer’s request), or a special draft (i.e., a customer’s negotiation of a special check drawn directly against an existing credit line, such as a home equity credit line.))

Taken at face value, the booklet would immediately require national banks and federal savings associations offering overdraft protection programs to:

  • Disclose clearly in account materials that the DRCC product is a loan and provide information about alternative products, including those that are less costly for the customer. Nevertheless, we question whether all DRCCs (for example, discretionary overdrafts that are immediately repayable) are loans.
  • Only enroll a customer for a product after receiving the customer’s affirmative request for the product and agreement to abide by the product terms and fees. This would extend to all overdraft transactions, including payment of a check, the Electronic Fund Transfer Act rule for ATM and one-time debit card transactions.
  • Establish policies and procedures to determine an applicant’s creditworthiness and ability to repay before offering the product.
  • Structure credit terms to reduce the principal loan balance over a reasonable period of time and offer multiple repayment methods appropriate for the type of credit.
  • Charge fees that are reasonably correlated to the actual costs of offering, underwriting, and servicing the product as well as associated risks.
  • Consider the significance of revenue from a particular product and monitor for any undue reliance on the fees generated by that product.

The reasonable fee and undue reliance requirements suggest the OCC’s current view is that national banks and federal savings associations are permitted to profit on DRCC products—just not too much. Unless they are withdrawn or modified, the new supervisory principles will immediately place national banks and federal savings associations at a severe competitive disadvantage relative to state banks.

The supervisory principles appear to question whether national banks and federal savings associations that have adopted “cooling off periods” for deposit advance loans to comply with the OCC’s guidance on this product are doing enough to limit usage. Noting that “some banks” now require such periods, the OCC states that it is “concerned, however, these cooling periods can easily be avoided and are ineffective in preventing repeated usage of these high-cost, short-term loans for longer-term borrowing needs.” We find this suggestion surprising for two reasons. We are not aware that any national banks or federal savings associations have continued to offer deposit advance loans subsequent to the OCC and FDIC guidance on this product, and the cooling-off periods required by the OCC and FDIC guidance were quite stringent, since they effectively limit customers to six deposit advances in any 12-month period.

The adoption of these new supervisory principles confirms our fears that the OCC and FDIC would not adhere to their decision not to apply their deposit advance guidance to overdraft credit lines. The new principles similarly confirm our concern that the CFPB’s prepaid card rules (or proposed rules) will eventually be applied to debit cards linked to deposit accounts. (As noted above, the principles apply to all transactions creating overdrafts on deposit accounts.)

In light of the OCC’s guidance, all national banks and federal savings associations should carefully review with counsel and, where necessary, modify their overdraft and overdraft protection practices, procedures, and disclosures. State banks should also take note. Although the guidance only applies to examiners of OCC-supervised financial institutions, regulators of other financial institutions may well be influenced by the OCC’s position. The guidance also puts pressure on the CFPB to adopt rigid limits on DRCCs.

On March 11, 2015, Ballard Spahr attorneys will hold a webinar "New and Threatened Regulatory Limits on Overdrafts and 'Deposit-Related Consumer Credit Products'," from 12 p.m. to 1 p.m. ET. More information and the registration form are available here.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, CFS Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com, Mark J. Furletti at 215.864.8138 or furlettim@ballardspahr.com, or Glen P. Trudel at 232.252.4464 or trudelg@ballardspahr.com.


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