I. INTRODUCTION
In response to concerns over the marketing of overdraft protection programs, sometimes referred to as “bounce protection programs,” the Federal Financial Institutions Examination Council (FFIEC), which includes the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Office of Thrift Supervision and the National Credit Union Administration (referred to as the “agencies”), issued an Interagency Guidance on Overdraft Protection Programs (hereafter referred to as the “Guidance”), coveringsafety and soundness considerations, legal risks and best practices associated with such programs. The Guidance is available at the Federal Reserve Board’s website at: http://www.federalreserve.gov/.
In the Guidance, the agencies expressed concern where a program is presented by a financial institution in a manner that appears to encourage consumers to overdraw their accounts and lead them to believe that overdrafts will always be paid when, in reality, the financial institution reserves the right not to pay some overdrafts. The Guidance is intended to assist financial institutions in responsible disclosure and administration of overdraft protection services.
The Guidance identifies concerns raised by financial institutions, the agencies and the public about the marketing, disclosure and implementation of overdraft protection programs. The Guidance contains three primary sections: Safety and Soundness Considerations; Legal Risks; and Best Practices.
The Safety and Soundness section seeks to ensure that financial institutions offering overdraft protection programs adopt adequate policies and procedures to address credit, operational and other associated risks.
The Legal Risks section alerts financial institutions of the need to comply with applicable laws and advises institutions to have their overdraft protection programs reviewed by legal counsel to ensure compliance prior to implementation. Several federal consumer compliance laws described in the Guidance are relevant to these programs.
The Best Practices section addresses marketing and communications with consumers about overdraft protection programs, including features and operations of the programs. Some of these best practices include: clearly disclosing fees; explaining the impact of transaction-clearing policies on the overdraft fees consumers may incur; disclosing the types of consumer banking transactions covered by the program; and monitoring program usage. The agencies also advise financial institutions to alert consumers before a transaction triggers any fees; to provide consumers the opportunity either to opt-in or opt-out of the program; and to promptly notify consumers of overdraft protection program usage each time it is used.
II. BACKGROUND – OVERDRAFT PROTECTION PROGRAMS
The introduction to the Guidance acknowledges that overdrafts paid on a discretionary basis as an accommodation to the account holder, where the accommodation is not promoted, do not raise significant concerns. Some financial institutions have offered “overdraft protection” programs that, unlike the discretionary accommodation traditionally provided to those lacking a line of credit or other type of overdraft service (e.g., linked accounts), are marketed to consumers essentially as short-term credit facilities. These marketed programs typically provide consumers with an express overdraft “limit” that applies to their accounts.
Programs that the Guidance appear to target are those that affect consumers and incorporate “some or all” of a list of seven characteristics, only one of which is that overdraft privileges are promoted as a feature of the account. The characteristics of an overdraft protection program noted in the Guidance are: (a) it is promoted as a service; (b) coverage is automatic for accounts that meet certain criteria; (c) an overdraft limit is set; (d) payment by the financial institution is discretionary; (e) the service may extend to transactions other than just checks; (f) a flat fee is charged; (g) some financial institutions offer closed-end loans to consumers to repay balances.
Financial institutions should weigh carefully the risks presented by the programs including the credit, legal, reputation, safety and soundness and other risks. Institutions should carefully review their programs to ensure that marketing and other communications do not mislead consumers to believe that the program is a traditional line of credit or that payment of overdrafts is guaranteed, do not mislead consumers about their account balance or the costs and scope of the overdraft protection offered and do not encourage irresponsible consumer financial behavior that potentially may increase risk to the institution.
III. SAFETY AND SOUNDNESS CONSIDERATIONS
When overdrafts are paid, credit is extended. Overdraft protection programs may expose an institution to more credit risk (e.g., higher delinquencies and losses) than overdraft lines of credit and other traditional overdraft protection options to the extent these programs lack individual account underwriting. Regardless of whether an institution promotes its overdraft protection program, the institution must adopt written policies and procedures adequate to address the credit, operational and other risks associated with it. Prudent risk management practices include the establishment of express account eligibility standards and well-defined and properly documented dollar limit decision criteria. Institutions should monitor these accounts on an ongoing basis and be able to identify consumers who may represent an undue credit risk.
Overdraft protection programs should be administered and adjusted, as needed, to ensure that credit risk remains in line with expectations. This may include, where appropriate, disqualification of a consumer from future overdraft protection. Reports sufficient to enable management to identify, measure and manage overdraft volume, profitability and credit performance should be provided to management on a regular basis.
Institutions are expected to incorporate prudent risk management practices related to account repayment and suspension of overdraft protection services, including the establishment of specific timeframes for when consumers must pay off overdraft balances. For example, there should be established procedures for the suspension of overdraft services when the account holder no longer meets the eligibility criteria (such as when the account holder has declared bankruptcy or defaulted on another loan at the bank) as well as for when there is a lack of repayment of an overdraft. In addition, overdraft balances should generally be charged off when considered uncollectible, but no later than 60 days from the date first overdrawn.
With respect to the reporting of income and loss recognition on overdraft protection programs, institutions should follow generally accepted accounting principles (GAAP) and the instructions for the Reports of Condition and Income (Call Report). Overdraft balances should be reported on regulatory reports as loans. Accordingly, overdraft losses should be charged off against the allowance for loan and lease losses. The agencies expect all institutions to adopt rigorous loss estimation processes to ensure that overdraft fee income is accurately measured. Such methods may include providing loss allowances for uncollectible fees or, alternatively, only recognizing that portion of earned fees estimated to be collectible. The procedures for estimating an adequate allowance should be documented in accordance with the Policy Statement on the Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions.
If an institution advises account holders of the available amount of overdraft protection (e.g., when accounts are opened or on depositors’ account statements or ATM receipts), the institution should report the available amount of overdraft protection with legally binding commitments for Call Report purposes. These available amounts should be reported as “unused commitments” in regulatory reports.
IV. LEGAL RISKS
Overdraft protection programs must comply with all applicable federal laws and regulations. The Guidance discusses the potential application of a number of federal laws, including: (a) the Federal Trade Commission Act prohibiting unfair or deceptive acts or practices; (b) the Truth and Lending Act (Regulation Z); (c) the Equal Credit Opportunity Act (Regulation B); (d) the Truth and Savings Act (Regulation DD); and (e) the Electronic Funds Transfer Act (Regulation E). The Guidance provides that neither Regulation Z nor Regulation B applies to discretionary overdrafts per se, but Regulation B may apply if any aspect of a program is administered in a discriminatory manner. Pricing policies that have a discriminatory impact on a prohibited basis and steering of certain classes of customers but not others to more favorable lines of credit programs are examples.
V. BEST PRACTICES
The Guidance includes a series of “best practices” aimed primarily at promoted programs, but that are “useful” for other methods of covering overdrafts. At the top of the “best practices” list is that institutions must not market programs in a way that encourages intentional overdrafts (and account mismanagement). Institutions may present the services and means of covering inadvertent overdrafts and should go no further. The institution may want to insert protective disclaimers, such as “always manage your account wisely” with ads or promotional statements regarding the institution’s overdraft protection program. If the institution offers more than one type of product (e.g., an overdraft line of credit), the best practice, when “informing” consumers about its discretionary program, is to inform them about those other services as well. Thus, advertisements should be reviewed and staff should be trained to provide this information.
Clear disclosures and explanations to consumers of the operation, costs, and limitations of an overdraft protection program and appropriate management oversight of the program are fundamental to enabling responsible use of overdraft protection. Institutions that establish overdraft protection programs should, as applicable, take into consideration the following “best practices,” many of which have been recommended or implemented by financial institutions and others, as well as practices that may otherwise be required by applicable law. These best practices currently observed in or recommended by the industry include:
A. Marketing and Communications with Consumers
1. Avoid promoting poor account management. Institutions should not market the program in a way that encourages routine or intentional overdrafts, but should present the program as a customer service that may cover inadvertent consumer overdrafts.
2. Fairly represent overdraft protection programs and alternatives. When informing consumers about an overdraft protection program, institutions should disclose other available overdraft services or credit products and how the terms, including fees, for these services or products differ. Institutions should identify for consumers the consequences of extensively using the overdraft protection program.
3. Train staff to explain program features and other choices. Train customer service or consumer complaint-processing staff to explain their overdraft protection program’s features, costs, and terms, including how to opt out of the service. Staff also should be able to explain other available overdraft products offered by the institution and how consumers may qualify for them.
4. Clearly explain the discretionary nature of program. If payment of an overdraft is discretionary, make this clear. If discretionary, institutions should not represent that the payment of overdrafts is guaranteed or assured.
5. Distinguish overdraft protection services from “free” account features. Do not promote “free” accounts and overdraft protection services within the same ad in a manner suggesting that the overdraft protection service is free of charges.
6. Clearly disclose program fees. In communications about overdraft protection programs, clearly disclose the dollar amount of the fee for each overdraft and any interest rate or other fees that may apply. For example, rather than merely stating that the institution’s standard NSF fee will apply, institutions should restate the dollar amount of any applicable fees or interest charges.
7. Clarify that fees count against the disclosed overdraft protection dollar limit. Consumers should be alerted that the fees charged for covering overdrafts, as well as the amount of the overdraft item, will be subtracted from any overdraft protection limit disclosed.
8. Demonstrate when multiple fees will be charged. If promoting an overdraft protection program, clearly disclose, where applicable, that more than one overdraft fee may be charged against the account per day, depending on the number of checks presented and other withdrawals made from the consumer’s account.
9. Explain the impact of transaction-clearing policies. Clearly explain to consumers that transactions may not be processed in the order in which they occurred and that the order in which they are received by the institution and processed can affect the total amount of overdraft fees incurred by the consumer.
10. Illustrate the type of transactions covered. Clearly disclose that overdraft protection fees may be imposed on transactions such as ATM withdrawals, debit card transactions, preauthorized automatic debits, telephone-initiated transfers or other electronic transfers, if applicable, to avoid implying that check transactions are the only transactions covered.
NOTE: The OTS Guidance additionally provides that savings associations may not administer transaction-clearing rules (including check-clearing and batch debit processing) unfairly or manipulate them to inflate fees.
B. Program Features and Operation
1. Provide election or opt-out of service. Obtain affirmative consent of consumers to receive overdraft protection. Alternatively, where overdraft protection is automatically provided, permit consumers to “opt out” of the overdraft program and provide a clear consumer disclosure of this option.
2. Alert consumers before a transaction triggers any fees. When consumers attempt to withdraw, transfer, or otherwise access funds made available through an overdraft protection program (other than by check), institutions should alert them that completing the transaction may trigger an overdraft protection fee. Institutions should also give consumers an opportunity to cancel the attempted transaction. If this is not feasible for a particular type of transaction, then institutions should allow consumers the choice to make access to the overdraft protection program unavailable by transaction type, even if this results in limiting the overdraft protection coverage only to check transactions.
3. Prominently distinguish balances from overdraft protection funds availability. When disclosing a single balance for an account by any means, institutions should not include overdraft protection funds in that account balance. The disclosure should instead represent the consumer’s own funds available without the overdraft protection funds included. If more than one balance is provided, separately and prominently identify the balance without the inclusion of overdraft protection.
4. Promptly notify consumers each time the overdraft protection program is used. In addition to any alert at the time of a transaction, promptly notify consumers when overdraft protection has been accessed, for example, by sending a notice the day the overdraft protection program has been accessed. The notification should identify the date of the transaction, the type of transaction, the overdraft amount, the fee associated with the overdraft, the amount necessary to return the account to a positive balance, the amount of time consumers have to return their accounts to a positive balance, and the consequences of not returning the account to a positive balance within the given timeframe. Notify consumers if the institution terminates or suspends the consumer’s access to the service, for example, if the consumer is no longer in good standing.
5. Consider daily limits on fees imposed. Consider providing a daily cap on overdraft fees charged against any one account, while continuing to provide coverage for overdrafts up to the overdraft limit.
6. Monitor overdraft protection program usage. Monitor excessive consumer usage, which may indicate a need for alternative arrangements or other services, and inform consumers of these available options.
7. Fairly report program usage. Institutions should not report negative information to consumer reporting agencies when the overdrafts are paid under the terms of the overdraft protection programs that have been promoted by the institution.
VI. CONCLUSION
All financial institutions should review their policies and procedures for the operation of discretionary overdraft protection programs to identify what changes may be necessary to implement the best practices issued by their respective regulators. Institutions should continue with efforts to help their customers better manage their finances and avoid overdraft situations. Customers who regularly overdraw their accounts and access overdraft protection services should understand the true costs of their ongoing inability to balance these accounts.