Letter to FDIC re: Overdraft and Deposit Advance Guidance

Dear Mr. Lyons:

The American Bankers Association(ABA) appreciates the opportunity to provide comments onthe FDIC’s proposed retirement of certain financial institution letters. Pursuant to a commitmentfound in the March 2017 EGRPRA final report, FDIC reports that it has identified and proposedfor elimination 374 Financial Institution Letters (FILs) that were issued between 1995 and 2017that pertain to risk management and supervision, believed to be outdated or that conveyinformation that is still in effect but is available elsewhere. This is over half of the riskmanagement supervision-related FILs issued between 1995 and 2017.

ABA supports the FDIC’s effort to retire these FILs, which we understand to be an effort tostreamline better the information available to bankers and the public. We also appreciate that asimilar review of consumer compliance-related FILs is underway. Pursuant to that effort we encourage you to consider the following as exemplary of policy issues involved with some of theFILs.

Overdraft Payment Supervisory Guidance (FIL-81-2010)

In 2010, the FDIC issued an FIL that imposed supervisory expectations with respect to bankoverdraft payment programs (Overdraft FIL).5 As we noted in 2010, the use of a financialinstitution letter to impose new regulatory requirements, particularly obligations that addsignificant compliance burden and limit customer choice, was tantamount to ultra viresrulemaking by the FDIC.

The Overdraft FIL has tended to reduce customer access to overdraft services by imposingexpected daily limits on overdraft fees and limiting access to overdraft services for certaincustomers, among other provisions. The FDIC issued these supervisory expectations eventhough the existing regulatory framework already empowered customers to make informed andresponsible account management choices when seeking, declining, or changing overdraftcoverage. In 2009, the Board of Governors of the Federal Reserve System (Board) amendedRegulation E to require bank customers to opt in to overdraft protection services before a bankcould impose a fee for an overdraft resulting from a point of sale debit card or ATM transaction.In addition, the Board amended Regulation DD in the same year to require banks to providecustomers with clear disclosures on periodic statements of all overdraft fees and by requiring thatinstitutions only disclose funds available for immediate use when disclosing automated accountbalances to a customer.

Despite these amendments—and without any demonstration that further regulation of overdraftservices was necessary or desirable—the FDIC issued the Overdraft FIL. The FDIC shouldwithdraw this guidance announced in FIL-81-210.

Direct Deposit Advance Guidance

We repeat our call for the FDIC to rescind its 2013 Guidance on Supervisory Concerns andExpectations Regarding Deposit Advance Products (DDA Guidance). The DDA Guidanceeffectively blocked from the regulated banking system a sustainable small dollar credit optionvalued by many customers, forcing all but one bank that offered the product to exit the marketand discouraging any new entrants.

DDA services, as they were offered, permitted eligible customers, for a fee, to borrow funds thatwere deposited directly into the customer’s account. Banks underwrote the advances usinginformation derived from the customer’s relationship with the bank, including the customer’shistory of incoming credits. Because of these underwriting efficiencies, banks could offer the product at competitive rates. Knowledge of the customer’s borrowing history also allowed banksto set reasonable limits on product use, without the need to resort to arbitrary and non-tailoredlimits. Customers appreciated that they could quickly access funds in a convenient manner(including from the customer’s online bank account) and at a lower cost than competing nonbank short-term credit products.

In November 2013, raising unfounded and undemonstrated safety and soundness concerns, theFDIC and the Office of the Comptroller of the Currency (OCC) each published identicalguidance that expressed the agencies’ “expectations” that banks would follow a prescriptive setof underwriting requirements in offering these credits, including the imposition of arbitrarycooling off periods on customers’ use of the product, inconsistent with the variable reality of lifeand customer credit needs. There was, however, no evidence offered to suggest that the operationof DDA programs presented operational, credit, or reputational risks that were not addressedadequately by existing supervisory programs and regulation. As ABA noted at the time, theagencies’ assertion of safety and soundness concerns was a thinly disguised attempt to engage inconsumer financial regulation—the authority for which had been transferred to the Bureau ofConsumer Financial Protection (BCFP)—and impose additional, unnecessary, and consumer-unfriendly requirements on a legal and functioning product, which, however, agency leadershipdisfavored.

In October 2017, following BCFP regulatory action, the OCC rescinded its guidance on DDAservices. In rescinding the guidance, the OCC expressed its concern that “in the years since theagency issued the guidance, it has . . . become difficult for banks to serve consumers’ need forshort-term, small-dollar credit,” and that “consumers who would prefer to rely on banks andthrifts for these products may be forced to rely on less regulated lenders and be exposed to therisk of consumer harm and expense.” Consequently, the OCC guidance “may even hurt thevery consumers it is intended to help, the most marginalized, unbanked and underbankedportions of our society.”

As we stated in our letter of October 12, 2017 (cited above), we believe that the OCC’s concernsapply similarly to the FDIC’s DDA Guidance. The DDA Guidance imposes the sameunderwriting and cooling-off requirements that are present in the OCC’s guidance and that theOCC found may restrict access to bank-provided small dollar credit. We urge the FDIC torescind the DDA Guidance.

Guidance for Managing Third-Party Risk (FIL-44-2008)

In the past decade, technological advances have impacted how banks develop and deploy newfinancial products and services. Increasingly, banks are leveraging the efficiency and expertise ofspecialized technology providers to offer products and services to customers. Banks also rely onpartnering nonbank financial technology firms to provide important back-office support. Whenbanks partner with such firms, customers can benefit by receiving innovative products deliveredthrough a channel they trust.

Bank-nonbank partnerships are subject to third-party risk management guidance issued by thefederal banking regulators, including FDIC FIL-44-2008 (June 6, 2008).14 While the guidancedocuments of the several agencies are similar, they are not identical. In all cases, the guidancedocuments apply broadly to a bank’s third-party relationships—from armored car services andoutside consultants to cloud providers and partnerships with online lenders.

FIL-44-2008 predates significant leaps in technology as well as the emergence of a variety ofnew providers of services. These changes have impacted the financial services landscape and thetypes of third-party partnerships that banks are exploring today. As banks have evaluatedpotential partnerships, questions have emerged regarding how the agencies’ third-party riskmanagement guidance applies, particularly with respect to a bank’s risk assessment and duediligence processes.

To address these issues, we recommend that the FDIC work through the Federal FinancialInstitutions Examination Council (FFIEC) to update the guidance and reduce the potential forinconsistent supervisory treatment and mixed policy signals regarding bank engagement withnonbank partners, particularly those offering new technological solutions. Consistent with therecommendation of the U.S. Department of the Treasury, we believe that the FDIC and theFederal banking regulators should, in coordination, review current third-party guidance through anotice and comment process. The issuance of joint guidance is one way to promote suchdesirable consistency.

Conclusion

ABA appreciates the FDIC’s work to retire FILs that convey redundant or outdated information.Further, we hope you will consider revisiting the policies found in the FILs, such as those that we have articulated. Should you have any questions, please do not hesitate to contact theundersigned at skern@aba.com or (202) 663-5253.

Sincerely,

Shaun Kern
Senior Counsel