BankersHub.com February, 2017 Newsletter Page - 1

OVERDRAFT UPDATE: INTERAGENCY WEBINAR BRIEFING

By Sterling Compliance LLC (originally published in Sterling Navigator, Dec 2016. All Rights Reserved

ABOUT THE AUTHOR(S)

Sterling Compliance LLC was forged out of a strong

bond of integrity, shared vision and unwavering

commitment to excellence in compliance consulting.

With nearly 40 years of combined experience

managing and regulating financial institutions.

Sterling’s mission is to be an integral, independent

resource to your compliance management team.

Email:

Angela Lucas: alucas@sterlingcompliancellc.com

Lisa Zigo: lzigo@sterlingcompliancellc.com

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Newsletter Article

February, 2017

If you haven’t had a chance to view the interagency webinar on

overdraft services held on November 9th, consider this your CliffsNotes

version. The intention of this webinar was not to introduce new guidance

or pending legislation; the purpose was to discuss previously identified

practices and issues. And, if you were wondering whether the CFPB

was getting any closer to formal legislation regarding overdraft practices

that impact checking accounts, the answer is no. The CFPB specifically

stated, during the Q&A period, that the Bureau remains in the pre-

rulemaking period with respect to overdraft programs that cover

checking account products. While there was no new legislation or rules

discussed, representatives from each regulatory agency took turns

addressing overdraft practices as they relate to compliance

requirements and violations cited. The webinar was basically the study

guide to the test, presenting real world scenarios to understand how

other financial institutions have gotten into trouble when it comes to

overdrafts and how you can mitigate the risk of non-compliance or

deceptive practices in your institution.

A common deficiency cited was the disconnect between account

disclosures and actual practices when making overdraft fee

decisions. In one scenario presented, a bank used the available balance

to decide whether an overdraft had occurred and, as a result, that a fee

should be assessed. The bank’s disclosure only stated deposits not

yet available would be subtracted. However, the bank subtracted

deposited funds not yet available AND “must pay” items from the

available balance. In this case, two overdraft fees were assessed

because the bank had used the available balance and posting point in

time when making the overdraft fee decisions. The key take-away from

this scenario? Account disclosures provided to customers must

accurately describe your practices for assessing overdraft fees.

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Presenting your disclosures in a clear and transparent manner is one part of the equation. Understanding

how your overdraft program works and when fees may be assessed is crucial to determining whether your

program presents risk of consumer harm. The regulators presented these additional practices as presenting

consumer harm:

Ability and Right to Cure Overdrawn Balances: In the example presented, a customer overdraws

his account on Thursday. On Friday, the customer deposits a check, which if credited immediately,

would cure the amount of the overdrawn balance. However, the bank treated the check as received

the following business day (Monday) and makes funds available for withdrawal the following

business day (Tuesday). While the check is subject to the Regulation CC hold, the bank charged the

customer a daily continuous overdraft fee and per diem interest on the overdrawn balance.

Calendar Days versus Business Days: This is a great example of how there can be a disconnect

between disclosure and actual practices for overdraft fees and is primarily related to continuous-day

overdraft fees. If your disclosure states that your continuous overdraft fee will be charged on

business days, then your system specs should be charging overdraft fees on business days. The

issues arise when there are disclosure and system mismatches and, in circling back to the point

above, when a consumer can reasonably cure an overdrawn balance.

Fee-on-Fee Assessment: Keep in mind overdrafts could be caused by bank-assessed fees in the

classic sense and then by the interest on fees.

Overdrawn Balances Added to Existing Loans: In some cases, overdrawn balances have been

added to existing loans, therefore improperly inflating the amounts owed on consumers’ loans.

The regulators presented key risk management practices that you should employ.

Monitor and control risks that are presented by any third-party vendors you use in administering your

overdraft program.

Monitor systems and software changes that could require changes in disclosures and marketing

materials.

Implement appropriate complaint management systems. Consumer complaints are an important

early warning signal.

Pay attention to other red flags, such as very high opt-in rates.

Don’t forget about your small business accounts! The FRB specifically stated that overdrafts for

small business accounts are included in the scope of their overdraft testing process. This has been

one area where UDAAP has crept over to the commercial side.

While we have presented a briefing on the issues discussed during the webinar, you can continue to access

the archived recording for internal training purposes and to listen to the Q&A session. Remember, even if

you maintain an ad hoc overdraft program, you must still assess your process for the risk of unfair

or deceptive practices that may pose consumer harm. We will continue to keep you updated on the

CFPB’s progress in moving toward formal overdraft program rulemaking.

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