On the heels of the Consumer Financial Protection Bureau’s (“CFPB”) April 24, 2013 white paper on payday loans and deposit advance products, the Board of Governors of the Federal Reserve Board (“Fed”) issued a formal statement to “emphasize to state member banks the significant consumer risks associated with deposit advance products.”
So what is a deposit advance product, anyway? This is a type of short-term, small-dollar credit product offered by depository institutions to consumers with a deposit account or reloadable prepaid card. The institution allows the customer to obtain an advance on expected further deposits. When the customer makes his or her next deposit, the advances and associated fees must be repaid. The CFPB’s study focused on costs and patterns of deposit advance product usage by consumers, and particularly on the sustained use of these products by consumers.
The Fed’s statement highlights the potential risks with deposit advance products, including the federal laws and regulations that circumscribe these products (TILA, EFTA, ECOA, etc.). The statement further explains the potential violations of the FTC Act prohibiting unfair and deceptive acts or practices (UDAP), as well as the provisions of Dodd-Frank prohibiting unfair, deceptive, and abusive acts or practices. The Fed emphasized that the prohibition against UDAP “applies broadly to every stage of the deposit advance product, including marketing, servicing, and collections.”
Importantly, the statement also points out that state member banks are responsible for the compliance of outside vendors with applicable laws and regulations. The Fed leaves no ambiguities that inadequate management or oversight of third-party vendors present compliance risks for the regulated institutions. The Fed stated that it expects institutions to develop procedures to closely monitor vendor practices and outcomes.
Moving forward, state member banks that offer deposit advance products need to carefully assess and mitigate risks posed by their internal management of these products. Moreover, any use of third-party vendors for deposit advance products should be evaluated with respect to fee sharing or other incentives to increase customer usage. Marketing and other aspects of these products must also be scrutinized. Institutions must have policies to monitor these aspects of third-party vendors.
Contact Spilman or your regulatory counsel to discuss this statement or necessary changes to your institution’s policies and procedures.