In our last article we focused on third party providers of overdraft payment programs (ODP). Federal regulators now require that financial institutions conduct a thorough due diligence process on overdraft service providers and we discussed what such an evaluation entailed. We’re switching gears in this piece and will be discussing what exactly credit unions need to be looking at within their own organizations prior to the July 1st deadline, which sets the new regulatory framework on these services. In effect, we’ll be covering specific areas surrounding your overdraft payment program that you’ll want to examine. These are aspects the regulators will be concerned with if they decide to conduct an audit.
First let me say that these areas we’ll discuss are not all encompassing and we can’t make any guarantees that if you abide by them your credit union will stand up to examination. What we can say is they will help you be better prepared to meet or exceed industry standards on regulations surrounding ODP.
To start, make sure your members understand the benefits, features, costs and limitations of the program. Proper communication and disclosure are a must. Don’t make your overdraft payment program a mystery. Some financial institutions use an undisclosed credit-scoring matrix. We don’t recommend such policies. Next, carefully consider the criteria for eligibility, assignment and suspension of the discretionary “privilege”. Beware of discriminatory practices, whether intended or inadvertent.
Avoid promoting poor account management. Credit unions should not market the program in a manner that encourages routine or intentional overdrafts. The program should be presented as a member service that may cover occasional and accidental overdraft situations. Credit unions should represent overdraft payment programs as well as alternative products fairly. When informing members about an overdraft payment program, let them know about other, perhaps cheaper, overdraft and credit products. Clearly explain how the terms and fees may differ and make it clear that reliance on an overdraft payment program can have serious financial consequences.
Train your staff to explain program features as well as other options. Your staff should be able to describe all features, costs and terms of your overdraft payment program including the ability to opt out. And, most importantly, you need to have processes and procedures to back this up. If payment of overdrafts is at the credit union’s discretion, say so. Credit unions should not represent that the payment of overdrafts is guaranteed if the institution retains discretion not to pay an overdraft.
It is also essential to distinguish overdraft payment services from “free” account features. Credit unions should not promote “free” accounts and overdraft payment programs together in a manner that would suggest the overdraft payment service is free of charges. Clearly disclose program fees. In all your communications relating to overdraft payment, disclose the dollar amount charged for each overdraft and any other fees that may apply.
To continue, clarify that fees count against the disclosed overdraft protection dollar limit in addition to the amount of the overdraft itself. Demonstrate when multiple fees will be charged. Clearly disclose, where applicable, that more than one overdraft fee may be charged against the account per day. Furthermore, explain the impact of transaction-clearing policies. Make it clear to members that transactions may not be processed in the order they occurred and that order can affect the total amount of fees incurred.
Don’t forget to illustrate the types of transactions covered. Disclose that overdraft fees may be imposed on such transactions as ATM withdrawals, debit card transactions, as well as telephone and other electronic transfers. Keeping members in the loop is important and it is necessary to alert members before a transaction triggers any fees. When members utilize the overdraft payment service, provide a specific consumer notice, where feasible, that completing the withdrawal or transfer may result in overdraft fees. And when an overdraft occurs, promptly notify the customer.
Prominently distinguish balances from overdraft payment funds availability. Never include overdraft payment allowances in the member’s account balance. Consider daily limits on members’ costs. Ironically, this can be a double-edged sword. Caps on fees may eliminate the deterrent value that fees have. And consumer advocates and regulators have often stated that fees should act as a deterrent.
In closing, be sure to monitor overdraft payment program usage. Excessive usage may indicate the need for alternative credit arrangements or other services. Additionally, report program usage accurately. Credit unions should not report negative information to consumer reporting agencies when the overdrafts are paid, as agreed, under the terms of the program. And finally, never manipulate transaction-clearing rules. Transaction-clearing rules, including check clearing and batch debit processing, should not be administered unfairly or manipulated to inflate fees.
Good luck examining your credit union’s overdraft payment program! Click here for more information.
In business since 1976, Strunk & Associates, LP is a financial advisory service recognized nationally for its innovative design, development and implementation of The Original “Overdraft Privilege Service Program”. Strunk & Associates, LP currently has over 1250 verifiable Overdraft Privilege Service clients throughout the United States and the Caribbean.