The OCC has issued guidance outlining safety and soundness and risk management considerations for national banks and federal savings associations offering tax refund-related products. The OCC defines “tax refund-related products” to include credit products (such as “refund anticipation loans” and “holiday loans”), deposit products (such as special purpose deposit accounts and prepaid cards), and the use of third-party settlement services to transmit tax refunds. Although the guidance applies only to OCC-regulated institutions, it provides important guidance for any financial institution offering tax refund-related products, such as tax refund prepaid cards or special deposit accounts.

In the OCC’s view, all tax refund-related products present special safety and soundness and compliance risks due to “their unique repayment and cost structures” and “banks’ reliance on third-party tax return preparers who interact with customers.” The OCC’s guidance includes several suggestions for mitigating those risks.

• Board and Management Responsibility. Management should establish underwriting criteria for credit products, set limits for each product as a percentage of the bank’s total capital, and evaluate product usage by reviewing regular reports. The bank management information system (MIS) should track production and portfolio trends, reasons for denial, IRS payments, and other information.

• Advertising, Marketing, and Disclosures. All advertising should be consistent with the IRS Advertising Standards Webpage, and material terms should be disclosed “in writing to each prospective customer before the customer applies for the product or pays any fee.” Disclosures should include the total cost of the product, a statement that the cost of the product will be deducted from the tax refund, a statement that the IRS can issue tax refunds directly without any cost, a statement detailing the ongoing periodic maintenance and transaction fees associated with the product, a description of the bank’s low-cost deposit accounts and prepaid access cards, and more.

• Costs and Fees. The OCC suggests that banks review the fee structure of tax refund-related products by analyzing the banks’ “actual costs” and “the fee structure for products of comparable risk that are offered by the bank or are available in the marketplace.”

• Bank Secrecy Act Compliance. The OCC reminds banks that their BSA compliance programs must take into account any tax refund-related products.

• Third-Party Risk Management and Verification. Banks offering tax refund-related products through third parties should monitor and verify the third party’s practices. The OCC suggests specific terms for written agreements with tax preparers and steps for vendor due diligence and oversight programs. To verify third party practices, the OCC even suggests using mystery shoppers to test the tax preparers and spot particular issues.

• Additional Guidance for Deposit Products and Prepaid Cards. Banks issuing prepaid cards that accept federal tax payments must ensure that they comply with the federal payment account rules (31 CFR 210.5), which require that the prepaid cards: (1) provide pass-through federal deposit insurance, (2) are not attached to a line of credit for which repayment is triggered when a federal payment is made, and (3) comply with Regulation E’s payroll cards rules.

• Additional Guidance for Credit Products. The guidance also provides additional considerations for credit products, such as additional disclosures, marketing standards, and consumer eligibility requirements. While it is unusual for a depository institution to provide refund anticipation loans, the OCC guidance defines “tax-related credit products” broadly, including loan “programs that anticipate (even if they do not necessarily require) loan repayment from future tax refund proceeds.” Even if your institution does not offer refund anticipation loans, it may be advisable to consult the OCC guidance if you offer special loan programs tied to the tax season.

For more information, see our Refund Anticipation Loan (RAL) Topic Page.