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Take a hard look at your overdraft policies

May 24, 2023
By: Amanda L. Knudsen
Financial Institutions

In a recent conversation with coworkers, we were discussing who carries around a checkbook these days, and even more revealing, who carries a check register with them and uses it to balance their checkbook on a regular basis.

Only a few admitted to entering every transaction into their register as it occurs. Those would include every check written, every debit card transaction and even ATM withdrawals.

The rest of us — and we’re all experienced financial industry professionals — felt a little guilty as we know this is the responsible way to monitor accounts.

The consensus was that we can check our balances anytime using online banking, so we no longer feel the need to use the old paper registers. We know we are not alone as many other consumers monitor their accounts the same way.

The ongoing dilemma with monitoring accounts via technology is activity delays in displaying the actual available balance in an account, which can result in unpleasant surprises.

The available balance of the account takes into consideration pending debit and credit transactions and is considered the most current balance, whereas the ledger balance on the account only reflects transactions that have settled to the account.

Without knowing the available account balance, a consumer could perform a transaction that would cause an overdrawn account — even if the consumer had checked their balance prior to making the transaction.

Overdraft fee guidance

Given the importance of consumers being aware of their available balance at any point, the FDIC and OCC recently issued guidance for financial institutions related to charging overdraft fees for authorize positive, settle negative (APSN) transactions.

The APSN transactions may sound complicated, but here is a simple example: An account had enough funds in it to cover a consumer’s dinner bill, so a debit card transaction was authorized to pay the bill, due to the positive available balance at the time of the transaction.

But the transaction did not immediately settle. That evening, two checks were submitted for payment, based on the available balance (which included the pending dinner bill/debit card transaction). The account balance was not adequate to pay for one or both of the checks. The checks were paid and an overdraft fee was assessed for each check that was an overdraft.

The next day when the dinner bill settled, the available balance in the account was not sufficient to cover the transaction because the balance had been reduced by the amount of the two checks, therefore an overdraft fee was charged on the debit card (dinner bill) transaction.

Even though the dinner bill was authorized when the account had a positive balance, the timing of settlement and the negative balance due to the intervening checks caused it to incur an overdraft fee.

Reducing consumer risk

The guidance issued states that overdraft fees related to APSN transactions are unfair because the consumer may not be able to reasonably void the fees as the overdraft and payment processing systems are out of the consumer’s control.

The guidance explains that even clear disclosures of the institution’s overdraft fees cannot avoid the potential UDAAP risk on APSN transactions and related overdraft fees.

So, what can you do? Institutions should reach out to any third-party provider that participates in processing transactions and overdraft fees to see if they offer options the institution can implement to address APSN overdraft transactions. This may include a change to the balance used for processing overdrafts.

Institutions should review their policies, processes and control systems related to overdrafts to ensure that all possible risk mitigation practices are implemented. In addition to enhancing disclosures or account agreements to clearly describe the balances used to assess overdraft fees, institutions should consider the potentially unfair practices related to the timing of their fees.

To ensure consumers have ample opportunities to remain aware of their available account balance, we recommend institutions clearly (and frequently) communicate all options available for consumers to access an account’s available balance as well as overdraft protection products or services.

These options may include, but are not necessarily limited to, online and mobile account access for balance inquiries and transfers, possible automated balance alerts, remote check deposit, automatic balance transfers and overdraft protection lines of credit. And yes, consumers still have the option of entering a transaction in a register and balancing it.

How Wipfli can help

Wipfli advisors are ready to help you review and determine your overdraft program’s compliance to help reduce potential UDAAP risks. Our team of compliance professionals can provide an independent review of your overdraft program and provide current guidance based on regulatory requirements and current industry trends.

Contact us to learn more about our regulatory compliance services. Sign up to receive additional financial institutions content in your inbox or continue reading on:


Amanda L. Knudsen
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