updated 12/02/13 11:08 AM
CUs Can Take Note, Expert Says
On Nov. 21, the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corp. (FDIC) both issued final guidance to financial institutions they supervise on deposit-advance loans.
Both agencies cited safety and soundness concerns with deposit-advance loans and outlined their supervisory expectations for these products. The Federal Reserve Board (FRB) did not issue guidance.
"It is interesting that the OCC and FDIC issued final guidance rather than wait for rules certain to come from the Consumer Financial Protection Bureau (CFPB)," said Sharon Lindeman, vice president of regulatory advocacy for the California and Nevada Credit Union Leagues. "The CFPB issued a white paper in April 2013 stating that deposit-advance products raise serious consumer protection concerns related to consumers' sustained use of the products. We expect they will follow this with a proposed rule."
She added: "While the OCC and FDIC guidance do not apply to credit unions, it is worth noting the agencies’ expectations, and further, to anticipate what we might see from the CFPB."
The new deposit-advance guidance for OCC and FDIC regulated financial institutions requires, among other things:
  • The bank must have written underwriting policies.
  • The customer must have a deposit account for at least six months.
  • Customers currently delinquent or who have adversely classified credits are ineligible.
  • The bank must consider the customer’s ability to repay without needing to borrow repeatedly.
  • Each deposit-advance loan should be paid off before extending a subsequent deposit advance loan, and a bank should not offer more than one loan per monthly statement cycle.
  • 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.
  • A customer's credit limit should not be increased unless the customer requests it and the bank conducts a full underwriting reassessment.
  • The bank should reassess the customer's eligibility for the product at least every six months.
Short-Term Small Amount Loans
The OCC, FDIC, and CFPB have all stated they recognize the need for small-dollar credit products that have affordable, reasonable interest rates with no or low fees and payments that reduce the principal balance of the loan.
The National Credit Union Administration (NCUA) also recognizes this need. In 2010, the agency amended the lending rules to allow federal credit unions to provide Short-Term Small Amount Loans (STS Loans). Part 701.21 (c)(7)(iii) outlines the requirements for STS Loans, including:
  • Small loans of $200 - $1,000
  • The borrower has been a member for at least one month
  • Short terms of one to six months
  • Application fee up to $20
  • No rollovers
  • Interest rate up to 28-percent APR
Furthermore, the best practices section of the NCUA rule is guidance, not a regulatory requirement, providing federal credit unions some flexibility in developing their own STS Loan programs.
Federal credit unions may also engage in other loan programs, such as deposit-advance products, as long as they comply with NCUA's interest rate ceiling, Regulation Z, and other applicable laws and regulations.
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