Examiners to scrutinize banks that offer ‘deposit advance’ products

11/22/2013 12:00 AM

11/21/2013 6:27 PM

Two federal bank regulators on Thursday said their examiners will be looking more closely at banks that offer products that resemble payday loans.

The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency said such products fall into a category of what they call “deposit advance” products. The products, they said, are small-dollar, short-term credit products that some banks offer to customers with a deposit account or reusable prepaid debit cards. The customer takes out an advance, or loan, which is to be paid with the customer’s next direct deposit.

The FDIC and OCC said in separate news releases Thursday that deposit advance products have some similar characteristics with payday loans, including high fees, short lump-sum repayment terms, and little assessment of the customer’s ability to repay the debt.

Such products carry certain risks for banks, including credit, operational and compliance risks, the regulators said. They also could have an effect on a bank’s reputation, regulators said.

“These products can trap customers in a cycle of high-cost debt that they are unable to repay,” OCC comptroller Thomas Curry said in a statement. “As a result, they pose significant safety and soundness and consumer protection risks. Banks must understand and manage those risks, and this guidance clarifies our expectations for doing so.”

FDIC spokesman David Barr said his agency knows of “very few” banks it regulates that are offering the products. Barr said he didn’t have an exact number of how many banks do offer the products and he didn’t know whether any of them operated in Kansas.

OCC spokesman Bill Grassano said that he didn’t have an exact number of banks that are offering the deposit advance products, and he wouldn’t speculate about whether regulators thought a trend was developing.

“All I know is there are a handful of banks that offer the product,” he said.

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