FDIC Supervisory Guidance on Overdraft Payment Programs
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1 FDIC Supervisory Guidance on Overdraft Payment Programs Presented by Sean Kulczycki, CRCM Partner, BKD, LLP Tim Holt President, Profit Resources, Inc. Training Agenda New FDIC Supervisory Guidance 2005 Interagency Guidance Recent Penalty Assessed by OCC for Overdraft Program Gutierrez v. Wells Fargo Other Overdraft Litigation Impact on Policy & Procedure Costly & Onerous Components Customer Impact Revenue Challenges Questions Overdraft Payment Programs & Consumer Protection Financial Institution Letter Supervisory guidance issued 11/24/2010, with expectation that procedures will be in place by 07/01/2011 Reaffirms existing supervisory expectations with respect to overdraft payment programs generally Provides specific guidance with respect to automated overdraft programs States that ad hoc [overdraft payment] activities are not the focus of this guidance Ad hoc overdraft payments Typically involve irregular and infrequent occasions on which a bank employee exercises discretion in a specific instance about whether to pay an item or not, as a customer accommodation and not on a pre-determined or formulaic basis (excerpt from FIL ) 1
2 Supervisory Expectations FDIC expects financial institutions to take the following actions regarding automated overdraft payment programs Board Oversight Ensure that boards of directors provide appropriate oversight of programs, including an annual review of an overdraft program s key features Review Program Material Review marketing, disclosure & implementation to minimize potential consumer confusion & promote responsible use Train Staff Train staff to explain program features & other choices Supervisory Expectations Distinguish Balances Prominently distinguish account balances from overdraft coverage amounts Monitor Program Usage Monitor programs for excessive or chronic customer use & if customer overdraws account on more than 6 occasions where a fee is charged in a rolling 12-month period, undertake meaningful & effective follow-up action such as Contacting the customer to discuss less costly alternatives Giving customer an opportunity to decide to continue fee-based overdraft coverage or another available alternative Institute Daily Limits Institute appropriate daily limits on customer costs, such as by Limiting number of transactions that will be subject to a fee Providing a dollar limit on total fees that will be imposed per day Supervisory Expectations Consider De Minimis Limits Consider Eliminating overdraft fees for transactions that overdraw an account by a de minimis amount If a fee is charged, it should be reasonable & proportional to amount of original transaction Alert Customers Consider cost-effective technology to alert customers when their account balance is at risk of generating a fee for nonsufficient funds Provide Counseling Information Consider providing information to consumers about how to access free or low-cost financial education workshops or counseling 2
3 Supervisory Expectations Review Check Clearing Procedures Review check-clearing procedures to ensure they avoid maximizing fees through clearing order (clearing items by order received or check number are considered appropriate) Monitor & Mitigate Risks Monitor & Mitigate risk, such as credit, safety & soundness, reputational & legal & compliance risks, including Federal Trade Commission Act, Section 5 Equal Credit Opportunity Act Truth in Savings Act Electronic Fund Transfer Act Recap of Supervisory Expectations Supervisory Guidance Provide board oversight Review program material Train staff Distinguish balances Monitor program usage Institute daily limits Consider de minimis limits Consider alerts to customers Providing counseling information Review check clearing order Monitor & mitigate risks 2005 Best Practice No No No Comments Boards of directors not mentioned within 2005 Guidance Added to Regulation DD effective 01/01/2010 However, new guidelines require specific action if excessive usage Recommended as something to consider in 2005 Guidance 2005 Guidance recommended only an explanation of practice & impact 2005 Interagency Guidance Best Practices Marketing & Communications Avoid promoting poor account management Fairly represent overdraft programs & alternatives Train staff to explain program features & other choices Clearly explain discretionary nature of program Distinguish overdraft protection services from free account features Clearly disclose program fees Clarify that fees count against disclosed overdraft protection dollar limit Demonstrate when multiple fees will be charged Explain impact of transaction clearing policies Illustrate type of transactions covered Program Features & Operation Provide opt-in or opt-out Alert consumers before a transaction triggers any fees Prominently distinguish balances from overdraft protection funds Promptly notify consumers of program usage each time used Consider daily limits on costs Monitor usage Fairly report program usage 3
4 FDIC Supervisory Guidance Regarding Regulation E Requirements Opt-in Requirement Effective July 1, 2010, financial institutions required to obtain customer opt-in prior to charging fees for overdrafts on ATMs & one-time debit card transactions Avoid Steering Guidance warns that institutions should not attempt to steer frequent users of fee-based overdraft products to opt-in to these programs while obscuring available alternatives Offer Opt-out FDIC states their belief that institutions should allow customers to opt-out of other types of overdraft coverage Remind Customers FDIC encourages institutions to remind customers that have opted-in that they can still opt-out FDIC Supervisory Guidance Examination Issues Reviewed at Each Exam Guidance states that overdraft payment programs will be reviewed at each examination Third-Party Risk Institutions using third-party arrangements are expected to follow 2008 Guidance for Managing Third-Party Risk UDAP A Guidance advises institutions to review FDIC s 2004 guidance (issued jointly with the Federal Reserve) on Unfair or Deceptive Acts or Practices by State-Chartered Banks (UDAP Guidance) Fair Lending Fair lending implications will be reviewed, including steering applicants to overdraft protection programs on a prohibited basis & inconsistent application of overdraft fee waivers Highlights of UDAP Guidance Unfair Practices Cause or are likely to cause substantial injury to consumers Cannot be reasonably avoided by consumers Are not outweighed by countervailing benefits to consumers or to competition Deceptive Practices Must mislead or be likely to mislead the consumer Consumer s interpretation of the representation, omission or practice must be reasonable under the circumstances Misleading representation, omission or practice must be material 4
5 Quotes from OCC Consent Order Bank had no daily, monthly or other limit on amount of overdraft fees a customer could incur Bank did not monitor customer accounts for excessive usage Accounts that were not brought to a positive balance within seven days were charged a continuous overdraft fee this practice was unfair because once continuous overdraft fees began, many bank customers were unable to avoid the assessment of continuous overdraft fees Marketed or promoted its deposit account products through a brochure that highlighted free or low cost features of certain accounts while omitting information about costly features of the account, such as overdraft protection Quotes from OCC Consent Order Brochure also suggested that certain accounts were well-suited for customers who had previous difficulty in managing their bank accounts while omitting information about costs of overdraft protection Brochure was deceptive because it omitted information about high cost features of accounts at the bank Bank provided a written disclosure at account opening that described the features of [its overdraft payment program] but did not mention that consumers could be automatically reinstated into [the program] after their use of the program was suspended or terminated Gutierrez v. Wells Fargo On 08/10/2010, a federal district court in California ordered Wells Fargo to pay restitution estimated at $203 million related to its overdraft payment practices Lawsuit alleged violations of California statutes due to bank s unfair & fraudulent practices Practice of posting debit items to consumer accounts in high-to-low sequence was the core controversy in this case 5
6 Other Pending Litigation Impact on Procedure & Policy Develop procedure for identifying & notifying customers with six fee generating overdrafts Develop procedure & training for informing customer of options to overdraft program Disclose all fees, terms & conditions regarding automated overdraft services Distinguish overdraft courtesy amounts from any published balance Establish daily limits for fees & consideration for low dollar transactions/overdrafts Impact on Procedure & Policy Establish reasonable limits on daily fees Educate & update board of directors at least annually on the status of overdraft program Continue compliance with the 2005 Joint Guidance on Overdraft Protection Programs Develop procedure & implementation plan to implement proper check posting/presentment order 6
7 Costly & Onerous Components Procedures for identifying & notifying customer when overdrawn six times within a 12-month period Some of the systems do not have standard reporting Manual intervention is necessary Apparent disregard for the number of customers that will hit this milestone Notify consumer (phone or in person) when overdrawn six times in the prior 12 months Costly & Onerous Components Train staff on consumer communications, overdraft program features & policies, alternative products to overdraft program & financial counseling options for customers Potential disclosures required (new presentment order, fees, lack of previous disclosures or presence of previous disclosures) Customer Impact Notify consumer (phone or in person) when overdrawn six times in the prior 12 months Provide information regarding free financial counseling Educate consumer as to options to overdraft services Disclose all fees, terms, & conditions regarding automated overdraft services Distinguish overdraft courtesy amounts from any published balance Establish daily limits for fees & consideration for low dollar transactions/overdrafts Consider using existing technology to notify customer of any pending NSF fees 7
8 Revenue Challenges Use a check posting order that does not maximize fee income; high to low or descending dollar amount is no longer acceptable Analyze impact before decision If currently high to low will need to change If currently low to high or serial number order it is an opportunity Some presentment orders will require significant procedure development Establish reasonable limits on daily fees Number of items or total fees Consider eliminating overdraft fees for transactions that overdraw an account by a de minimis amount Review current environment & establish reasonable amounts (total overdrawn balance & possibly transaction limitation) Contact Information Sean Kulczycki, CRCM BKD, LLP 211 N. Broadway Suite 600 St. Louis, MO Phone: Fax: skulczycki@bkd.com Tim Holt Profit Resources, Inc. 240 N. Washington Blvd. Ste. 420 Sarasota, FL Phone: tdholt@profitresources.com Questions? 8
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