Safety and Soundness
Overdraft services are subject to examiner review for compliance and safety and soundness examinations. Every institution
should be prepared to have its overdraft services, formal or ad
hoc, reviewed during both compliance and safety and soundness
examinations. The 2005 Overdraft Guidance also set forth certain
safety and soundness considerations institutions should consider
when establishing overdraft programs and services:
■ ■ ■ Written policies and procedures adequate to address the credit,
operational, and other risks associated with overdraft programs;
■ ■ ■ Prudent risk management practices including the establishment
of express account eligibility standards and well-defined and
properly documented dollar limit decision criteria;
■ ■ ■ Account monitoring on an ongoing basis with the ability to
identify consumers who may represent an undue credit risk
to the institution;
■ ■ ■ Programs should be administered and adjusted, as needed,
to ensure that credit risk remains in line with expectations;
■ ■ ■ Reports on a regular basis that are sufficient to enable management to identify, measure, and manage overdraft volume,
profitability, and credit performance;
■ ■ ■ Prudent risk management practices related to account repayment and suspension of overdraft services, including specific
timeframes for when consumers must pay off their overdraft
balances;
■ ■ ■ For reporting of income and loss recognition on overdraft programs, institutions should follow generally accepted accounting
principles (GAAP) and the instructions for the Reports of Condition and Income (Call Report), and NCUA 5300 Call Report;
■ ■ ■ Overdraft balances should be reported on regulatory reports
as loans and should be charged off against the allowance for
loan and lease losses; agencies expect all institutions to adopt
rigorous loss estimation processes to ensure that overdraft fee
income is accurately measured;
■ ■ ■ Proper risk-based capital treatment of outstanding overdrawn
balances and unused commitments; risk-weighted according
to the obligor;
■ ■ ■ Contracts with third-party vendors must conduct thorough
due diligence reviews prior to signing a contract;
To be sure, safety and soundness is a vital component of any
overdraft program or service. After all, paying items into overdraft is credit. And because it is credit, financial institutions must
manage its risk accordingly, including its safety and soundness
risk and fair lending risk.
Fair Lending
Fair lending laws apply to all forms of credit, including overdrafts.
Whether the bank’s overdraft product or service is ad hoc, formal,
a line of credit or an account sweep, fair lending considerations
come into play. For example, age limits on overdraft programs
and fees can pose a discrimination issue under ECOA. For example, if an institution offers a checking product with overdraft
services for 55+ and the overdraft fee is $25 versus $35 for all
other checking products, this would be age discrimination under
Regulation B. The product and service could be offered to age
62+ without violating ECOA.
Institutions would be wise to track overdraft fee waivers, whether
discretion to pay is automated or by human-decisioning. Patterns
The agencies recently issued the Interagency Statement Clarifying the Role of Supervisory Guidance3 wherein they state that “Unlike a law or egulation, supervisory guidance does not have the force and effect of
law, and the agencies do not take enforcement actions based on supervisory
guidance. Rather, supervisory guidance outlines the agencies’ supervisory
expectations or priorities and articulates the agencies’ general views regarding
appropriate practices for a given subject area.” However, the Interagency
Statement is not intended to convey any message that it is acceptable not to
follow or otherwise incorporate supervisory guidance into an institution’s risk
management programs. Rather, the intent is to clarify that no violation will be
cited for supervisory guidance. Notwithstanding, each of the prudential regulators
has the authority to cite its regulated institutions for unsafe or unsound practices
that violate other areas of law that may overlap with a supervisory guidance.
