A fantastic break-out session at the ABA RCC addressed current regulatory expectations, best practices, and an update of the timing of the anticipated rule making regarding discretionary overdraft practices. The presenters included Cara Thompson, SVP and Chief Compliance Officer – Columbia State Bank, Jonathan Thessin, Senior Counsel II – Center for Regulatory Compliance and ABA, Maria Mayshura, First Vice President and Internal Auditor – Ocean City Home Bank, and Sandra Chapman, CRCM, EVP and Compliance Officer – Busey Bank.
In May, 2016, the CFPB posted its semi-annual update of its proposed rulemaking for the remainder of the year. The CFPB set forth its intention to begin the pre-rulemaking process to consider potential regulation of overdraft services on checking accounts. In all likelihood the initial proposal will be released in late 2016 or early 2017. It is anticipated the rule making will address the payment order of incoming debits, likely preventing banks from paying in a high dollar to low dollar amount order. In addition, it is anticipated that written and oral disclosures associated with such products will increase while the amount of allowable discretionary overdrafts paid by the bank in a given time period will be limited. The CFPB has already begun this process by encouraging the largest 25 banks in the country to offer lower risk checking accounts to consumers, without a discretionary overdraft option.
Listed below are some of the suggestions mentioned that may minimize the bank’s risks associated with its overdraft programs:
- Do not encourage, advertise or promote such a product as the regulatory agencies have concerns over the revenue streams generated for the bank;
- Emphasize to customers in written and oral statements or disclosures that payments of such overdrafts are wholly at the discretion of the bank;
- Ensure consistent use of terminology/language in disclosures and any promotional materials; for example, don’t refer to such a charge as an “overdraft fee” in disclosures and a “paid NSF fee” in promotional materials;
- Periodically review the core system to determine if the parameters are working as anticipated – if the maximum amount of overdrafts allowed over a rolling 12-month period was set at 6, monitor the system to determine whether it’s working as anticipated;
- Set a de-minimus amount to ensure that very small amounts of overdrafts, such as less than $1, will not trigger an initial or continuous overdraft fee – for example, a $.50 overdraft creating eventual accumulative overdrafts of $100 could be viewed negatively by regulators or auditors;
- Similar to the above, setting a transaction amount, such as $5, where an overdraft fee will not be charged if the account became negative – e.g. buying a $4 cup of coffee which triggered the overdraft fee and effectively caused the coffee to cost $39;
- Don’t steer heavy users of overdrafts to more expensive discretionary products that charge higher fees;
- Review the bank’s complaint logs related to this product and if there are identified issues attempt to determine if other customers may have been similarly affected;
- Develop a uniform methodology for determining when discretionary overdraft accounts are to be rescinded, such as 6 overdrafts in a rolling 12-month period as suggested in regulatory guidance, and take final action in a back-office department such as Deposit Operations or Branch Administration, rather than in the branches, in order to assure uniformity in the process;
- Detailed, periodic (monthly or quarterly) reporting on use of this product to the Board, Senior Management, Compliance Committee and each branch;
- Development and use of a series of escalation letters to customers each time discretionary overdrafts are used;
- Senior bank management and individuals in departments that develop and oversee this product should periodically review the parameters used to determine which customers are approved for use of such a product; and
- Discretionary overdraft program review should be within the scope of the bank’s annual audit plan.
The session also approached the topic from a fair lending perspective. The payment of any overdraft creates a credit relationship between the consumer and the bank as the consumer becomes indebted to the bank; therefore, this product also subjects the bank to potential fair lending risks. Banks must ensure that this product, like other credit products, must be offered to consumers in an unbiased, and uniform manner. The bank may wish to
- Utilize surname proxies to review potential use by males versus females and any related steering issues.
- Geocode the home address provided by the customer to determine if the customer resides in a LMI census tract or a majority-minority census tract.
Such information would allow the bank to use proxies, similar to those in use at banking regulatory agencies, to determine if there are discrepancies in use of the product related to race and income levels.
At the heart of the matter…what, if any, alternative(s) does the bank have for the customer in lieu of expensive, discretionary overdrafts? Is the customer better served by the bank allowing continued use of this product whereby the customer’s bills are paid and also likely ensuring the customer is paying a disproportionate amount of fees in relationship to the customer’s income? On the flip side, is the customer better served if the bank terminates the discretionary overdraft account and possibly the related checking account which might potentially cause the customer to exit the traditional banking system and seek out entities such as pay-day lenders?
Time will tell the impact this rule making will have on banks and their bottom line!