and trends should be carefully scrutinized to ensure no fair lending concerns can be perceived, actual or potential. Policies and
procedures should clearly indicate who has authority to waive
an overdraft fee or to pay/not pay an item into overdraft as well
as parameters of when an overdraft fee should be waived. Fair
lending training should include the potential of discrimination
of waiving fees and discretion to pay/not pay. This is particularly
true when it comes to waiving fees for high net worth customers
and executive officers and directors. Fair lending concerns could
arise if your high net worth customers tend to be of a particular
race, ethnicity, age, or gender, for example. Executive officers and
directors are subject to restraints under Regulation O.
Regulation O
Under Regulation O ( 12 CFR 215.4), no bank
may pay an overdraft of an executive officer
or director of the bank or executive officer or
director of its affiliates4 on an account at the
bank, unless the payment of funds is made in
accordance with: (i) a written, preauthorized,
interest-bearing extension of credit plan that
specifies a method of repayment; or (ii) a
written, preauthorized transfer of funds from
another account of the account holder at the bank. The one exception to the rule is that an institution may honor an “inadvertent
overdraft”, which such overdrafts, in the aggregate, may not exceed
$1,000, the account is not overdrawn for more than five business
days, and the executive officer or director is charged the same fee
as any other customer of the bank in similar circumstances.
Are You Covered?
Offering overdraft programs and services can be a compliance
challenge, but it is not an impossible feat. In addition to complying with the regulations, financial institutions should monitor
consent orders and the guidance issued by all the agencies as
regulators may adopt similar findings or practices. To get your
overdraft programs or services on a compliance-track, consider
the following best practices in addition to regulatory requirements:
■ ■ ■ Memo post holds—Ensure systems do not charge overdraft fees
when a preauthorized hold for a lower amount comes back
higher and now there are insufficient funds (e.g., gas stations
and restaurants may have a lower amount initially and settle
at a higher amount).
■ ■ ■ Collecting opt-ins with no intent to pay—Do not collect opt-ins for ATM/POS transactions if the policy is not to pay such
overdrafts as force-pays may trigger a charge.
■ ■ ■ Linked accounts—Offer services with details of how transfers
work (in part or whole only transfers) and fees; charge appro-
priate fees for sweep vs. overdraft.
■ ■ ■ Limiting fees—Consider limits on maximum amount of fees
charged in a day; consider fees proportional to the amount
overdrawn; ensure system parameters are functioning accordingly; ensure fees are comparable to peers and competitors.
■ ■ ■ Transaction clearing—Ensure system parameters and manual
processes have a neutral process for clearing transactions (high
to low is strongly discouraged).
■ ■ ■ Notifications—Notify customers electronically, at teller window
and/or ATMs if transaction will cause overdraft, in order to
allow the customer to cancel the transaction without a fee.
■ ■ ■ Disclosures—Ensure consistent terminology is used across
advertisements, disclosures and account agreements (e.g.,
overdraft fee across all three vs. NSF); use model language
provided in regulations.
■ ■ ■ Advertising overdraft options—Ensure compliance with advertising overdraft rules if you promote programs or services,
including all required disclosures and recommended disclosures as applicable; do
not reference “free” if in fact there are fees
associated; include alternative options; do
not use pressure tactics to obtain opt-ins.
■■ ■ Naming overdraft services—Do not
call overdraft services “overdraft protection” which implies that it is on all the
time (you wouldn’t want your home security system to work some of the time); title
the service what it is: Overdraft Courtesy,
Overdraft Coverage, or Overdraft Management, for example.
■ ■ ■ Training—Ensure staff are trained on
the impact of fair lending and UDAAP concepts on overdraft
programs as well as the product/service offered to ensure sales
pitches are accurate and without undue pressure; provide customer education information and materials (e.g., brochures,
financial workshops, detailed disclosures).
■ ■ ■ Monitoring—Do regularly monitor service usage to ensure the
same customers are not incurring overdraft fees on a recurring
basis (if they are, the bank should have a process in place to
address such excessive overdraft usage); front line ongoing
monitoring of systems and manual processes (including that
automated fees are charged accurately); and re-validate systems
after updates and patches.
■ ■ ■ Reporting—Provide usage, cost, loss reports to senior management and the Board of Directors on a regular basis.
■ ■ ■ Complaint Management—Monitor complaints about the services; adjust programs and services to avoid unfair, deceptive
or abusive acts or practices; monitor complaints of third party
overdraft products/services institution utilizes.
■ ■ ■ Third-party risk management—Ensure third parties have strong
compliant overdraft programs, policies, procedures and practices
in place; request regular reports as applicable; ensure oversight
in place and performed.
■ ■ ■ Corrective Action—Take identified issues seriously and address
promptly; provide refunds or restitution promptly.
In addition to complying with the regulations,
financial institutions should monitor
consent orders and the guidance issued by
all the agencies as regulators may adopt
similar findings or practices.
