UPDATE: On February 20, the OCC announced that it would be removing the “Deposited-Related Consumer Credit” booklet, originally issued on February 11, from its website. The OCC’s February 11 booklet seemingly required banks to change overdraft protection services, however the agency has since stated that the booklet was not intended to establish new policy. According to the OCC’s website, the agency will “[revise] the booklet to clarify and restate the existing law, rules, and policy.” When the OCC releases its amended version of the booklet, we will update the February 16 Special Alert to reflect the agency’s modifications.
On February 11, 2015, the OCC issued the “Deposit-Related Consumer Credit” booklet of the Comptroller’s Handbook, which replaced the “Check Credit” booklet. The booklet provides updated guidance and examination procedures that the OCC will use to assess a bank’s deposit-related consumer credit (DRCC) products, which include check credit (overdraft lines of credit, cash reserves, and special drafts), overdraft protection services, and deposit advances. In many respects, it tracks the CFPB’s proposed prepaid rule, which would apply the Truth-in-Lending Act and Regulation Z to a broad range of credit features associated with prepaid products.
The OCC sets forth certain supervisory principles that apply to all DRCC products, which appear to meld consumer protection and safety and soundness concerns. These principles require that banks provide substantive consumer protections in connection with certain DRCC products that are not currently required by the applicable consumer protection regulations. Specifically, the supervisory principles include the following:
The OCC also expects banks to monitor the volume of revenue that DRCC products generate, and to evaluate whether the bank unduly relies on fees generated by a DRCC product. Bank management should also guard against “an over reliance on fee income from any single product.”
In addition, the OCC expects banks to monitor customer behavior and any outlier usage of DRCC products to avoid what the guidance frames as operational, compliance, reputational, and credit risk. For example, the OCC posits that repeated extensions of credit may constitute “loan flipping” and subject the bank to credit risk. Additional supervisory principles address disclosures, program availability and eligibility, consumer usage, credit terms and repayment methods, and credit reporting.
The OCC’s risk management expectations may also have tangible effects on a bank’s current operating practices, including higher capital requirements insofar as DRCC portfolios may have subprime credit characteristics. In this regard, the OCC’s requirement that banks report DRCC products in regulatory reports as loans may also have practical effects on banks.
It is worth noting that, two years ago, the OCC published proposed guidance relating to deposit advance products in the Federal Register, which allowed for public comment and time to prepare for any new compliance and supervisory expectations. The OCC published final guidance in the Federal Register in November 2013 (previously covered here) and OCC Bulletin 2013-40. This time, the OCC has dispensed with the opportunity for public comment and appears to require immediate compliance, notwithstanding that many of the expectations outlined with respect to certain DRCC products are radically new—including for overdraft protection services, as to which the OCC previously stated that “[b]anks generally do not underwrite overdraft protection services on an individual basis when enrolling the consumer.”
Questions regarding the matters discussed may be directed to any Orrick attorney with whom you have consulted in the past.