Overdraft Protection Programs
Banks are aware that the regulatory environment surrounding overdrafts is now at the forefront of regulatory rulemaking, and many still face confusion regarding which Overdraft Protection guidance is applicable.
This awareness is attributed both to the increased scrutiny banks are experiencing during their regulatory examinations, as well as the material number of regulatory documents issued on the subject by a host of regulatory agencies. No bank wishes to be the next bank taken to task for their overdraft practices which have withstood scrutiny for multiple examinations.
Beginning in 2005, there have been various interagency guidance or examination manuals issued by regulatory agencies that appear to be only applicable to their member institutions. Additionally, the CFPB has been very active in this area and has issued whitepapers and related reports, blog articles, and various other communications that outline the intent to issue proposed rulemaking over the coming months.
We’ll identify which guidance was issued on an interagency basis and is applicable to all banks, as well as the guidance and examination handbooks issued by singular agencies intended for their member banks. We will also address the CFPB releases and the intended or implied guidance for all financial institutions that offer one of the various forms of overdraft products. We’ll review major regulatory findings and agreed-upon corrective action set forth in recent written consent actions. This program is intended for a wide range of bank personnel who are involved in the first, second or third line of defense for this area.
Over the years, a number of overdraft programs have evolved that are intended to cover potential Non-Sufficient Funds (NSF) situations. The earlier products included Lines of Credit attached to a deposit account or a link to another deposit account, which funds could be accessed for payment of the NSF. Later overdraft products included ad-hoc overdraft services to view NSF situations on a manual discretionary basis.
In recent years, banks began to automate this service and provide coverage on a range of their consumer and small business accounts if the account met certain parameters. These programs were advertised or promoted by banks as a source of short term credit, and were typically called “bounced check protection” or “courtesy overdraft”. These products are at the center of the latest round of regulatory interest. There have been two large financial institutions involved in consent decrees with regulatory agencies that resulted in penalties and expensive litigation. This program:
- Identifies problem areas highlighted in consent decrees and regulatory guidance
- Identifies particular practices that have the highest risk of being designated a UDAAP issue
- Provides suggestions, including a list of industry best practices and regulatory agency recommendations, to avoid and/or correct identified issues.
Participants receive a detailed manual that serves as a valuable resource long after the conclusion of the program.
Participants will leave understanding regulatory expectations regarding:
- Opt-in process for transactions not covered by Regulation E
- Opt-out process for non-Regulation E products that are automatically covered
- Policy and program requirements
- Board and Senior Management oversight
- Concise and informative disclosures
- Legal and regulatory risks
- Reputational risks
- Call Report impact
- Transaction clearing order
- Advance alerts
- Dissemination of information on similar fee-free products
- Bank’s discretionary right to pay
- Promotion or marketing as “free” or “low-cost”
- Fee regimen including initial, continuous or negative balance
- Relationship to UDAAP
- Transactional testing
- Consumer vs. business accounts
- Ability to Repay (ATR) determination
- Assessment of a reasonable fee to correlated service.
Compliance Officers, Branch Administration, Deposit Operations, Senior Management, Auditors, and those responsible for the development, implementation, maintenance and oversight of a bank’s overdraft protection program
Don L. Blaine is the Senior Training Consultant for Compliance Resource, LLC. Don has over 30 years of experience in regulatory compliance for the banking industry with banks ranging in size from community banks to money center banks. He provides training on Bank Secrecy Act/Anti-Money Laundering and deposit compliance. His prior roles have included: Chief Compliance Officer, Senior Compliance Regulatory Examiner, Compliance Audit Manager, and business unit compliance manager.
Don has taught at the ABA’s National Compliance School and has served as an instructor at programs offered by state banking associations. Prior to joining Compliance Resource, LLC, Don served as a consultant to numerous banks. He has attained Certified Regulatory Compliance Manager (CRCM) and Certified Risk Professional (CRP) certifications.
Institute of Certified Bankers: Visit http://www.icbmembers.org/login.aspx for instructions regarding self-reporting. Estimated credits: 2.5 CE Credits
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