I. INTRODUCTION
The FDIC has issued final guidance, which reaffirms existing supervisory expectations with respect to overdraft payment programs in general, and provides specific guidance with respect to automated overdraft payment programs. The FDIC expects the institutions it supervises to closely monitor and oversee any overdraft payment programs they offer to consumers, including taking appropriate measures to mitigate risks, incorporating the best practices outlined in the 2005 Joint Guidance on Overdraft Protection Programs, and effectively managing third-party arrangements. Management should be especially vigilant with respect to product over-use that may harm consumers, rather than providing them the protection against occasional errors or funds shortfalls for which the programs were intended.
The FDIC expects financial institutions’ boards of directors and management to ensure that the institution mitigates the risks associated with offering automated overdraft payment programs and complies with all consumer protection laws and regulations, including providing clear and meaningful disclosures and other communications about overdraft payment programs, fees, and other features and options, and demonstrating compliance with new opt-in requirements for automated teller machine (ATM) withdrawals and one-time point-of-sale debit card transactions. In addition, the FDIC expects financial institutions to:
Institutions using a third-party vendor for their overdraft payment programs must exercise careful oversight, as discussed in the FDIC’s 2008 Guidance for Managing Third-Party Risk.
The FDIC will take supervisory action where overdraft payment programs pose unacceptable safety and soundness or compliance management system risks or result in violations of laws or regulations, including unfair or deceptive acts or practices and fair lending laws.
Positive CRA consideration will continue to be provided for responsible transaction accounts, and affordable small-dollar loan programs or other lower cost credit alternatives, particularly for low- and moderate-income consumers.
II. SUPERVISORY EXPECTATIONS
The FDIC expects institutions to implement effective compliance and risk management systems, policies, and procedures to ensure that institutions manage any overdraft payment programs in accordance with the 2005 Joint Guidance on Overdraft Protection Programs (Joint Guidance) (FIL-11-2005) and the FRB November 12, 2009, amendments to Regulation E, to avoid harming consumers or creating other compliance, operational, financial, reputational or other risks. As changes are made to overdraft payment programs in response to regulatory developments or to implement additional recommendations, institutions are reminded to ensure that customer communications (e.g., agreements, correspondence, marketing materials, etc.) are updated accordingly, present information accurately and are not misleading.
The FDIC is particularly concerned about the risks posed by automated overdraft payment programs, which are established programs, often partially or fully computerized, that are used by institutions to determine whether non-sufficient fund (NSF) transactions qualify for overdraft coverage based on pre-determined criteria. Ad hoc overdraft payments typically involve irregular and infrequent occasions on which a bank employee exercises discretion in a specific instance about whether to pay an item or not, as a customer accommodation and not on a pre-determined or formulaic basis. Such ad hoc activities are not the focus of this guidance. Similarly, linked lines of credit are not the focus of this guidance. Management should also ensure that all overdraft payment and line of credit practices conform to all applicable laws and regulations. To mitigate safety and soundness and compliance risks, and avoid violations of related laws and regulations, the FDIC expects its supervised institutions to take the following actions regarding automated overdraft payment programs:
III. REGULATION E REQUIREMENTS
Under Regulation E requirements that took effect on July 1, 2010, institutions must provide notice and a reasonable opportunity for customers to opt-in to the payment of ATM and POS overdrafts for a fee. In complying with these requirements, institutions should not attempt to steer frequent users of fee-based overdraft products to opt-in to these programs while obscuring the availability of alternatives. Targeting customers who may be least able to afford such products such as through aggressive advertising or other promotional activities can raise safety and soundness concerns about potentially unsustainable consumer debt. Any steering activity with respect to credit products raises potential legal issues, including fair lending, and concerns about unfair or deceptive acts or practices (UDAPs), among others, and will be closely scrutinized.
Although the FRB did not address the payment of overdrafts resulting from non-electronic transactions, such as paper checks or automated clearing house (ACH) transfers, the FDIC believes institutions should allow customers to decline overdraft coverage (i.e., opt-out) for these transactions and honor an opt-out request.
In addition, the FDIC encourages institutions to remind their customers, especially chronic or excessive users of overdraft programs, that even if they have chosen to opt-in to the payment of ATM and POS overdrafts for a fee, at any time they can still choose to opt-out of ATM and POS overdraft programs.
IV. EXAMINATIONS
Overdraft payment programs will be reviewed at each examination. Overdraft payment programs that are found to pose unacceptable safety and soundness or compliance risks will be factored into examination ratings and corrective action will be taken where necessary. Institutions that use third party arrangements will be expected to follow the 2008 Guidance for Managing Third-Party Risk.
Institutions should review the FDIC’s 2004 guidance on Unfair or Deceptive Acts or Practices by State-Chartered Banks. Section 5 of the FTC Act prohibits UDAPs in or affecting commerce,and the FDIC enforces compliance with this important consumer protection law by FDIC-supervised institutions pursuant to its authority under the FTC Act and Section 8 of the Federal Deposit Insurance Act.
The prohibition against UDAPs applies to all products and services offered by financial institutions, including automated overdraft payment programs, and regardless of whether such programs are offered directly or indirectly through a third party.
In addition, as stated in the Joint Guidance:
“Under the Equal Credit Opportunity Act (ECOA) and Regulation B, creditors are prohibited from discriminating against an applicant on a prohibited basis in any aspect of a credit transaction. This prohibition applies to overdraft protection programs. Thus, steering or targeting certain consumers on a prohibited basis for overdraft protection programs while offering other consumers overdraft lines of credit or other more favorable credit products or overdraft services, will raise concerns under the ECOA.”
The FDIC expects institutions to employ measured and appropriate follow-up with customers pursuant to this guidance, as compared with inappropriate efforts to coerce consumers to opt-in. Inconsistent application of waivers of overdraft fees will be evaluated in light of all applicable fair lending statutes and regulations.
Institutions will continue to receive favorable CRA consideration for offering positive alternatives to overdrafts that are responsive to the needs of the customers in their local communities. For example, FDIC examiners will inquire about and consider favorably lower cost transaction accounts and credit alternatives, such as small dollar loans and overdraft lines of credit, which are responsive to consumer needs, particularly those of low- and moderate-income individuals. FIL-50-2007 provides additional details on small-dollar loans.
V. FREQUENTLY ASKED QUESTIONS
The FDIC has developed a series of frequently asked questions (FAQs) and answers in response to questions from supervised institutions and third-party vendors about the FDIC’s Overdraft Payment Supervisory Guidance issued in November 2010. The Questions and Answers can be found at the FDIC website: https://www.fdic.gov/.