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Overdraft Overkill

Jun 19, 2018

I hesitated to write an article on overdraft practices because it seems there has been an over- abundance of industry information during recent years. However, although the concerns about overdraft practices may feel like old news, there constantly is new news about examiner scrutiny of anything overdraft related. So it seemed like a good time to review the potential overdraft tripwires.


In February of 2005, pre-CFPB, the four primary regulators issued the Joint Guidance on Overdraft Protection Programs. At that time, the main concern was marketing practices that appeared to encourage consumers to overdraw accounts, with overdrafts covered by an express overdraft limit. Those were the good ol’ days. Since then, a myriad of guidelines, rules, and regulations, backed by exam findings and enforcement actions for a multitude of overdraft situations, have raised the overall skittishness about anything overdraft related. The goal of this article is to discuss some of the interpretations and expectations garnered from news reports, regulator “issuances,” and examination discussions and findings.


Let’s start with Regulation DD—it’s probably the most straightforward with respect to expectations. In general, the regulation requires two things: a description of the circumstances under which an overdraft fee may be assessed and the disclosure on periodic statements of total fees for overdrafts and for returning items unpaid. The compliance challenge seems to be in the unspecified expectations. For example, with respect to the conditions under which an overdraft fee may be imposed, the Commentary to 1030.4 states, “It is sufficient for an institution to state that the fee applies to overdrafts ‘created by check, in-person withdrawal, ATM withdrawal, or other electronic means,’ as applicable.” So for years institutions have used this “sufficient” language. But recently some examiners have been critical of institutions that do not offer an opt-in to the payment of ATM overdrafts but included the “ATM withdrawal” reference in Regulation DD disclosures. In addition, buried in the Commentary is the requirement for the use of consistent terminology between account-opening disclosures and periodic statements. The regulation references the use of the term “overdraft” to describe items paid, and “returned item fee” or “NSF fee” to describe fees for returning items unpaid; whereas some core systems refer to either situation as an “overdraft” on periodic statements and others refer to either situation as a “non-sufficient funds” or “NSF fee.” When this occurs, it is difficult to ascertain which fees relate to a paid versus unpaid item. To ensure consumer understanding, the disclosures should delineate between fees for items that are paid, resulting in a negative account balance, and fees for items that are not paid.  


The Regulation E requirements for an opt-in to the payment of overdrafts related to ATM and one-time debit transactions can also cause angst. Neither the regulation nor other industry guidance related to the opt-in option states that in order to solicit the consumer to opt in to the payment of overdrafts, an institution must have an overdraft privilege program. In fact, the model consent form specifically states that overdrafts will be paid at the institution’s discretion, and payment of transactions is not guaranteed. Yet, examiners have been critical of institutions that solicit an opt-in from consumers but do not have an overdraft privilege program. The premise is that consumers do not receive any benefit by opting in, but are charged an overdraft fee that consumers from the same institution who do not opt in would not otherwise be assessed. They may have a point.


The assessment of continuous or extended overdraft fees has caused headaches and reimbursements for institutions cited for violations of Section 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices. The issues stem from inadequate or unclear language in account disclosures relative to the assessment of the fee.  Examples include lack of specificity with respect to whether the fee will be assessed after a certain number of calendar days or business days, as well as whether the fee will be assessed on the Xth day following the overdraft or after X number of days. Disclosures should clearly state whether the fee will be charged only on business days or on calendar days. If an institution’s system charges the fee on calendar days, it needs to consider whether this practice is fair to consumers who are unable to cure overdrafts on weekends and holidays. An institution also needs to determine the circumstances under which the continuous or extended overdraft fee is assessed. If service charges or other fees that cause an account balance to become negative could ultimately result in the assessment of the continuous or extended overdraft fee, the institution must be sure that fact is clearly disclosed. Also, if the fee is termed a “continuous overdraft fee” but the fee can be assessed for negative balances occurring under circumstances other than an “overdraft,” the fee name may need to be changed to avoid consumer confusion. All in all, financial institutions must be sure the disclosure is very explicit with respect to the timing and circumstances of this fee. 


Recently, overdraft scrutiny has expanded to transfer services where funds may be transferred from one deposit account to satisfy overdrafts in another account, and to overdraft lines of credit. Examiners have focused on whether the disclosures clearly describe the service and whether the operational aspects of the service are fair to consumers. Some institutions have been cited for assessing both the transfer fee and an overdraft fee when the transfer account does not contain sufficient funds to cover the overdraft. This practice has been determined to cause consumer harm because the consumer paid the transfer fee, but did not avoid the overdraft fee. If an institution has this practice, the disclosure must clearly describe that the consumer will be assessed both fees, and the institution must also consider whether this is a fair practice. In addition, if the transfer service restricts transfers from a savings account over the Regulation D limits, that fact should also be stated in the transfer agreement. A similar occurrence with transfers from overdraft lines of credit could be considered to cause consumer harm when an overdraft fee, as well as a fee (either fixed or accrued interest), is assessed on the overdraft line of credit when a sufficient balance is not available to cure the overdraft in the deposit account.


All in all, it’s a good idea to routinely compare account disclosures to core system parameters to ensure the service is performing exactly as intended, to make sure that the respective disclosure very clearly describes the service and related fees, and to consider whether the assessment of the fee is fair to consumers. If financial institutions have done this before, doing it again may sound like overkill, but trust me, core systems change, expectations change…to be continued, I’m sure.


Kathy Enbom, CRCM
Principal, Compliance
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