Avoiding “OOPS” in Your Overdraft Protection Programscontent.aba.com/briefings/3012594.pdf · Avoiding “OOPS” in Your Overdraft Protection Programs Tuesday, August 25, 2015

ABA BRIEFING | PARTICIPANT’S GUIDE

Avoiding “OOPS” in Your Overdraft Protection Programs

Credit and Operations Summer Solutions Series

Tuesday, August 25, 2015 Eastern Time

2:00 p.m.–4:00 p.m. Central Time

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11:00 a.m.–1:00 p.m.

American Bankers Association Credit and Operations Summer Solutions Series Avoiding “OOPS” in Your Overdraft Protection Programs Tuesday, August 25, 2015 ▪ 2:00 – 4:00 p.m. ET

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II

Table of Contents

TABLE OF CONTENTS ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II

SPEAKER & ABA STAFF LISTING ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III

SPEAKER BIOGRAPHY ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV

PROGRAM OUTLINE ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . V

CONTINUING EDUCATION CREDITS INFORMATION ... . . . . . . . . . . . . . . . . . . . . . . . . VI

CPA SIGN-IN/SIGN-OUT SHEET ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII

INSTRUCTIONS FOR RECEIVING CERTIFICATES OF ATTENDANCE .. VIII

PROGRAM INFORMATION ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ENCLOSED

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III

Speaker and ABA Staff Listing

Speaker Patti Blenden, CRCM, CPA President Financial Solutions for Growing Companies, Inc. PO Box 159 Lake Lure NC 28746 (843) 870-7725 [email protected]

ABA Briefing/Webcast Staff Cari Hearn Senior Manager (202) 663-5393 [email protected] Linda M. Shepard Senior Manager (202) 663-5499 [email protected]

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IV

Speaker Biography

PATTI BLENDEN, CRCM, CPA Patti Blenden founded Financial Solutions in 1990 to provide community financial institutions with effective solutions for the ever increasing need for cost-effective regulatory risk management. The company provides compliance reviews, in-house training, compliance policy and procedure development and other special projects for bank clients. Patti firmly believes that community bank has very little to do with your asset size, but everything to do with your heart! Patti’s ability to transform complex requirements into simple, practical solutions is bound by a deep conviction that “excellence is not optional” which translates into effective answers for community bankers. She has a thorough understanding of the current regulatory environment and is able to integrate, streamline and automate related priorities without compromising compliance or performance. Ms. Blenden is a frequent presenter for the American Bankers Association where she serves as a faculty member of its prestigious Stonier Graduate School of Banking and National, Intermediate and Graduate Compliance Schools. Additionally, Patti partnered with Lucy Griffin in the fall of 2013 to develop and deliver a four-part ABA briefing/webcast series on the new mortgage requirements which took effect in January 2014. She also works extensively with many state and regional banking associations, has been an invited speaker for various State and Federal regulatory agencies, and law enforcement agencies. In addition, Patti speaks at many national and state compliance seminars, schools and conferences, conducts in-bank training and is a published compliance resource. Patti has a B.S. degree in Accounting from Louisiana Tech University, has over 35 years of banking experience. She is a Certified Public Accountant (CPA) and Certified Regulatory Compliance Manager (CRCM).


V

PROGRAM OUTLINE TIMES SESSION AND SPEAKERS

1:45 – 2:00 p.m. ET

Pre-Seminar Countdown

2:00 – 2:02 p.m.

Welcome and Speaker Introduction 1Source International.

2:02 – 2:12

Opening Comments Patti Blenden, CRCM, CPA Financial Solutions for Growing Companies, Inc.

2:12 – 2:22

Important Terms

2:22 – 2:52

Prudential Regulator Guidance

2:52 – 3:22

CFPB Focus

3:22 – 3:42

Best Practices

3:42 – 3:52

Useful Resources

3:52 – 4:00 p.m.

Questions and Answers Wrap-up


VI

Continuing Education Credits Information

The Institute of Certified Bankers™ (ICB) is dedicated to promoting the highest standards of performance and ethics within the financial services industry.

The ABA Briefing/Webcast, “Avoiding ‘OOPS’ in Your Overdraft Protection Programs”

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VIII

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ABA: Avoiding OOPS in Your ODP Aug 2015 1

aba.com 1-800-BANKERS

Avoiding “OOPS!”In Your Overdraft Protection

Programs!

ABA Credit and Operations Summer Solutions Briefing SeriesTuesday, August 25, 20152:00 – 4:00 p.m. ET


Disclaimer

This Briefing will be recorded with permission and isfurnished for informational use only. Neither the speakers,contributors nor ABA is engaged in rendering legal norother expert professional services, for which outsidecompetent professionals should be sought. All statementsand opinions contained herein are the sole opinion of thespeakers and subject to change without notice. Receipt ofthis information constitutes your acceptance of these termsand conditions.

2



Presenter

3

Patti Blenden, CRCM, CPAPresident and Founder Financial Solutions for Growing Companies, Inc.

http://www.finsolinc.com/pattib.htm


Agenda

• Opening Comments• Important Terms• Prudential Regulator Guidance• CFPB Focus• Best Practices • Useful Resources• Questions & Answers

Appendix 1 – Best Practices Checklist for Deposit-Related CreditAppendix 2 – FDIC Compliance Exam Manual

Section V. Lending — Overdraft Payment ProgramsAppendix 3 – OCC Appendix B: Checklist for Deposit Advance Products

4



Selected Overdraft Practices Regulatory Guidance

• 2005 Feb - Joint Guidance and Best Practices• 2008 Nov - FDIC Study of Bank Overdraft Programs• 2009 Dec - FRB Compliance Outlook ODP Audio Conference• 2010 Jan - Reg DD requires report MTD & YTD OD & NSF fees• 2010 May - FDIC Webinar and Conference Call• 2010 Jun - FDIC Third Party Risk Exam Procedures Issued• 2010 Jul - Reg E Opt-In for ATM and one-time POS effective• 2011 Jun - New FDIC Exam Manual ODP Section published • 2013 Jun - CFPB Study of Overdraft Programs• 2013 Nov - OCC & FDIC Guidance on Deposit Advance Products• 2014 Mar - FDIC Kansas City: Fees Associated with Extended OD• 2014 Jul - CFPB Data Point Report: Checking Account Overdraft• 2015 Mar - Call Report with Deposit Account Fee Income Line Items

5


The Effect of Guidance?

• Guidance does not technically have the full force of the laws and the regulations – We have seen a dramatic shift in this perception. Guidance

has far more power today than ever before!

• However, don’t ever underestimate the fact that they can be an issue with regards to Safety and Soundness or could be a forewarning of UDAAP violations!

• The FDIC regularly refers to the guidelines as their “Expectations” and the aggressive stance that will be taken in enforcing the “Expectations”

6



Important Distinctions

• Insufficient Fund Items (NSF)– Debit transactions are presented for payment and the account

has insufficient funds to cover the debit amount. The item is not allowed to post (or is posted and subsequently reversed out) and is returned to the payee.

• Overdraft Items (OD)– Debit transactions are presented for payment and the account

has insufficient funds to cover the debit amount. The item is paid into overdraft (negative account balance) and is not returned to the payee.

7


Banks’ Options for Overdrafts

1. Ad hoc decision to pay or return items

2. Automate transfers to cover overdrafts from other deposit accounts

3. Manually transfer funds to cover overdrafts from other deposit accounts at customer’s request

4. Assign a $ amount to allow overdrafts up to a limit at the account level

5. Offer overdraft lines of credit governed by Reg Z

6. Offer Bounce Protection – automated overdraft program

7. Offer small dollar low cost closed-end loans

8



AOP or Ad Hoc Programs?• Partially or fully computerized• Used by banks to determine whether NSFs qualify for overdraft coverage

based on pre-determined criteria; and• Decision to pay or return specific items generally does not rely on bank

decision maker, customer or item

AOPAutomated Overdraft Payment

• Bank employee exercises judgment in making a specific decision about whether to pay or return an item

• Decisions are made based on specific considerations and knowledge of a particular customer; and

• They are provided an accommodation, not on a pre-determined basisAd Hoc

• Some overdraft payment programs have elements that are both automated and ad hoc.

• In these instances, examiners should exercise judgment in making a determination about whether a program is automated or ad hoc based on the aforementioned criteria, and consider appropriate follow-up action

DANGER!

9


Early Regulatory Concerns

• Marketed as a line of credit and use of the overdraft was highly encouraged

– “Why wait until payday? Pay those unexpected bills today with no worries! Gotcha covered!”

• Marketing ODP linked to “Free” accounts, accused of implying no fees for payment of overdrafts

• No clear definition of when ODP will apply– Checks, ATM withdrawals, POS transactions, etc.

• Artificial inflation of balances with ODP limit (on ATMs, at POS) and no alert that a withdrawal will cause ODP fee

• Fees can easily use up the ODP limit without the consumer realizing it absent fee limitations by banks

• Flat fee charged regardless of transaction amount

10



Additional Regulatory Concerns

• Banks are overly reliant on ODP fees as primary source of fee income

• Payday lending without an Annual Percentage Rate (APR) disclosure

• Low-Income consumers bearing the brunt of the cost

• Misleading and confusing advertising and disclosures results in an uninformed consumer who misuses the programs

11


2005 TISA Reg DD Amendments

• Final rule published on May 24, 2005 (70 FR 29582)

– Mandatory Compliance July 1, 2006

• Amended the regulation and its commentary to “address concerns about the uniformity and adequacy of information provided to consumers when they overdraw their deposit accounts.”

• The 2005 rule even created a new section requiring institutions promoting the payment of overdrafts in ads to disclose total overdraft fees and return item fees on consumer statements

– Current period fees and year-to-date fees

July 1, 2006

12



2005 Reg DD Amendments

• Definition of “Advertisements” expanded to include communications promoting ODP and specifies required ad disclosures

• Specified fee disclosures in statements if payment of overdrafts is advertised– Total $ fees for paying checks or other items

– Total $ fees for returning items unpaid

– Both fees must be stated in current period fees and year-to-date fees by category

July 1, 2006

13



• Period Statement Disclosures– Since 2005 Reg DD amendment with its mandatory compliance date

of July 1, 2006, ODP banks must disclose total fees overdraft and returned item fees imposed, both for current period and year-to-date

– Also prescribed the precise location and format of this required disclosure

• Must be in “close proximity” to the statement disclosures of other account fees

• Format must be in a “format substantially similar” to Sample Form B-10 in the new Appendix B

– New amendments extend this requirement to ALL institutions, regardless of whether they advertise payment of overdrafts

• Mandatory Compliance 1/1/2010

July 1, 2006

14



Aggregate Fee Disclosures on Periodic Statements

• Depository institutions must disclose aggregate costs of the overdraft service for the statement period and the calendar year-to-date on periodic statements

Total ForThis Period

Total Year-to-Date

Total Overdraft Fees $60.00 $150.00

Total Returned Item Fees $0.00 $30.00

January 2010

15



• Account Balance Disclosures for Automated Systems– Disclosures by telephone, online via Internet or ATMs

– Balance may not include additional amounts provided to cover an item when there are insufficient funds available in the consumer’s account

– At your option, you may disclose additional account balances available to pay overdrafts IF you prominently state that any balance includes the additional amounts

– First, disclose ledger balance that does not include any additional amounts used under for-a-fee ODP services

16



2005 Overdraft Fees to be Disclosed

• FRB Staff Interpretations clarify that overdraft fees now required to be disclosed applies only to “for-a-fee overdraft” protection services and not to fees for transferring funds from another account of the consumer to avoid an overdraft, or fees under a service subject to Reg Z

17


Misleading or Inaccurate…

• Regulatory authority to prohibit disclosure of the additional funds was justified in the Supplementary Information by TISA Section 263(3) that prohibits misleading or inaccurate advertisements, announcements or solicitations relating to a deposit account

• The new requirements standardize a bank’s disclosure of funds available for overdraft and should provide some protection against litigation under UDAP– Unfair or Deceptive Acts or Practices

January 2010

18



2006 FDIC ODP Study

• Conducted as a two-part study and initiated in 2006

– Survey of 462 FDIC-supervised institutions

– Collection of customer account and transaction-level detail from up to 100 of the surveyed banks

• Transaction records collected from 39 institutions with collective assets of $332 billion

• Reflects transactions on 6.5 million customer accounts over a 1-year period when the accounts were collectively overdrawn 22.5 million times

• As of 2006, about 41% of the banks and 77% of large banks (assets > $1 billion) had automated ODP programs

• Large banks (assets > $1 billion) were early adopters

• Since 2001, growth in use of the programs has been rapid among banks of all sizes

FDIC May 26, 2010 Conference Call

19


2006 FDIC Study Small Swipe – Large APR

Average Activity

Percent of NSF Items

APR*

Checks $66 30% 1,067%ATMs $60 8% 1,173%POS $20 49% 3,520%

* Estimated Annual Percentage Rate (APR) based on the average $27 per item Fee and a two-week repayment cycle.

FDIC May 26, 2010 Conference Call

20



FDIC ODP Guidance THREAT

• Strongly worded FDIC Guidance covering automated overdraft systems was issued in November 2010

• Guidance was much broader than the Reg E overdraft rules by specifically referring to all payment types, not just ATM and POS as in Reg E 2010 changes

• Emphasizes compliance with two existing regulatory requirements:– Provide clear and meaningful disclosures regarding overdraft programs

– Provide an affirmative opt-in for fee-based overdraft coverage for ATM and POS transactions and prefer that you offer opt-in for all types of withdrawals (checks, recurring ACH, etc.)

FDIC Guidance 11/2010

21


2005 FDIC ODP Operational Expectations

• Promptly honor customer requests to opt-out from ODP coverage on non-EFT transactions

• Provide consumers with affirmative option to choose which ODP best suits their needs

• Monitor accounts, then take meaningful and effective action to limit use by customers as a short-term high-cost credit (i.e. monitor usage and notify after 6 times)

• Institute appropriate daily limits on ODP fees• Assign priority of payment type in such a way as to

minimize overdrafts


22



FDIC ODP Oversight Expectations

• Strengthen oversight of overdraft programs with at least an annual review of the program by board and bank management

• Provide meaningful reports to management regarding the ODP use, delinquencies, charge-offs, etc.

• Maintain close contact with customers using ODP more than 6 times in a rolling 12-month period– Contact customers by telephone or in person

– Explain alternatives available for ODP such as linked savings accounts, lines of credit, etc.

– Provide time for an informed customer decision


23


FDIC ODP Expectations

• In addition, institutions are expected to consider:– Eliminating fees for de minimis overdrafts or, alternatively,

charging a fee proportional to the size of the overdraft;– Using technology to send customer alerts (e.g., text message

alerts); and– Sending consumers to financial literacy programs or

individualized counseling to help them learn to effectively manage their personal finances

• FDIC Guidance states that institutions should allow customers to opt-out of overdraft coverage for other types of transactions, such as paper checks or ACH transfers


24



FDIC ODP Threats Promises

• Bank’s ODP program will be examined at each and every examination

• Strongly suggests that if a bank does not comply with FDIC’s expectations, the bank could be subject to Unfair or Deceptive Acts or Practices (UDAP) violations

– Is your FREE CHECKING really FREE???

• Raises the potential for Equal Credit Opportunity Act (ECOA) violations in the event bank provides some customers more favorable overdraft or NSF treatment than others in a discriminatory manner


25


Comparison of ODP Guidance

OCC 2010 Proposal

FDIC 2010 Guidance

FDIC 2005 Guidance Requirement

Disclosures must clearly explain program

Avoid misleading claims in advertisements and marketing items

Clearly disclose payment order of deposit items

Do not use the payment order of items to maximize fee income

Comply with all applicable laws and regulations

Customers should have to opt-in and continuous opt-out rights

Allow opt-out for non-electronic transactions

Provide for an opt-in, or alternatively, an opt-out

Maintain eligibility criteria and analyze consumer can repay

Banks should establish a daily fee cap

Establish de minimis amount for fee waiver

26



Comparison of ODP GuidanceOCC 2010 Guidance

FDIC 2010 Guidance

FDIC 2005 Guidance Requirement

Monitor frequent users and follow-up, offering other options

Defined excessive usage of >6 overdrafts with a fee assessed in a rolling 12-month period

Management should appropriately oversee program

Defined oversight to include annual review of program features

Management must oversee third party vendors

Timely charge off of overdrafts was emphasized

Train staff to clearly explain program features and other choices

Provide consumer alerts before overdrafts occur

Provide financial education workshops or counseling information

Overdraft payment programs will be reviewed at each exam

Selectively report negative info to consumer reporting agencies

27


July 2010 Reg E Everyday Debit Rule: Opt-In

• Opt-in for ATM and one-time debit card transactions – Fed decided consumers would not exercise rights, and chose the

conservative approach requiring OPT-IN– Rule does not apply to overdrafts related to checks, ACH or

recurring debit card transactions

• Four requirements:– Provide opt-in notice, segregated from other info– Provide reasonable opportunity to opt in– Obtain consumer’s affirmative consent– Provide written confirmation to the consumer

• Ongoing right to change opt-in status

• Model form for compliance was provided

28



2010 Reg E Opt-In Notice Requirements

• Notice must be segregated from all other information and cannot be combined with an initial Reg E disclosure

• Very strict disclosure content rules

– The content must be “substantially similar” to the model form provided (Reg E Model A-9)

• Customize the opt-in notice content a great deal since overdraft service description, fees, limits and opt-in methods are all based on each bank’s policy

29


2010 Reg E Opt-In Notice Contents

1. Standard overdraft practices and the transaction types for which an ODP fee or charge may be imposed

2. Standard or general overdraft practices, not just your policies for ATM and one-time debit transactions.

3. Dollar amount of all ODP fees or charges assessed4. If fee is calculated based of the # of times account has been overdrawn,

the overdraft $$, or other factors, disclose maximum fee and the calculation.

5. Maximum number of overdraft fees or charges per day, or no limit6. Consumer’s right to opt in for ATM and one-time debit card transactions

under your overdraft service, including other consent methods by telephone , mail, online banking, etc.

7. Identify alternative overdraft options you offer, including lines of credit or linked accounts as alternative plans for covering overdrafts

30



2010 Reg E Opt-In Notice Restrictions

• Required notice may not contain any information not specified in, or otherwise permitted, by the rule

• Permitted modifications include:– Content stating that the consumer has the right to opt in to, or opt

out of, the payment of overdrafts under the institution’s overdraft service for other types of transactions, such as checks, ACH transactions, or automatic bill payments;

– A means for the consumer to exercise this choice; and – Disclosure of the associated returned item fee and that additional

merchant fees may apply. – Disclosure of the consumer’s right to revoke such consent at a

later time.

31


2010 Reg E Opt-In Requirement

• An “opt-in” by the consumer does not require the institution to cover a particular ATM or debit card overdraft, it only allows the institution to charge a fee if it does cover the transaction.

• Consumers who “opt-in” have an ongoing right to revoke consent later

32



2010 Reg E Opt-In Exceptions

• If you have a policy and practice of declining to cover ALL overdrafts on ATM or one-time debit card transactions with respect to a particular type of account, the notice and “opt-in” requirements do not apply to that account or group of accounts

• Final Rule does not apply to overdraft transactions other than by ATM or one-time debit, such as by check, Automated Clearing House (“ACH”) transactions or recurring debits

33


2010 Reg E Non-Discrimination Provisions

• Regulation includes 2 provisions designed to ensure that consumers do not feel compelled to opt in, and therefore have a meaningful choice with respect to the overdraft service and prohibit:

– Conditioning the opt-in– Variation of account terms

34



2010 Reg E Consumers Electing Not to Opt-In

• If a consumer does not “opt-in” to your institution’s overdraft payment services, you may decline ATM withdrawals and one-time debit card transactions that would overdraw the consumer’s account.

• You may elect to cover overdrafts in these circumstances, but may not charge a fee for doing so.

• The Final Rule specifically prohibits declining the payment of a check, ACH transaction, or other type of transaction that may overdraw a consumer’s account, due to that consumer’s failure to “opt-in” to ODP service for ATM and non-recurring debit card withdrawals.

35


2010 Reg E Additional Opt-In Rules

• A consumer may affirmatively consent to or revoke prior consent for ATM and debit card overdraft service at any time

• You can always cover an overdraft of an ATM or one-time debit card transaction without a fee

• Institutions can and should continue to make overdraft payments discretionary

• Institutions can require a consumer to make an opt-in decision at account opening

36



2010 Reg E No Exceptions to Fee Prohibition

• Under the final rule, banks cannot charge overdraft fees unless the bank has provided notice and obtained the consumer’s opt-in

• The final rule does not have any exceptions to the fee prohibition

• The final rule does permit institutions to collect amount overdrawn

37


Recap: 2010 Reg E Compliance Procedures

• Before charging overdraft fee, you are required to:

– Provide notice about your service options– Provide an opportunity to opt-in– Obtain the opt-in– Confirm the opt-in – Inform consumer of his or her right to revoke– Notice and confirmation can be provided in writing or

electronic form following appropriate protocol

38



FDIC Compliance Manual Jan 2014

• First added as a section in the Compliance Exam Manual in 2011

• FDIC stated banks targeting customers who may be least able to afford such products can raise safety and soundness concerns about potentially unsustainable customer debt.

• Overly aggressive marketing, advertising, and other promotional activities require particular vigilance to ensure that they are not unfair or deceptive.

• Steering activity with respect to credit products raises potential legal issues, including fair lending, equal credit opportunity, and concerns about UDAPs, among others, and will be closely scrutinized.

• Inconsistent application of waivers of overdraft fees will be evaluated in light of all applicable fair lending statutes and regulations

Page V‐13.239


FDIC: Unfair or Deceptive Acts or Practices

• Section 5 of the FTC Act prohibits UDAPs in or affecting commerce.

• The prohibition against UDAPs applies to all products and services offered by financial institutions, including overdraft services, and regardless of whether such services are offered directly or indirectly through a third party.

• The prohibition applies to every stage and activity:

– From product development to the creation and rollout of the marketing campaign; from account maintenance and collections all the way through termination of the customer relationship

Page V‐13.240



FDIC: Community Reinvestment Act Credit

• Institutions will continue to receive favorable CRA consideration under the service or lending tests (consistent with CRA regulations and FIL-50-2007 providing details on small dollar loans), for offering financial education and positive alternatives to overdrafts that are responsible to the needs of customers, particularly low- and moderate-income individuals, in their local communities.

• Examples include:– Lower-cost transaction accounts and credit alternatives such as a linked

savings account, a small reasonably priced line of credit consistent with safe and sound banking practices, or a safe and affordable small dollar loan.

Page V‐13.241

FDIC Quarterly,2010,

Volume 4, No. 2

42

www.fdic.gov/bank/analytical/quarterly/2010_vol4_2/fdic_quarterly_vol4no2_smalldollar.pdf



FDIC: Third Party Arrangements

• In addition to general third-party oversight considerations, these third-party overdraft payment programs may raise concerns that differ from potential issues related to in-house programs. – For example, some vendors have tended to promote

programs that encourage generation of income by percentage of incentive compensation paid to the vendor. This practice is generally inconsistent with promoting the responsible use of these programs.

• Compliance examiners should evaluate whether the third-party relationship raises the potential for compliance, operational, financial, and reputational risks to the financial institution.

Page V‐13.243


FDIC: Third Party Arrangements (cont.)

• Where third-party vendors take a reduced percentage of compensation if the financial institution implements a transaction processing order of largest-to-smallest, this arrangement may rise to the level of a UDAP violation if at the vendor’s encouragement, the bank manipulates the processing order solely to generate fees and increase both the institution’s fee income and vendor’s compensation.

• Customers may be harmed if this practice is designed exclusively to increase the amount of overdraft fees assessed without any corresponding and meaningful benefit to the consumer.

Page V‐13.244



FDIC: Baseline Review of Current AOP

• Give customers the opportunity to affirmatively choose the credit product most suitable for their financial needs, including overdraft payment products;

• Ensure that customers understand overdraft payment programs and alternative product choices;

• Appropriately monitor accounts and take meaningful and effective action to reach customers frequently using automated overdraft programs to inform them of lower-cost alternatives;

• Structure transaction clearing practices in a neutral manner not intended to maximize overdraft-related fees charged to customers; and

• Establish appropriate daily limits on fees.

Page V‐13.245


Consumer Protection Laws Addressed by the 2010 Guidance and included in FDIC Exam Manual

• Truth in Lending / Regulation Z• FTC Act prohibition against unfair or deceptive acts or

practices (UDAP)• Truth in Savings/ Regulation DD• Equal Credit Opportunity Act / Regulation B• Electronic Fund Transfer Act / Regulation E• Expedited Funds Availability Act / Regulation CC• Community Reinvestment Act / Regulation BB• Fair Lending

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47

March 2014


FDIC Kansas City Guidance (March 2014)

• “Bankers are encouraged to review the information provided to consumers concerning overdraft services, particularly any extended overdraft and negative balance fees, and conduct transactional testing to ensure that the bank is charging these fees as disclosed from a reasonable consumer’s perspective.”

• “As a customer, would I know enough about how the fee is assessed to prevent myself from incurring it, should I accidentally overdraw my account?”

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CFPB July 2014 Data Point ReportChecking Account Overdrafts

• Average Checking Account Fees

• Distribution of Overdraft Frequency

• Overdraft by Transaction Types

• Negative Balance Episodes

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• Overdraft and NSF fees comprise more than 50% of monthly net checking account fees for the following major checking account fee categories –

– ATM and Account Usage Fees (wire transfer fees, fees per debit, etc.)– Maintenance Fees (periodic fees that can be waived for minimum balances, etc.)– Transfer Fees (transfer $$ from savings to checking, etc.)– Other Fees (fees for stop payments, returned deposited items, etc.)– Overdraft and NSF (including fees charged for continuous overdraft balances).

• Approximately 14% of the account holders had opted-in to overdraft coverage (Reg E ATM/POS opt-in accounts) and these accounts experienced higher Overdraft and NSF fees compared to accounts that had not opted-in

– In dollars, $21.61 per month compared to $2.98 per month– As a percentage of total fees paid by the consumer, 74.1% compared to 41%

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CFPB July 2014 Data Point ReportAverage Checking Account Fees


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aba.com 1-800-BANKERS 52



• Nearly 70% of accounts do not incur any overdraft fees on an annual basis and approximately 82% of accounts incur 3 or fewer overdrafts.

• Nearly 75% of overdraft fees are incurred by 8% of those account holders that annually incur >10 overdrafts.

– Almost 18% of opted-in account holders incurred >10 overdrafts per year and accounted for nearly 85% of overdraft fees paid by the opt-in accounts.

– Slightly < 6% of account holders that did not opt-in incurred >10 overdrafts per year.

• More than 90% of account holders that do not use debit cards also incur no overdrafts charges.

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CFPB July 2014 Data Point ReportDistribution of Overdraft Frequency





• The incidence of overdrafts is higher across all transaction types for opted-in accounts.

• Opted-in customers have 7 times as many overdraft transactions resulting in fees than customers that have not opted-in.

• Debit Card transactions are by far the most frequent of the 6 types of customer-initiated checking account transactions identified by the CFPB of approximately 17 transactions per month overall and 24 transactions per month for opt-in account holders.

• The other transaction types include ACH, ATM, Check, Other (online transactions), and Teller transactions and collectively accounted for 11 transactions per month.

• The median size of a Debit Card transaction that results in an overdraft is $24, while the median transaction size for an overdraft under all of the transaction types is $50.

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CFPB July 2014 Data Point ReportOverdrafts by Transaction Type









• A negative balance episode is the sequence of days following an initial overdraft during which an account holder’s balance remains negative.

• The study found that 29% of negative balances were returned to a positive balance within 1 calendar day

• More than 50% of all episodes last 3 days or fewer, and 76.1% last a week or less

• Less than 3% last 45 days or more and some result in an account closure and negative balance charge-off.

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CFPB July 2014 Data Point ReportNegative Balance Episodes




OCC Releases: Feb 2015 Mar 2015

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OCC: Deposit-Related Consumer Credit

• February 2015• March 2015

• Check credit (CC)• Overdraft protection (ODP)• Deposit advance products (DAP)• Other products and services

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OCC: Check Credit (CC)

• Overdraft line of credit: automatic transfers from an existing line of credit to the customer’s demand deposit account when check or payment is presented for payment that would cause an overdraft.

• Cash reserve: customer requests bank transfers from an existing line of credit to the customer’s demand deposit account before the check or payment is presented for payment.

• Special draft: customer negotiates special check drawn directly against existing line of credit, such as a credit card. Demand deposit accounts not impacted.

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OCC: Overdraft Protection (ODP)

• Coverage offered to pay customers’ checks and allow other overdrafts when there are insufficient funds in the account. Typically automated services provided to transaction account customers as alternatives to a traditional overdraft line of credit.

• Common names for ODP are automated overdraft protection, bounced check protection, and courtesy overdraft protection.

• In most cases, customers who meet a bank’s eligibility criteria may be enrolled in ODP. Banks generally do not underwrite ODP on an individual account basis when enrolling the customer. Most banks do review individual customer accounts periodically to determine whether the customer continues to qualify for the service and whether the amount of ODP coverage provided continues to be appropriate.

• Automation is typically used to apply specific bank criteria for determining whether to honor overdrafts and to set limits on the amount of ODP coverage provided.

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OCC: Overdraft Protection (ODP) (cont.)

• Some banks may extend ODP to non-check transactions like: – Account withdrawals made at automated teller machines (ATM), – Purchases using a debit card, pre-authorized automatic debits from a

customer’s account, – Automated clearing house (ACH) transactions,– Telephone-initiated funds transfers, or – Online banking transactions.

• Banks must provide consumers with the right to opt in, or affirmatively consent, to the bank’s ODP for ATM and one-time debit card transactions (12 CFR 1005.17(b)). Notice of the opt-in right must be provided, and the consumer’s affirmative consent obtained, before fees or charges may be assessed on the consumer’s account for paying such overdrafts.


• National banks are authorized to provide overdraft credit relating to commercial demand deposit accounts under 12 USC 24(Seventh).

• A federal savings association also may extend overdraft credit. All banks are subject to the lending limitations of 12 CFR 32. Overdraft credit extended by a federal savings association relating to commercial demand deposit accounts, however, is subject to the statutory limit on commercial loans, as set forth in the Home Owners’ Loan Act (12 USC 1464(c)(2)(A)) and regulations (12 CFR 160.30, endnote 19).

• Management and the boards of federal savings associations should be aware of any implications and limits regarding small business loans in the calculation of the limit on commercial loans.

OCC: Overdraft Protection (ODP) (cont.)Commercial Demand Deposit Accounts



OCC: Deposit Advance Products (DAP)

• A DAP is a type of small-dollar, short-term credit product offered to customers maintaining a deposit account, reloadable prepaid card, or similar deposit-related vehicle at a bank.

• The bank provides a credit feature that allows the customer to take out a loan in advance of the customer’s next direct deposit, based on a history of the customer’s recurring deposits.

• OCC guidance on DAPs applies to all open-end or closed-end extensions of credit meeting this criteria.

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OCC: Deposit Advance Products (DAP) (cont.)

• Cost: Generally based on a fee structure, rather than an interest rate.

• Eligibility and loan limits: A customer is eligible for a DAP if deposit account has been open for a certain period and receives recurring deposits. The DAP limit generally is limited to a percentage or amount of the recurring deposit.

• Ability to repay: Some DAPs have been predicated solely on amount and frequency of a customer’s deposits, rather than customer’s ability to repay.

• Repayment: Repayment is required through a preauthorized electronic payment with each deposit. Some banks have implemented alternative repayment methods, such as the customer mailing the payment or coming into the bank to make the payment.

• Marketing and access: Banks typically market DAPs as intended to assist customers with financial emergencies or to meet short-term needs and include with deposit product listings rather than credit products.

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OCC: Other Products and Services

• Some banks implement unsecured credit products and services in the form of installment loans in place of DAPs.

• Refer to the Comptroller’s Handbook booklet “Installment Loans” for additional information on unsecured lending.

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72

OCC: Risks Associated with Dep-Related Credit

Strategic Risk

Credit Risk

Operational Risk

Compliance Risk

Reputation Risk

Liquidity Risk



OCC: Credit Risk

• Numerous and repeated extensions of credit to the same individual may be substantially similar to continuous advances and subject the bank to increased credit risk. Customers may repeatedly take out loans because they are unable to fully repay the balance on prior loans.

• This is similar to the practice of “loan flipping,” which the OCC, the Federal Deposit Insurance Corporation (FDIC), and the Board of Governors of the Federal Reserve System (Board) have previously noted to be an element of predatory lending.– OCC Bulletin 2001-6, “Subprime Lending: Expanded Guidance for

Subprime Lending Programs.” This guidance was jointly signed by the OCC, the Board, the FDIC, and the Office of Thrift Supervision (OTS) (January 31, 2001).

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OCC: Compliance Risk

• Compliance Risk– The potential for serious or frequent violations of law, or failure to meet

expectations contained in pertinent guidance, is heightened when the bank’s oversight program does not include appropriate audit and control features, particularly when a third party is implementing new bank activities or expanding existing ones.

– Compliance risk also increases when privacy or customer records are not adequately protected, when conflicts of interest between the bank and affiliated third parties are not appropriately managed, or when the bank or its service providers have not implemented an appropriate information security program. Further, section 5 of the Federal Trade Commission Act (FTC Act), 15 USC 45, prohibits unfair or deceptive acts or practices (UDAP).

74



OCC: Risks Associated with Dep-Related Credit

• Compliance Risk– Various practices may raise compliance risk and supervisory

concerns. Examples include:

• Steering customers toward DRC products and services when they may qualify for other less costly forms of credit.

• Failure to disclose the costs and fees of DRC products and services.

• Failure to monitor accounts for excessive use of DRC products and services and the costs of those products and services.

• Failure to ensure adequate risk management, including appropriate internal audits and compliance reviews.

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OCC: Other Laws & Regs for DRC

• Truth in Lending Act (TILA): TILA and Regulation Z require creditors to provide cost disclosures for extensions of consumer credit. Different rules apply to Regulation Z disclosures depending on whether the credit is an open- or closed-end credit product.

• Electronic Fund Transfer Act (EFTA): A DRC product or service that involves use of electronic fund transfers must meet applicable disclosure and other requirements of EFTA and Reg E. EFTA requires certain disclosures be made, generally prohibits creditors from mandating that credit be repaid by “preauthorized electronic fund transfers,” and allows consumers to withdraw authorization for “preauthorized fund transfers.”

• Truth in Savings Act (TISA): A program that involves a consumer’s deposit account must meet the disclosure requirements of TISA and Regulation DD. Under TISA, deposit account disclosures must include the amount of any fee that may be imposed in connection with the account and the conditions under which the fee may be imposed.

• Equal Credit Opportunity Act (ECOA): Under ECOA and Regulation B, creditors are prohibited from discriminating against an applicant on a prohibited basis in any aspect of a credit transaction. The manner in which a creditor exercises its discretion, for example, in determining the application of eligibility requirements, loss mitigation options, and fee waivers, may raise fair lending risk.

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OCC: Deposit Related Credit, Feb 2015

• Another law specified in the Feb 2015 version that was removed from the March 2015 version is the Military Lending Act (MLA) (a.k.a. the Talent Amendment).

• MLA currently addresses predatory lending practices targeting servicemembers. MLA limits the amount of interest that a creditor may charge on consumer credit to a maximum military annual percentage rate (MAPR) of 36%, an “all-in finance charge.” DRC does not meet the current defined coverage criteria.

• The new MLA would cover consumer credit extensions and all types of deposit advances effective for consumer credit transactions consummated after October 3, 2016 for most products. It will cover credit cards effective October 3, 2017.

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Supervisory Principles For Overdraft Programs

• Included in Feb 2015 version, excluded from Mar 2015

• The OCC’s principles outlined supervisory expectations for banks that offer line of credit and overdraft protection programs, including principles regarding– Disclosures, – Customer eligibility requirements, – Program features, – Limitations on customer use, and– Program oversight by bank management.

• Some of these supervisory expectations are based on regulatory provisions in Regulation E or Regulation Z.

• Many appear to be based on UDAP and UDAAP principles.

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Regulatory Oversight via Call Report

• As of the March 31, 2015 Call Report, insured depository institutions with $1 billion or more in total assets that offer one or more deposit account products (other than time deposits) primarily intended for consumers will be required to report the amount of income earned from each of three categories of service charges on their consumer deposit account products.

– Overdraft related service charges– Periodic maintenance charges– Consumer customer ATM fees– Other (to tie back to Statement of Income Service Charges

on Deposit Accounts)

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Call Report as of March 2015

80

Schedule RI, item 5.b: Noninterest Income: Service Charges on Deposit Accounts



Regulation by Enforcement

Selected Cases

81


Woodforest National BankOct 2010 Consent Order for Civil Money Penalty

• Issued by the OCC based on “identified deficiencies in the Bank’s compliance with consumer laws” with regard to its PriviligePay overdraft protection product

• Specifically cited for UDAP violations

• Bank required to pay $1,000,000 CMP

• Agreement between Woodforest and OCC to remediate possible harm suffered by consumers as a result of PrivilegePay

• Bank also must establish a minimum, a $32,000,000 restitution fund to refund specific consumers’ excessive ODP fees

OCC Consent Order AA-E-10-93

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Consent Order: OCC’s Major Findings

1. Overdraft program, PriviligePay, with automatic enrollment 30 days after account opening and a per transaction fee with each ODP transaction.

2. Bank had no daily, monthly, or other limit on customer overdraft fees.

3. Accounts not brought positive within 7 days were charged a “continuous overdraft fee” which OCC considered unfair.

4. Bank marketed or promoted its deposit account products through a brochure highlighting the free or low cost features of certain accounts while omitting info about costly features such as overdraft protection

5. Account opening disclosure did not originally describe explain that consumers could be automatically reinstated in PrivilegePay after use was suspended or terminated by the bank

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Material Violations Noted by OCC

• Unfair or deceptive acts or practices in or affecting commerce [15 USC § 45(a)(1)]

• Conditioning credit on repayment by preauthorized electronic fund transfers [12 CFR § 205.10(e)]

• OCC imposed a civil money penalty of $1,000,000

• Restitution required, estimated $32,000,000

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CFPB Fines Regions Bank $7.5 Million for Unlawful Overdraft Practices (April 2015)

• Bank Refunds $49 Million in Illegal Fees to Consumers Who Did Not Opt-In to Overdraft

• WASHINGTON, D.C. – The CFPB took action against Regions Bank for charging overdraft fees to consumers who had not opted-in for overdraft coverage. The bank also charged overdraft and non-sufficient funds fees on its deposit advance product despite claims that it would not. Regions has already refunded hundreds of thousands of consumers approximately $49 million in fees, and the consent order requires the bank to fully refund all remaining consumers. The Bureau also fined the company $7.5 million for its illegal actions.

• “Today the CFPB is taking its first enforcement action under the rules that protect consumers against illegal overdraft fees by their banks,” said CFPB Director Richard Cordray…We take the issue of overdraft fees very seriously and will be vigilant about making sure that consumers receive the protections they deserve.”

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Useful Resources

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Useful Resources

• http://www.pewtrusts.org/~/media/Assets/2014/04/09/ChecksandBalancesReport2014.pdf

• 4th report in their series on key checking account terms

• Rated the 50 largest banks based on 3 general categories of best and good practices

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PEW Recommendations to CFPB

1. Summarize key information about terms and fees in a concise, uniform format. [Pew’s Model Disclosure Box for Checking Accounts]

2. Provide accountholders with clear, comprehensive terms and pricing information for all available overdraft options.

3. Make overdraft penalty fees reasonable and proportional to the financial institution’s costs in providing the overdraft loan.

4. Post deposits and withdrawals in a fully disclosed, objective, and neutral manner that does not maximize overdraft fees.

5. Prohibit pre-dispute mandatory binding arbitration clauses in checking account agreements, which prevent accountholders from accessing courts to challenge unfair and deceptive practices or other legal violations.

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PEW: Checks and Balances, April 2014

• Overdraft Disclosures

• Best Practices– Adoption of a summary disclosure box that meets Pew’s criteria

• Good Practices– Attempts a summary disclosure box but missing key information– Identifies the overdraft default option– Overdraft penalty fee amount disclosed– Overdraft transfer fee amount disclosed

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• Overdraft Practices

• Best Practices– No ATM overdrafts allowed– No debit point-of-sale overdrafts– No high-to-low transaction reordering

• Good Practices– Limited high-to-low transaction reordering– Threshold amount to trigger an overdraft fee– No extended overdraft fee– Limited number of overdraft fees per day

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• Overdraft Dispute Resolution

• Best Practices– No mandatory binding arbitration– No class-action waiver clause– No loss, costs, and expenses clause

• Good Practices– Arbitration opt-out provision– No jury trial waiver clause– Small-claims arbitration exemption

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Useful Resources

• http://www.pewtrusts.org/~/media/Assets/2014/06/26/Safe_Checking_Overdraft_Survey_Report.pdf

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PEW: Overdrafter Survey June 2014

• PEW Charitable Trusts’ June 2014 Report• Overdrawn – Persistent Confusion and Concern About Bank Overdraft

Practices Key Findings• Compared 2013 survey results to 2014 survey results

• More than 50% of overdrafters do not recall opting-in to overdraft coverage• More than half of the 1804 nationally representative respondents indicated

their most recent overdraft event resulted in multiple penalty fees, including extended overdraft fees

• Over 80% of the survey participants claim their bank did not warn them a transaction would overdraw their account before completing the transaction

• Approximately 68% of respondents with an overdraft indicated they would prefer a transaction to be declined rather than to pay an overdraft fee

• Approximately 46% of overdrafters only paid 1 or 2 penalty fees in 2013

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PEW: Overdrafter Survey June 2014 (cont.)

• PEW Charitable Trusts’ June 2014 Report• Overdrawn – Persistent Confusion and Concern About Bank

Overdraft Practices Key Findings• “Profiles of Overdrafters,” page 3

• “A 25-year old is 133% more likely to pay an overdraft penalty than a 65-year-old.

• Consumers earning less than $100,000 are 105% more likely to pay an overdraft penalty fee than those earning $100,000 or more.

• Non-whites are 83% more likely to pay an overdraft penalty than whites.• Consumers who have a credit card are 34% less likely to pay an

overdraft penalty fee than those who do not have a credit card.”

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• PEW Charitable Trusts’ June 2014 Report

• Overdrawn – Persistent Confusion and Concern About Bank Overdraft Practice Key Findings

• “Profiles of Overdrafters,” page 5

• 52% of overdrafters do not believe they opted in to overdraft coverage.

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PEW: Overdrafter Survey June 2014 (cont.)


Useful Resources

• “Service members have access to a wide array of financial service providers, but this study is limited to Association of Military Banks of America (AMBA) and the Defense Credit Union Council (DCUC) member institutions, which have a military installation presence.

• The physical proximity of these institutions to those living and working on a military installation, as well as their often specific missions to serve military personnel, means they provide checking accounts to millions of service members.”

• www.pewtrusts.org/~/media/Assets/2014/10/MilitaryCheckingBankingPracticesReportOct2014.pdf

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PEW: Checks and Balances, Stars and Stripes

• PEW Charitable Trusts’ November 2014 Report• Checks and Balances, Stars and Stripes

• Selected statistics from the report

• Only 2% of credit unions and half of banks operating on domestic military installations have adopted a disclosure box meeting pew’s standards

• Most banks and credit unions operating on domestic military installations charge consumers a fee for using out-of-network ATMs

• Most banks and credit unions operating on domestic military installations disclose some overdraft and ATM fees, but few disclose all fees

• Most banks but only about ¼ of credit unions operating on domestic military installations do not reorder ATM or point-of-sale transactions by dollar amount

• Most banks but few credit unions operating on domestic military installations require binding arbitration

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• PEW Charitable Trusts’ November 2014 Report• Checks and Balances, Stars and Stripes

• Daily Overdraft Limits

• Of the 18 banks, 16 (89%) disclose they limit the number of overdrafts service members can be charged per day.

– Median cap is 4.5 fees per day, with a range of 3-6 fees per day.

• Among the credit unions, only 7 CUs (also 7%) disclose they limit the maximum number of daily overdrafts.

– Caps range from 3-6 with a median of 4. – 73 credit unions (68%) do not disclose any information on limiting the number

of overdraft fees in their account agreements, fee schedules, or websites.

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PEW: Checks and Balances, Stars and Stripes



http://www.cfsinnovation.com/


http://www.cfsinnovation.com/financial‐health‐segments



CFSI’s 7 US Financial Health Segments

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Healthy

• Thriving• Focused• Stable

Coping

• Striving• Tenuous

Vulnerable

• Unengaged• At Risk!


• The Financially Striving– 39 million adults are striving– 64% use online banking and 40% use mobile financial services regularly– 49% female and 51% male– 32% have children– 59% White, non-Hispanic– 19% Hispanic– 14% Black, non-Hispanic– 22% Household income of < $30,000

• The Financially Tenuous– 39 million adults are tenuous– 64% use online banking and 42% use mobile financial services regularly – 49% female and 51% male– 32% have children– 62% White, non-Hispanic– 15% Hispanic– 13% Black, non-Hispanic– 28% Household income of < $30,000

102

CFSI’s Financial Health Segment Analysis



CFSI’s Financial Health Segment Analysis

• The Financially Unengaged– 39 million adults are unengaged– 33% use online banking and 27% use mobile financial services regularly– 28% do not have a checking account and 50% do not have a savings account– 49% female and 51% male– 32% have children– 50% White, non-Hispanic– 24% Hispanic– 18% Black, non-Hispanic– 46% Household income of < $30,000

• The Financially At Risk– 12% of Americans are financially at risk– 53% use online banking and 37% use mobile financial services regularly– 16% of at risk households have a prepaid card– 57% female and 43% male– 40% have children– 66% White, non-Hispanic– 15% Hispanic– 14% Black, non-Hispanic– 47% Household income of < $30,000

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The Four Compass Principles

• Embrace Inclusion: – Responsibly expand access.

• Build Trust: – Develop mutually beneficial products that deliver clear and

consistent value.

• Promote Success: – Drive positive consumer behavior through smart design

and communication.

• Create Opportunity: – Provide options for upward mobility.

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How to Submit Questions

If you are participating on the Web:Enter your Question in the “Questions” Box

and Press ENTER / SUBMIT

If you are participating by Phone:Email your question to: [email protected]

106



Thank you for your participation today!

Patti [email protected]

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Appendix Page 1

Financial Solutions * August 2015

Best Practices Checklist for Deposit-Related Credit (DRC)

Assess whether banks apply the following principles to any DRC product they offer.

1. Disclosurea. Banks should provide clear and conspicuous disclosures to customers before enrollment,

consistent with applicable law, and should address program costs, terms, and materiallimitations before providing a product.

b. Account materials and marketing should not mislead customers about the optional nature ofthe product or otherwise promote routine use or undue reliance on deposit-related creditproducts.

c. Account materials should also make clear that the DRC product is a loan. Banks should alsoprovide customers with information about alternative products that it offers, including thosethat are less costly to the customer.

d. Banks should consider mailing an annual reminder to overdrafters that have opted-in to remindthem of program options.

2. Legal compliancea. Any product, and the manner in which it is offered or marketed, must comply with applicable

law, including compliance with consumer protection laws (i.e., TILA, ECOA, EFTA, the CardAct and the prohibition against UDAP practices in the FTC Act).

3. Affirmative requesta. Customers should not be automatically enrolled in programs for DRC products.b. Enrollment should occur only after the customer has received appropriate disclosures, has

made an affirmative request for the product, and has agreed to abide by product terms,including associated fees.

4. Program availability and prudent eligibility standardsa. Policies and procedures should set forth the eligibility criteria that must be met by a depositor

to obtain the specific DRC product.b. Policies and procedures should also identify the product features and underwriting criteria.c. Before approving the customer for a product, the bank should have sufficient information

about the customer to evaluate whether the customer meets the bank’s eligibility standards.

5. Financial capacitya. Banks should establish policies and procedures to determine an applicant’s creditworthiness

and ability to repay the loan according to its terms before offering the product to theconsumer.

b. Underwriting practices should include an analysis of income or assets and debt obligationsand should consider the customer’s ability to repay without needing to borrow repeatedlyfrom any source to meet necessary expenses. Analyze an average of a 6-month consecutiveperiod of recurring deposits (inflows) and checks/credit/customer withdrawals (outflows).Lines of credit of any sort, including overdrafts, and drafts from savings should not beconsidered inflows to determine available cash for repayment.

c. Each deposit advance loan, along with all applicable fees, should be repaid in full before theextension of a subsequent deposit advance loan, and a bank should not offer more than oneloan per monthly statement cycle. A cooling off period of at least one monthly statement

Appendix Page 2


cycle after repayment should be completed before another advance may be extended to avoid repeated use of the short-term product.

d. An appropriate degree of analysis should be conducted before the DRC product request isapproved to determine whether the customer is able to manage and repay the creditobligations arising from the product while still meeting other financial obligations.

e. The amount of credit available to a customer should not be increased without a fullunderwriting reassessment.

f. A bank should identify risks that could negatively affect a customer’s eligibility to receiveadditional deposit advances. For example:o Repeated overdrafts (establish/set a certain number during a specified number of months).o Evidence that the customer is overextended with respect to total credit obligations.

6. Prudent limitations on product costs and usagea. Products should be subject to prudent limitations on credit extensions, customer costs, and

usage.b. Fees should be based on safe and sound banking principles and take into account other

appropriate factors, including reputation and strategic risks to the bank. While permittingappropriate returns, fees should be reasonably correlated to the actual costs of offering,underwriting, and servicing the product as well as associated risks.

c. Some banks now require a “cooling off period” where customers who have taken out aspecified number of deposit advance loans within a certain time frame are required to wait fora specified period before they are eligible to take out a new loan. The OCC is concerned,however, these cooling off periods can be easily avoided and are ineffective in preventingrepeated usage of these high-cost, short-term loans for longer-term borrowing needs.

7. Continuous overdraft fees and negative balance feesa. Carefully compare disclosed methods for any such fees to actual practices to ensure accuracy.b. Disclose very clearly the business days or calendar days consumers are given to cure an

overdraft before charging a fee, especially on days the bank is not open for business such asover a weekend or a holiday.

c. Banks should disclose when the continuous overdraft fee will be assessed in messagesnotifying a customer that an overdraft has occurred.

d. If the fee is assessed on calendar days, the institution must consistently handle continuousoverdraft situations that occur over a weekend or holiday period where the final day of the“cure” period falls on a non-business day for all customers.

e. Banks should clearly disclose weekend deposit application to allow prompt overdraft cure.f. Consider not assessing fees on days when the customer is not able to cure the overdraft.g. Banks should also give customers “a reasonable time” to cure the overdraft prior to assessing

any continuous overdraft fee.h. If the assessment of bank service charges or fees cause an extended negative balance fee to be

assessed, ensure the consumer is informed that other fees can lead to a negative balance, whichcan lead to additional fees.

8. Credit terms and methods of repaymenta. Banks should structure credit terms to reduce the principal balance of the loan over a

reasonable period of time.b. Bank management should offer multiple repayment methods appropriate for the type of credit.

Appendix Page 3


c. As prohibited by law, banks cannot condition approval of the credit on the consumer agreeingto repay the loan by means of preauthorized electronic fund transfers at substantially regularintervals.

9. Credit reportinga. Banks should consider reporting payment information to credit bureaus.

10. Monitoring and risk assessmentsa. The volume of revenue generated from DRC products and changes in customers’ usage of

those products should be regularly monitored to identify risks such as operational, compliance,reputational, and credit risks.

b. Appropriate action should be taken to address any risks identified, such as excessive usageand nonperformance. These actions include reassessing customers’ creditworthiness;adjusting credit terms, fees, or limits; suspending or terminating the credit feature; or closingaccounts.

c. Banks should consider the significance of revenue from a particular product and monitor forany undue reliance on the fees generated by that product.

d. Ensure adequate risk management, including appropriate periodic internal audits andcompliance reviews.

11. Management oversighta. Bank management should exercise appropriate oversight of products and services, through

regular review of reports on product usage, fee income, associated losses and expenses, legalcompliance, and periodic audits.

b. Bank management should consider the significance of revenue from a particular product andmonitor for any undue reliance on the fees generated by that product for the bank’s revenueand earnings. Banks should not have an over reliance on fee income from any single product.

c. Effective bank management practices should include identifying highest volume overdraftand insufficient fund users and the related cost to the customer for excessive use.

d. Appropriate oversight includes monitoring of third-party relationships that provide servicesrelated to the product. In addition, banks should periodically evaluate the success andprofitability of the program.

e. Ensure employee compensation and incentive programs are not designed to inadvertentlysteer customers toward DRC products and services when they may qualify for other lesscostly forms of credit.

12. Account management and charge-offsa. Applicable guidelines on account management and charge-offs of uncollectible balances

should be followed.b. Banks should be mindful that higher capital requirements generally apply to loan portfolios

that exhibit higher-risk characteristics and are subject to less stringent loan underwritingrequirements. Loans exhibiting subprime credit characteristics are higher-risk loans and mayrequire higher levels of capital.

c. Anticipate that examiners will assess whether the ALLL is adequate to absorb estimated creditlosses within the deposit advance loan portfolio.

Appendix Page 4

Appendix Page 5

V. Lending — Overdraft Payment Programs

FDIC Compliance Examination Manual — January 2014 V–13.1

Overdraft Payment Programs1

Introduction

As highlighted by the FDIC’s November 2008 Study of Bank Overdraft Programs, institutions have expanded the types of overdraft payment programs provided to customers in recent years. Some of these programs impose substantial fees and interest and rely on third-party vendors to develop systems to maximize the amount of fee income generated. Customer complaints have increased, along with reported legal and enforcement actions. In many cases, fees are repeatedly charged and are often disproportionate to the amount originally intended to be funded. Some institutions manipulate their transaction processing order to maximize fee income. Customers have complained that they were not made aware of the existence or potential negative consequences of, or alternatives to, various types of overdraft coverage. Some customers’ financial difficulties have been exacerbated by institutions’ overdraft payment practices and programs, even though the institutions maintain alternative programs more suitable for those customers.

In an effort to assist FDIC-supervised institutions in identifying, managing, and mitigating risks regarding overdraft payment programs, the FDIC issued its November 24, 2010, Overdraft Payment Supervisory Guidance (“2010 Supervisory Guidance”) (FIL-81-2010).1 The 2010 Supervisory Guidance, which particularly focuses on the risks associated with excessive or chronic use of automated overdraft programs, is intended to serve as a comprehensive, up-to-date source of information about concerns and risks, as well as a summary of existing guidance and recent regulatory developments. In addition, the 2010 Supervisory Guidance encourages FDIC-supervised institutions to promote responsible use of overdraft payment programs through a series of specifically recommended actions institutions can take to help minimize the potential for consumer harm and regulatory or other risks. These overdraft payment program examination procedures:

• Incorporate recent changes to applicable laws andregulations;

• Integrate the supervisory expectations stated in the 2010Supervisory Guidance; and

• Reaffirm principles contained in the 2005 InteragencyJoint Guidance on Overdraft Protection Programs (“JointGuidance”) (FIL-11-2005) and the 2008 Guidance for

1 On April 1, 2011, FDIC staff published a set of Frequently Asked Questions and answers in response to questions received from supervised institutions and third-party vendors about the 2010 Supervisory Guidance, available at https://www.fdic.gov/news/conferences/overdraft/FAQ.pdf

Managing Third-Party Risk (“Third-Party Guidance”)2

(FIL-44-2008).

The 2010 Supervisory Guidance reaffirms existing laws, regulations, and guidance and addresses concerns regarding the risks posed by automated programs and excessive use. The specific supervisory expectations set out in the 2010 Supervisory Guidance with respect to excessive or chronic users of automated overdraft programs do not apply to ad hoc overdraft practices. The Joint Guidance,3 Third-Party Guidance, and range of applicable laws and regulations potentially apply to any method of covering overdrafts, including automated programs, linked accounts and lines of credit.

Laws and Regulations

Compliance examiners should continue to reference appropriate chapters in the Compliance Examination Manual governing laws and regulations applicable to overdraft payment programs. The scope of potentially applicable statutes and regulations that may apply to overdraft payment programs includes:

• The Truth in Lending Act (TILA) and Regulation Z;• The Truth in Savings Act (TISA) and Regulation DD;• The Electronic Fund Transfer Act (EFTA) and Regulation

E;• Section 5 of the Federal Trade Commission Act (FTC Act)

governing Unfair or Deceptive Acts or Practices (UDAPs)and Regulation AA;

• The Equal Credit Opportunity Act (ECOA) andRegulation B;

• The Expedited Funds Availability Act and Regulation CC;and

• The Community Reinvestment Act (CRA).

Compliance examiners should apply the Overdraft Payment Program Compliance Examination Procedures and relevant laws and regulations, and refer to the 2010 Supervisory Guidance, the Joint Guidance, and the Third-Party Guidance, as appropriate, to verify that institutions are adhering to applicable laws and regulations, and implementing appropriate policies, procedures, compliance management systems, and risk mitigation strategies.

2 See Third-Party Risk Compliance Examination Procedures issued June 1, 2010.

3 Compliance examiners should pay particular attention to the “Best Practices” in the Joint Guidance, which cover both Marketing and Communications with Consumers and Program Features and Operation.

Appendix Page 6

https://www.fdic.gov/news/news/financial/2010/fil10081b.pdf

https://www.fdic.gov/news/news/financial/2010/fil10081.html

http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20050218/attachment.pdf





https://www.fdic.gov/news/conferences/overdraft/FAQ.pdf







V–13.2 FDIC Compliance Examination Manual — January 2014

Regulation E Changes

Changes to laws and regulations place additional requirements on institutions’ overdraft payment programs. Under Regulation E rules that took effect July 1, 2010, institutions must provide notice and a reasonable opportunity for customers to opt-in to the payment of automated teller machine (ATM) and one-time, point-of-sale (POS) overdrafts provided in exchange for a fee. Institutions must also inform the customer if alternatives are available.4 In complying with these requirements, institutions should not attempt to steer frequent users of fee-based overdraft products to opt-in to these programs while obscuring the availability of alternatives.

Targeting customers who may be least able to afford such products can raise safety-and-soundness concerns about potentially unsustainable customer debt. Overly aggressive marketing, advertising, and other promotional activities require particular vigilance to ensure that they are not unfair or deceptive. Steering activity with respect to credit products raises potential legal issues, including fair lending, equal credit opportunity, and concerns about UDAPs, among others, and will be closely scrutinized. In addition, inconsistent application of waivers of overdraft fees will be evaluated in light of all applicable fair lending statutes and regulations.

Unfair or Deceptive Acts or Practices

Section 5 of the FTC Act prohibits UDAPs in or affecting commerce.5 The FDIC enforces compliance with this important consumer protection law regarding FDIC-supervised institutions pursuant to its authority in the FTC Act and Section 8 of the Federal Deposit Insurance Act.6 The prohibition against UDAPs applies to all products and services offered by financial institutions, including overdraft services, and regardless of whether such services are offered directly or indirectly through a third party. Moreover, the prohibition applies to every stage and activity: from product development to the creation and rollout of the marketing campaign; from account maintenance and collections all the way through termination of the customer relationship.7

4 See Regulation E (Electronic Fund Transfer Act) Examination Procedures. In addition, as of January 1, 2010, Regulation DD (Truth in Savings) requires institutions to disclose on periodic statements the aggregate dollar amounts charged for overdraft fees and for returned item fees, for the statement period and the year-to-date. It also requires institutions that provide account balance information through an automated system to provide a balance that does not include additional funds that may be made available to cover overdrafts. See Regulation DD Examination Procedures.

5 15 U.S.C. § 45(a). 6 See 12 U.S.C. § 1818(b). 7 See Unfair or Deceptive Acts or Practices Compliance Examination

Procedures.

Community Reinvestment Act

Institutions will continue to receive favorable CRA consideration under the service or lending tests (consistent with CRA regulations and FIL-50-2007 providing details on small dollar loans8), for offering financial education and positive alternatives to overdrafts that are responsive to the needs of customers, particularly low- and moderate-income individuals, in their local communities. Examples include lower-cost transaction accounts and credit alternatives, such as a linked savings account, a small, reasonably priced line of credit consistent with safe and sound banking practices, or a safe and affordable small dollar loan.

Third-Party Arrangements

With the growth of third-party arrangements for overdraft payment programs, Compliance examiners should ensure that financial institutions are managing these relationships in accordance with the principles outlined in the Third-Party Guidance.9 In addition to general third-party oversight considerations, these third-party overdraft payment programs may raise concerns that differ from potential issues related to in-house programs. For example, some vendors have tended to promote programs that encourage generation of fee income by linking the amount or volume of overdraft fees charged to the percentage of incentive compensation paid to the vendor.10 This practice is generally inconsistent with promoting the responsible use of these programs.

Where vendor compensation is tied to a percentage of income or fees generated by the product sold, Compliance examiners should evaluate whether the third-party relationship raises the potential for compliance, operational, financial, and reputational risks to the financial institution. For example, where a third-party arrangement provides that the vendor will take a reduced percentage of compensation if the financial institution implements a transaction processing order of largest-to-smallest, this arrangement may rise to the level of a UDAP violation if the institution, at the vendor’s encouragement, is manipulating the transaction processing order solely to generate fees and increase both the institution’s fee income and the vendor’s compensation. Customers may be harmed if this practice is designed exclusively to increase the amount of overdraft fees assessed without any corresponding and meaningful benefit to the consumer.

8 See also Interagency Questions and Answers Regarding Community Reinvestment, 75 Fed. Reg. 11642 (Mar. 11, 2010), available at http://www.ffiec.gov.

9 See footnote 2. 10 See FDIC Study of Bank Overdraft Programs (November 2008) at p. 50

(Section VII), available at https://www.fdic.gov/bank/analytical/overdraft.

Appendix Page 7


http://www.ffiec.gov/cra/qnadoc.htm

http://www.ffiec.gov/cra/qnadoc.htm

https://www.fdic.gov/bank/analytical/overdraft/

https://www.fdic.gov/bank/analytical/overdraft



The 2010 Supervisory Guidance

The FDIC expects that supervised institutions will review their current automated overdraft payment programs, policies and procedures in light of the 2010 Supervisory Guidance. For example, as a threshold matter, Compliance examiners should determine if the institution has reviewed its existing program and determined whether the institution is going to: • Give customers the opportunity to affirmatively choose

the credit product most suitable for their financial needs, including overdraft payment products;

• Ensure that customers understand overdraft payment programs and alternative product choices;

• Appropriately monitor accounts and take meaningful and effective action to reach customers frequently using automated overdraft programs to inform them of lower-cost alternatives;

• Structure transaction clearing practices in a neutral manner not intended to maximize overdraft-related fees charged to customers; and

• Establish appropriate daily limits on fees.

Identification of Types of Overdraft Payment Programs Offered

Compliance examiners should first identify overdraft payment practices, programs and products offered and used by the financial institution at each examination, and consider the applicability of existing laws, regulations and guidance, as appropriate. In particular, examiners will need to determine whether overdraft payment decisions and programs are automated or not.

Automated overdraft payment programs typically rely on computerized decision-making and use pre-established criteria to pay or return specific items. There is little to no case-by-case review and decision-making with respect to an individual customer or item. By contrast, ad hoc programs typically involve the exercise of bank employee judgment in making a specific decision about whether to pay or return an item, as an accommodation and based on the employee’s knowledge of a particular customer. See Management and Policy-Related Examination Procedures of this section for further explanation of automated and ad hoc programs.

Automated overdraft payment programs are the focus of the 2010 Supervisory Guidance. Ad hoc overdraft payments have been authorized by banks for years as an accommodation based on specific considerations and knowledge of a particular customer, and they have generally not been the subject of the type of product over-use concerns that can be associated with automated overdraft programs. Consequently, the specific supervisory expectations set out in the Guidance regarding customer contact for excessive or chronic users do not

apply to ad hoc overdraft practices. Compliance examiners should not focus on ad hoc overdraft payments or practices when evaluating appropriate risk mitigation efforts in connection with the 2010 Supervisory Guidance; however, if significant safety and soundness or compliance risks regarding ad hoc programs and practices are identified, an examiner may consider an expanded review (See Expanded Review for Ad Hoc Programs or Practices).

Examiners should focus on identifying and mitigating the significant risks posed by automated overdraft programs, including taking a risk-based approach in scoping examinations to verify that institutions’ automated overdraft payment programs comply with applicable laws and regulations, and that such programs are not operating in a manner that is inconsistent with expectations set out in the 2010 Supervisory Guidance, the Joint Guidance and the Third-Party Guidance. In examining for appropriate application of the 2010 Supervisory Guidance, reviews of management activities, policies and procedures, and transaction testing, including document requests, should focus on automated overdraft programs.

Supervisory Action to Mitigate Risks

Overdraft payment programs that are found to pose unacceptable safety and soundness or compliance risks will be factored into examination ratings, and corrective action will be taken where necessary. Violations should be cited on the appropriate Violation pages of the Report of Examination (ROE). Other concerns regarding practices that are inconsistent with the 2010 Supervisory Guidance, the Joint Guidance, and/or the Third-Party Guidance should be discussed in the Examiner’s Comments and Conclusions page of the ROE. Additionally, Compliance examiners should make appropriate recommendations to bank management in the ROE. These violations and concerns should be taken into consideration when assessing the institution’s Compliance Management System (CMS) and determining the overall Compliance Rating.

Appropriate corrective action will be pursued where overdraft payment practices or programs pose unacceptable safety and soundness or compliance management system risks, or result in violations of laws or regulations, including UDAPs. Depending on the circumstances, corrective action may include ratings downgrades, informal agreements, enforcement orders, customer restitution, and/or civil money penalties. Regional Offices should ensure that appropriate post-examination tracking covers instances where the ROE identifies:

• Inconsistencies with the 2010 Supervisory Guidance, the Joint Guidance and the Third-Party Guidance given an

Appendix Page 8



institution’s overall CMS and risk mitigation approach, and

• Other overdraft-related violations and concerns, to ensurethat timely and appropriate corrective action is taken bybank management.

In addition, at the conclusion of each compliance examination, examiners are required to complete the overdraft payment program related questions in the Credit and Consumer Product/Services Survey. Finally, Compliance examiners should consult with Risk Management examiners, as appropriate, where safety and soundness concerns are identified.

Examination Procedures

Examination Objectives

These Overdraft Payment Program Compliance Examination Procedures incorporate existing and updated laws, regulations, and guidance. These procedures demonstrate a new, heightened, and detailed focus on identifying risks resulting from excessive use of automated overdraft payment programs. Specific examination objectives include the following:

1. Assess the quality of the financial institution’s compliancerisk management systems and its policies and proceduresgoverning overdraft payment practices and programs.

2. Determine the financial institution’s compliance withapplicable laws and regulations.

3. Assess how and whether institutions are implementing therecommended actions contained in the 2010 SupervisoryGuidance.

4. Determine the effectiveness of the financial institution’smanagement of third-party risks, where applicable, inaccordance with the Third-Party Guidance.

5. Determine the effectiveness of the financial institution’sinternal controls and procedures for monitoring overdraftpayment practices and programs consistent with the JointGuidance and the 2010 Supervisory Guidance.

6. Direct corrective action when violations of laws, rules, orunsafe and unsound practices are identified, or when thefinancial institution’s practices, policies or internalcontrols are found to be deficient.

7. Determine the level of compliance with the 2010Regulation E opt-in notice requirements and relevantregulatory changes related to overdraft products (e.g.,TISA).

Management and Policy-Related Examination Procedures

Compliance examiners should follow the Management and Policy-Related Examination Procedures identified below, as

applicable, in each examination involving overdraft payment programs. If after conducting a review of an institution’s Management and Policy-Related Examination Procedures, an examiner identifies weaknesses or other areas of concern,11 examiners should conduct appropriate transaction testing consistent with the Transaction-Related Examination Procedures (See Transaction-Related Examination Procedures for Automated Programs) to determine whether the overdraft program poses unacceptable safety and soundness, compliance, or other risks.

1. Determine how the financial institution handles decisionsassociated with overdraft payment programs and non-sufficient funds items (NSFs), including whether theinstitution offers overdraft payment programs tocustomers, and the types and characteristics of theseprograms.• Identify the overdraft practices, payments, and

products used by the institution.• Identify who in management is responsible for daily

oversight of NSFs and overdraft decisions.• Determine who in management has the ability to

override overdraft policies and limits.• Determine to what extent front-line employees who

interact with customers on a daily basis have beentrained on the institution’s overdraft and NSF policies,procedures, and products.

• Determine the level of discretion and parametersinvolved in any waivers or refunds.

• Identify the extent to which the Board of Directors(Board) and management oversee and review theactivities associated with overdraft payment programs,decisions, and policies.

2. Determine if the overdraft payment programs qualify asautomated programs for purposes of the 2010 SupervisoryGuidance.• Automated overdraft payment programs typically

include the following characteristics:° They are partially or fully computerized;° They are used by institutions to determine whether

NSF transactions qualify for overdraft coverage based on pre-determined criteria; and

° The decision to pay or return specific items is pre-established and generally does not rely on bank employee decision-making with respect to any individual customer or item.

11 Consistent with existing examination protocols governing Compliance Management Systems, examiners should follow these procedures (including the Transaction-Related Examination Procedures, if warranted) in the first examination conducted after issuance of the 2010 Supervisory Guidance. The guidance states that the FDIC expects institutions to have approved, responsive compliance and risk management action plans by July 1, 2011.

Appendix Page 9



• By contrast, ad hoc programs or practices typically have the following characteristics: ° A bank employee exercises judgment in making a

specific decision about whether to pay or return an item;

° Decisions are made based on specific considerations and knowledge of a particular customer; and

° They are provided as an accommodation, not on a pre-determined basis.

• Some overdraft payment programs have elements that are both automated and ad hoc. In these instances, examiners should exercise judgment in making a determination about whether the program is automated or ad hoc based on the aforementioned criteria, and consider appropriate follow-up action.

• If, after completion of the Management and Policy-Related review, examiners identify significant risks and concerns covered in the 2010 Supervisory Guidance with respect to automated overdraft payment programs, examiners should consult the Transaction-Related Examination Procedures (See Consistency with Recommendations in the 2010 Supervisory Guidance – Expanded Review for Automated Programs).

• During Management and Policy-Related reviews, the specific supervisory expectations set out in the 2010 Supervisory Guidance regarding customer contact for excessive or chronic users generally should not be applied to ad hoc overdraft practices. However, institutions that authorize overdrafts on an ad hoc basis should manage potential reputational, compliance, and litigation risks regarding certain overdraft payment practices, such as check clearing practices designed to maximize overdraft fees.

• On an exception basis, where unacceptable risks are discovered during an examination regarding ad hoc programs and practices that potentially raise legal, regulatory, or other significant compliance concerns, examiners should consider whether follow-up action should be taken (See Expanded Review for Ad Hoc Programs or Practices).

3. Review all written policies and procedures, management’s self-monitoring, customer complaints, compliance audit reports including work papers, training materials, and other reports, as appropriate based on the nature of the overdraft program. Determine whether: • Policies and procedures are all encompassing and take

into consideration, as appropriate, issues covered by the 2010 Supervisory Guidance, the Joint Guidance, and the Third-Party Guidance.

• Customer complaints are captured and handled in a timely manner, with appropriate reimbursements and adjustments.

• The scope of the audit or self-monitoring addresses, as appropriate, issues covered by the 2010 Supervisory Guidance, the Joint Guidance, and the Third-Party Guidance.

• Management has taken corrective action to follow-up on previously identified deficiencies.

• Testing includes samples covering overdraft payment practices, programs, and decision centers.

• Testing includes monitoring for risks identified in the Joint Guidance, as appropriate.

• Testing encompasses monitoring accounts for excessive or chronic customer use; meaningful and effective customer follow-up with respect to automated programs; transaction processing order; establishment of overdraft payment decision parameters that ensure continued applicability and appropriateness; and other expectations, as appropriate, and consistent with the 2010 Supervisory Guidance.12

• Testing includes review of all third-party arrangements related to overdrafts.

• The scope of the work performed is appropriate. • The work performed is accurate. • Significant deficiencies and their causes are included in

reports to management and/or the Board. • Management and/or the Board follow up to ensure that

action is taken to correct any significant deficiencies identified.

• Review frequency is appropriate. • The institution documents instances of accountholder

excessive use of automated overdraft payment programs (e.g., more than six occasions where a fee is charged in a rolling twelve-month period).

4. Through discussions with management and review of available information, determine whether the institution’s internal controls are adequate to ensure appropriate compliance with the 2010 Supervisory Guidance, the Joint Guidance, and the Third-Party Guidance (including managing third-party arrangements related to the practices and programs under review), and applicable laws and regulations.

5. Review the following: • Organization charts; • Process flowcharts; • Policies and procedures; • Account documentation; • Checklists; • Computer program documentation;

12 See also Consistency with Recommendations in the 2010 Supervisory

Guidance – Expanded Review for Automated Programs of the Transaction-Related Examination Procedures.

Appendix Page 10



• Marketing materials; • Training materials; • Third-party agreements; • Reports on the frequency of customer overdraft

payment program use, overdraft accommodations, and associated fees; and

• Reports documenting efforts to monitor accountholder excessive use of automated overdraft payment programs (e.g., more than six occasions where a fee is charged in a rolling twelve-month period).

6. Through a review of the financial institution’s training materials and procedures, determine whether: • The institution provides appropriate training to

individuals responsible for compliance with, and operational responsibilities for, the institution’s overdraft payment practices and programs, e.g., customer service representatives, tellers, individuals handling complaints, audit and compliance staff, and marketing personnel.

• The training is comprehensive and covers the various aspects detailed in the 2010 Supervisory Guidance, the Third-Party Guidance, the Joint Guidance, and applicable laws and regulations.

• In addition to knowledge of the institution’s overdraft payment programs, practices and policies (including applicable laws, regulations and guidance), the training should specifically cover: ° Information on alternative and less costly products

and options, ° How customers opt-in or opt-out (if the institution

chooses to allow customers to opt-out) of various programs,

° How to monitor for excessive use, ° How and when to conduct meaningful and effective

follow-up with customers, and ° How to respond to customer complaints.

7. Determine the extent and adequacy of the institution’s policies, procedures, and practices for ensuring compliance with safe and sound operational, financial and reputational risks and consumer protection laws and regulations. In particular, verify that: • The institution has developed overdraft payment

program policies, procedures and practices that ensure compliance with applicable laws and regulations, including: ° TILA and Regulation Z; ° TISA and Regulation DD; ° EFTA and Regulation E; ° Section 5 of the FTC Act (governing UDAPs) and

Regulation AA;

° ECOA and Regulation B; ° EFA and Regulation CC; and ° CRA.

• The institution’s overdraft payment program policies, procedures and practices address, as appropriate, the supervisory expectations noted in the 2010 Supervisory Guidance, compliance and risk management principles identified in the Third-Party Guidance, and best practices noted in the Joint Guidance.

Among other things, Compliance examiners should verify that:

• The institution has adopted appropriate procedures in accordance with Regulation E to eliminate overdraft charges related to ATM and one-time, point-of-sale (POS) transactions unless the customer has opted-in to having such fees charged.13

• The institution treats customers the same regarding the payment of other NSF items and such payment is not conditioned upon whether or not the customer has affirmatively agreed to pay overdraft fees on ATM or one-time, point-of-sale (POS) transactions.

• The institution’s marketing for an overdraft payment program is consistent with the requirements of applicable laws and regulations.

• The institution has developed practices that treat all customers equally, including ensuring that customers are not steered to more expensive products based on their use of overdraft services.14

• The institution has developed procedures and methodologies to monitor the use of overdrafts by its customers and associated fees charged.

• The institution has enacted policies and procedures that address prompt handling of requests to opt-in (and to opt-out if the institution, within its discretion, chooses to permit consumers to opt-out) of overdraft payment programs and transactions.

• The institution has developed a process that facilitates meaningful and effective follow-up with customers who have been identified as chronic or excessive users of automated overdraft payment programs. An institution’s program should be structured to provide customers with information regarding alternative credit programs or other products that would be more beneficial to their financial needs, and given a meaningful opportunity to affirmatively choose the overdraft payment product that overall best meets their needs. ° According to the 2010 Supervisory Guidance,

potential excessive use can occur if a customer

13 See footnote 4. 14 See FFIEC Interagency Fair Lending Examination Procedures and

Regulation E Examination Procedures.

Appendix Page 11

http://www.ffiec.gov/pdf/fairlend.pdf

http://www.ffiec.gov/pdf/fairlend.pdf



overdraws his or her account on more than six occasions where a fee is charged in a rolling twelve-month period.

° For ease of examination, institutions should be encouraged to incorporate excessive use monitoring triggers consistent with the 2010 Supervisory Guidance. If an institution maintains a different standard for excessive use, this standard is expected to be reasonable and designed to implement the supervisory expectation that institutions monitor and take meaningful and effective follow-up action when customers use the overdraft payment program excessively.

• The institution has developed a transaction clearingprocess method that is fully supported by soundbanking business reasons, is neutral in its application,and not designed to maximize the cost to consumers.

• The institution has developed appropriate overdraftpayment decision parameters (e.g., daily limits onfees).

• The institution performs adequate due diligence beforeentering into and during the course of a third-partyrelationship in connection with an overdraft paymentprogram.15

• The institution has developed policies and proceduresfor monitoring and responding to customer complaints.

Transaction-Related Examination Procedures for Automated Programs

Compliance examiners should conduct transaction testing using the Transaction-Related Examination Procedures if, after completing the Management and Policy-Related Examination Procedures, they discover weaknesses or other risks requiring further investigation. Examiners should use their judgment in deciding the sample size of, e.g., accounts, disclosures and advertisements. Sample sizes should be increased until confidence is achieved in reviewing various aspects of the financial institution’s automated overdraft payment programs, practices, policies and procedures.

As noted in Identification of Types of Overdraft Payment Programs Offered and Management and Policy-Related Examination Procedures, for the vast majority of examinations, Compliance examiners will not conduct transaction-related testing on ad hoc programs and practices.

Further Document Collection and Review

To the extent not already reviewed pursuant to the Management and Policy-Related Examination Procedures, examiners should obtain and review copies of the following

15 See footnote 2.

documents for consistency with applicable laws, regulations and guidance:

• Descriptions of overdraft payment programs;• Disclosure forms;• Account agreements;• Opt-in and opt-out agreements;• Excessive use and fee reports;• Procedures for monitoring excessive or chronic

customer use and undertaking meaningful and effectivefollow-up action;

• Overdraft activity reports and compliancedocumentation (including any to management or theBoard related to monitoring and follow-up, workoutloans, charge-offs, fee waivers, daily limits, de minimistransactions, etc.);

• Third-party contracts for overdraft payment programs;• Procedural manuals and written policies;• Approval guidelines and parameters for all overdraft

payment programs, including daily fee limits;• ATM receipts, periodic statements, and ATM/POS

terminal notices;• Form letters and other correspondence used to notify

customers of NSFs or overdraft items;• Form letters and other correspondence used to notify

customers of an overdrawn account status;• Form letters and other correspondence used in case of

errors or questions concerning an account;• Form letters and other correspondence used to contact

customers who are excessive users to inform them ofalternative, less expensive products;

• Form letters and other correspondence to opt-in or opt-out of overdraft products, including Regulation E ATMand one-time, POS opt-in related materials;

• All other form letters and correspondence used relatingto NSF and overdraft items or programs;

• Any agreements with third-parties allocatingcompliance responsibilities;

• Marketing materials and scripts, including RegulationE ATM and POS-related materials; and

• Customer complaint files.

Consistency with 2005 Joint Guidance Best Practices – Expanded Review

Further review the financial institution’s overdraft payment practices and programs to ensure that they reflect the “Best Practices” outlined in the Joint Guidance, and are consistent with the 2010 Supervisory Guidance. In addition to the safety and soundness considerations and legal risks identified, Compliance examiners should review efforts to mitigate risk and concerns raised consistent with the following 2005 Best Practices, including:

Appendix Page 12



• Marketing and Communications with Consumers 1. The institution does not market the program in a

manner that encourages routine or intentional overdrafts.

2. The institution informs customers of other overdraft services and credit products, if any, that are available and the differences in each product (terms and fees), including the consequences of extensively using overdrafts to cover short-term credit needs.

3. The institution trains staff to explain overdraft payment practices, program features, costs, terms, how to opt-in (or if the institution, within its discretion, chooses to permit consumers to opt-out, how to opt-out), and availability of other products to cover overdrafts.

4. The institution makes clear when payment of overdrafts is discretionary and does not indicate that payment is guaranteed if the institution retains discretion to not pay an overdraft item.

5. The institution does not promote “free” accounts and overdraft payment programs in the same advertisement in a manner that would suggest that the program is free of charges (consistent with Regulation DD).

6. The institution clearly discloses the dollar amount of the fee for each overdraft and any interest rate or other fees that may apply, in communications about overdraft payment programs.

7. The institution informs customers that the overdraft fees, as well as the amount of the overdraft, will be subtracted from any overdraft limit disclosed (consistent with Regulation DD).

8. The institution clearly discloses, where applicable, that more than one overdraft fee may be charged against the account per day, depending on the number of checks presented or withdrawals made from the customer’s account.

9. The institution clearly explains to consumers that transactions may not be processed in the order in which they occurred, and that the order in which the transactions are received and processed can affect the total amount of overdraft fees incurred.

10. The institution clearly discloses the types of transactions that can incur an overdraft fee (e.g., ATM withdrawals, debit card transactions, preauthorized automatic debits, telephone-initiated transfers, or other electronic transfers), to avoid implying that check transactions are the only transactions covered.

• Program Features and Operations 1. The institution provides a specific notice, where

feasible, to inform the customer that completing the withdrawal or fund transfer may trigger an overdraft fee and presents the notice in a manner that permits the customer to cancel the transaction after receiving the notice. If this is not feasible, the institution

prominently displays notices explaining that transactions that overdraw accounts may be approved and fees may be incurred.

2. The institution does not include overdraft payment program funds when providing a single balance for an account by any means (consistent with Regulation DD).

3. The institution promptly notifies customers each time an overdraft payment program has been accessed. The notice identifies the date of the transaction, type of transaction, item amount, overdraft amount, fee imposed, amount necessary to return the account to a positive balance, amount of time the customer has to return the account to a positive balance, and the consequences of not returning the account to a positive balance within that time period. Additionally, the institution notifies customers if the institution terminates or suspends customer access to the service.

4. The institution establishes daily limits on the customer’s costs from overdraft payment programs, e.g., by limiting the dollar amount of fees or number of transactions per day.

5. The institution monitors excessive customer use of overdrafts, which would indicate a need for alternative credit arrangements or services, and informs customers of these options.

6. The institution does not report negative information to consumer reporting agencies when overdrafts are paid under the terms of the institution’s overdraft payment program.

Consistency with Recommendations in the 2010 Supervisory Guidance – Expanded Review for Automated Programs

Where transaction testing is warranted, examiners should perform a detailed review of the financial institution’s automated overdraft payment practices and programs for appropriate consistency with the “Supervisory Expectations” outlined in the 2010 Supervisory Guidance, as well as the “Regulation E Requirements” and “Examinations” discussions. Examiners should discuss with institutions which recommendations, expectations, and items are appropriate given the institution’s overdraft payment programs and practices, customer base and use patterns, and business model, as well as other efforts by the institution to address excessive use.

In particular, for automated overdraft payment programs Compliance examiners should determine whether:

1. The institution gives customers the opportunity to affirmatively choose the overdraft payment product that best meets their needs.

Appendix Page 13



• This includes, for example, a linked savings account,16

a more reasonably priced line of credit that isconsistent with safe and sound banking practices, or asafe and affordable small-dollar loan.17

2. The institution’s Board provides appropriate oversight ofprograms consistent with its ultimate responsibility foroverall compliance, and management provides oversightof program features and operations on an ongoing basis,including annual review of an overdraft paymentprogram’s key features.

3. The institution reviews its marketing, disclosures, andimplementation of such programs to minimize potentialcustomer confusion and promote responsible use.

4. The institution trains staff to explain program features andother choices.

5. The institution prominently distinguishes account balancesfrom any available overdraft coverage amounts (consistentwith Regulation DD).

6. The institution monitors programs for excessive or chroniccustomer use, and undertakes meaningful and effectivefollow-up action.• Meaningful and effective follow-up means that the

institution has made reasonable efforts to provide thecustomer with information on alternatives to automatedoverdraft payment programs that may be better-suitedto the individual’s need for short term credit, and aclear mechanism for the customer to avail him orherself of those alternatives.° The key goal is to ensure that customers are able to

make informed choices among available options to manage recurring needs for short-term credit.

° An institution should be able to demonstrate it monitors account usage, undertakes programs designed to address excessive or chronic use, and monitors its success in informing frequent users of overdraft payment programs of the high cumulative costs of the program and the availability of less costly or otherwise more appropriate alternatives.

° Although institutions are encouraged to provide responsible alternatives, and most institutions offer some form of short-term alternative, including lines of credit, fixed-term small dollar loans, and linked savings accounts, they are not required to develop new products in response to the 2010 Supervisory Guidance.

• Compliance examiners should weigh the institution’soverall approach in addressing excessive or chronic

16 See The FDIC’s Model Safe Account Pilot which provides a template for safe, low-cost transactional and savings accounts (http://www.fdic.gov.)

17 See A Template for Success: The FDIC’s Small-Dollar Loan Pilot Program which provides a template for safe and affordable small dollar loans (http://www.fdic.gov).

customer use and assess whether a chosen course of action demonstrates meaningful and effective follow-up. ° Steps should include assessing the institution’s level

of effort to reach customers, and the ease with which customers are able to select alternative products.

Key areas of focus regarding meaningful and effective follow-up include:

• Institutions are encouraged to be proactive incontacting customers, clearly communicating availableoptions and giving a meaningful choice among options.

• Institutions may employ a variety of techniques, basedon individual customer profiles and general businesspractices, to contact excessive or chronic users ofoverdraft payment programs.

• While examples of meaningful and effective follow-upcould include contacting a customer via telephone, inperson, by mail, or through electronic notifications, asingle action may or may not necessarily showappropriate follow-up. When evaluating meaningfuland effective follow-up, examiners should consider theinstitution’s overall process for providing notice toexcessive use customers and the circumstances at thatinstitution. Factors to consider include whether:° The institution has a regular program to inform

excessive or chronic users of overdraft usage and cumulative costs in a prominent or conspicuous fashion;

° The institution highlights availability of alternatives to overdraft payment programs that may be lower-cost or more appropriate;

° The institution provides a clear and simple manner to contact the institution to discuss available alternatives;

° Contact with the customer was cursory; ° The customer and the institution engaged in relevant

dialogue or exchanged correspondence; or ° Other information provided by the institution that

documents meaningful and effective follow-up. • Although institutions should use their judgment in

determining what risk mitigation response isappropriate for their particular institution, two specificexamples of ways in which an institution coulddemonstrate meaningful and effective follow-upregarding excessive or chronic use of automatedoverdraft programs are: 1) providing enhanced periodicstatements; or 2) employing a targeted outreachapproach.

Appendix Page 14

https://www.fdic.gov/consumers/template/SafeAccountsFinalReport.pdf

https://www.fdic.gov/smalldollarloans/



1. Enhanced Periodic Statement Approach

° Under the enhanced periodic statement approach, an institution would augment existing, required disclosures for overdraft fees under Regulation DD (requiring disclosure of the total amounts of fees charged for overdrafts during the statement period and calendar year-to-date), by: – Prominently highlighting how excessive or

chronic users of automated overdraft programs can contact the institution to discuss available alternatives, and

– Encouraging meaningful and effective contact. ° If a customer incurs more than six overdrafts in a

rolling twelve-month period, the institution would prominently display on the periodic statement information describing how the customer can contact the institution to discuss alternative options. – An effective method is to include the name or

names of specific employee(s) who have knowledge of alternative credit products for which the customer might qualify and are able to assist the customer in determining whether he or she qualifies for them.

– For example, the following statement could be used: “You have been paying multiple overdraft fees and there may be cheaper alternative products that may be better suited for your needs. Please call [name(s) of employees] at xxx-xxx-xxxx to discuss other options with a customer service representative or visit us at your local branch.”

° Under this approach, institutions should continue to send enhanced periodic statements to customers for as long as the customer continues to exhibit chronic or excessive usage.

2. Targeted Outreach Approach

° A targeted outreach approach would involve contacting excessive users in person or by telephone to discuss less costly alternatives to automated overdraft payment programs.

° An institution would initiate outreach within a reasonable time period (e.g., 30 days) when a customer incurs more than six overdrafts in a rolling twelve-month period to discuss overdraft usage and available alternatives to the overdraft payment program.

° If a customer decides to remain in the automated overdraft payment program, the institution should also engage the customer to determine the customer’s preferences regarding future contact

regarding participation in the automated overdraft payment program.

° Absent an indication of customer preference regarding subsequent contact, a targeted outreach approach would involve contacting a customer whenever there is a cycle of repeated, excessive use (e.g., subsequent occurrences of more than six overdraft occasions where a fee is charged in a rolling twelve-month period).

Additional key areas of focus regarding meaningful and effective follow-up include: • Institutions should establish a reasonable period of time

in which to reach the customer to discuss less costly alternatives (e.g., 30 days).

• Institutions are not expected to suspend the availability of or limit access to overdraft coverage during the period in which they are engaging in good faith efforts to reach customers.

• Once successful contact with the customer occurs, institutions should evaluate the appropriate course of action. Before pursuing a course of action, institutions should consider the overall risks and circumstances, including whether the customer has expressed a desire to pursue alternatives or continue participating in the overdraft payment program.

• An occasion occurs when an overdraft fee is charged (e.g., a per-transaction, sustained daily, or other overdraft fee, but not an NSF fee charged where payment for an item is rejected). If three overdraft fees are charged in one day, that constitutes three occasions. If four overdrafts occur in one day but only three fees are charged for three transactions that day (e.g., if the institution waives fees after a daily limit of three is met), that similarly constitutes three occasions.

• If a financial institution posts a single $105 fee to an account for three, per-transaction overdrafts (i.e., a $35 fee is charged for each overdraft), this would still constitute three overdraft fees and, consequently, three occasions.

Is there documentation or empirical evidence that the institution’s follow-up has resulted in customers choosing more affordable alternatives? • After meaningful and effective contact, and repeated

instances of follow-up, a customer may not wish to receive follow-up contact envisioned by the 2010 Supervisory Guidance. ° Regardless of customer choice, institutions should

continue to monitor account usage. • At the same time, institutions should not attempt to

steer frequent users of fee-based overdraft products towards continuing fee-based overdraft coverage while obscuring the availability of less costly alternatives. In addition, institutions should not employ inappropriate efforts, including overly aggressive advertising or other

Appendix Page 15



promotional activities to coerce consumers to choose to continue with fee-based overdraft coverage.

• As with all customer communications, simple and clearlanguage is preferred. Regardless of customer choice,institutions should continue to monitor accounts forexcessive use that may pose safety and soundness risks.

7. The institution has appropriate daily limits on customercosts. For example, the financial institution has done thefollowing:• Limited the number of transactions that will be subject

to a fee (e.g., no more than three per day), or• Provided a dollar limit on total fees that will be

imposed per day.Daily limits should be reviewed as one element of the institution’s overall overdraft payment program. Failure to institute daily limits on customer costs with respect to overdraft payment programs does not in and of itself mean that the institution is not acting in a manner that is consistent with the expectations set out in the 2010 Supervisory Guidance.

8. The institution has implemented transaction-clearingprocedures that operate in a manner so as to avoidmaximizing customer overdrafts and related fees throughmanipulation of the clearing order, and ensures that anythird-party vendor has similar procedures in place.• Determining clearing order does not in and of itself

necessarily indicate whether an institution is or is notacting consistent with the expectations set out in the2010 Supervisory Guidance. Examiners should reviewand consider whether the processes, practices, policies,and procedures of the financial institution and theirthird-party vendor provide an overall compliancemanagement system or framework that is consistentwith those expectations.

• To the extent that institutions make decisions regardingtransaction processing order, transactions should beprocessed in a neutral order that avoids manipulating orstructuring processing order to maximize customeroverdraft and related fees.

• Institutions are discouraged from implementingsystems that re-order transactions to clear the highestitem first, as this approach will tend to increase thenumber of overdraft fees. In addition, althoughprocessing batches of transactions in a random order ororder received is a neutral approach, institutions arediscouraged from arranging the order of types oftransactions (i.e., batches) cleared in order to increasethe number of overdrafts and maximize fees.

• Compliance examiners should consider the overallrisk-profile of the institution and the following factorsor characteristics:° Is the transaction order neutral (e.g., by order

received, check number, serial number sequence, or other potentially equitable approaches)?

° Has the institution established that their transaction processing order is necessary for sound business reasons and is not manipulated so as to maximize fees?

9. The institution monitors and, where necessary, mitigatescredit, litigation, reputational, safety and soundness, andother risks, as appropriate.18

10. The institution complies with Regulation E requirementsrequiring institutions to provide notice and a reasonableopportunity for customers to opt-in to the payment ofATM and one-time POS overdrafts for a fee and does notsteer frequent users of fee-based overdraft products to opt-in to these programs while obscuring the availability ofalternatives (raising safety and soundness concerns aboutpotentially unsustainable consumer debt, as well aspotential fair lending and UDAP concerns).

11. The institution is consistent in its application of overdraftfee waivers, in light of applicable fair lending statutes andregulations.

In addition, an institution in its discretion may choose or elect to implement further risk mitigation efforts. If an institution decides to implement such activities or practices, examiners should weigh these further efforts in evaluating the overall effectiveness of an institution’s compliance management system and evaluate whether an institution’s overdraft program and practices are consistent with the expectations set out in the 2010 Supervisory Guidance. Examples of additional efforts that mitigate risks include the following:

1. The institution has an appropriate process in place foreliminating overdraft fees for transactions that overdrawan account by a de minimis or very low amount.19

Examples of possible de minimis limits that could beimplemented include: transaction amounts of less than$10, or an institution could decline to charge overdraftfees for transactions that overdraw an account by less than$10.

2. The institution has effectively employed cost effective,existing technology, as appropriate, to alert customerswhen their account balance is at risk of generating a feefor NSFs.

3. The institution has provided information to customersabout how to access free or low-cost financial educationworkshops or individualized counseling to learn how tomore effectively manage personal finances. Small or ruralinstitutions may want to consider using Web-basedresources or referrals to reputable, non-profitorganizations.

18 Compliance examiners should consult with Risk Management examiners, as appropriate, where safety and soundness concerns are identified.

19 If a fee is charged such a fee should be reasonable and proportional to the amount of the original transaction.

Appendix Page 16



4. The institution has appropriate policies and procedures in place for allowing customers to decline overdraft coverage (i.e., opt-out) for non-electronic transactions (meaning transactions that are not subject to the Regulation E opt-in requirements), such as paper checks, automated clearing house transfers and recurring debits, and honor an opt-out request.20 ° It is recommended that institutions consider occasional

communications to remind customers of available options to terminate overdraft coverage.

5. The institution has appropriate policies and procedures in place for reminding their customers, especially chronic or excessive users of overdraft programs, that even if they have chosen to opt-in to the payment of ATM and one-time POS overdrafts for a fee, at any time they can still choose to opt-out of ATM and one-time, POS overdraft programs.

Expanded Review for Ad Hoc Programs or Practices

For ad hoc programs or practices, if unacceptable risks are identified on an exception basis during the Management and Policy-Related review, examiners should consider whether the institution’s ad hoc payment practices require closer review. For example:

• When weaknesses or other risks are discovered that may indicate that ad hoc programs or practices are not in compliance with existing laws and regulations; and/or

• When red flags are raised indicating potential reputation, compliance, and litigation risks regarding certain practices, such as check clearing practices designed to maximize overdraft fees, examiners should consider inquiring about: ° The nature of the red flag; ° Why the issue occurred; and ° How the institution oversees and manages such issues,

including a potential review of policies and procedures.

Overdraft Payment Program Supervisory Guidance Frequently Asked Questions

FDIC staff has developed the following Frequently Asked Questions (FAQs) and answers in response to questions from supervised institutions and third-party vendors about the FDIC’s Overdraft Payment Supervisory Guidance issued in November 2010 (FIL-81-2010) (Guidance). The responses represent the views and opinions of FDIC staff regarding incorporation of the Guidance into the examination process.

20 Revised Regulation E provides consumers with an ongoing right to rescind

their prior opt-in to coverage of ATM and one-time POS overdrafts.

I. Defining Automated and Ad Hoc Programs

1. How does an “automated” overdraft payment program differ from “ad hoc” overdraft payment practices?

Automated overdraft payment programs typically rely on computerized decision-making, and use pre-established criteria to pay or return specific items. There is little to no case-by-case review and decision-making with respect to an individual customer or item.

By contrast, ad hoc practices typically involve the exercise of bank employee judgment in making a specific decision about whether to pay or return an item. This is done as an accommodation and based on the employee’s knowledge of a particular customer.

2. Do the specific supervisory expectations about customer contact apply to ad hoc overdraft payments?

No. The FDIC’s November 2010 Guidance is focused on assisting institutions in identifying, managing, and mitigating the particular risks posed by automated overdraft payment programs. Ad hoc overdraft payments have been authorized by banks for years as an accommodation based on specific considerations and knowledge of a particular customer, and they have generally not been the subject of the type of product over-use concerns that can be associated with automated overdraft programs. Consequently, the specific supervisory expectations set out in the Guidance regarding customer contact for excessive or chronic users of automated overdraft payment programs do not apply to ad hoc overdraft practices.

3. Should institutions monitor and manage risks associated with ad hoc payments of overdrafts?

Yes. While the Guidance’s specific supervisory expectations relate only to automated overdraft payment programs, institutions that authorize overdrafts on an ad hoc basis should manage potential reputational, compliance, and litigation risks regarding certain overdraft payment practices, such as check clearing practices designed to maximize overdraft fees. In addition, the Guidance provides updated information on the laws, regulations, and other guidance that apply to all types of overdraft payment practices and programs.

II. Excessive Use and Meaningful Follow-Up

1. The Guidance states that FDIC-supervised institutions should monitor programs for excessive or chronic customer use, and if a customer overdraws his or her account on more than six occasions where a fee is charged in a rolling twelve-month period, undertake meaningful and effective follow-up action. What is an “occasion” where a fee is charged?

Appendix Page 17



An “occasion” occurs each time an overdraft transaction generates a fee. For example, this would include a per-transaction overdraft fee or a daily fee for an outstanding overdraft status. As a result, potentially more than one “occasion” can occur per day. If three overdraft fees are charged as a result of three transactions (even if the fees are aggregated), that would constitute three occasions. If a fee itself triggers an overdraft, that event would count if a further overdraft fee is charged as a result.

By contrast, overdraft items paid where no fee is charged (for example, if a bank pays an item after a daily limit is met on overdraft items paid and the bank waives additional fees) would not be included. Thus, if four overdrafts occur in a day but the bank only charges three fees as a result of a per-day limit on fees charged, this would constitute three occasions.

2. What is meaningful and effective follow-up for chronic orexcessive use and how can an institution demonstrate it hasmade meaningful efforts to reach chronic or excessive usersof automated overdraft payment programs?

Meaningful and effective follow-up means that the institution has made reasonable efforts to provide the customer with information on alternatives to overdraft payment programs that may be better-suited to the individual’s need for short-term credit, as well as a clear mechanism for the customer to avail himself or herself of those alternatives. The key goal is to ensure that customers are able to make informed choices among available options to manage recurring needs for short-term credit. The FDIC will assess the institution’s level of effort to reach customers, the institution’s program for providing notice to customers of available alternatives, and the ease with which customers are able to select alternative products.

Institutions may employ a variety of techniques, based on individual customer profiles and general business practices, to contact excessive or chronic users of overdraft payment programs. For example, the institution’s overall approach could incorporate contacting a customer via telephone, in person, by mail, or through electronic notifications. Relevant factors include whether the institution:

• Has a regular program to inform excessive or chronicusers of overdraft usage and cumulative costs in aprominent or conspicuous fashion;

• Highlights availability of alternatives to overdraft paymentprograms that may be lower-cost or more appropriate; and

• Provides a clear and simple manner to contact theinstitution to discuss available alternatives.

The institution should be able to demonstrate that it monitors account usage, undertakes programs designed to address excessive or chronic use, and monitors its success in informing frequent users of overdraft payment programs of the high

cumulative costs of the program and the availability of less-costly or otherwise more appropriate alternatives.

Two examples of ways in which an institution could demonstrate meaningful and effective follow-up regarding excessive or chronic users of overdraft programs are to provide enhanced periodic statements or employ a targeted outreach approach. Specific information discussing meaningful and effective follow-up when utilizing these approaches is described in the attached Illustrations. Institutions may employ other approaches for engaging in effective and meaningful follow-up with chronic or excessive users.

III. Fee Limits and Maximizing Fees

1. What is an example of an appropriate daily limit onoverdraft fees?

Daily limits can help prevent a customer’s individual lapse in financial management from triggering a cascade of overdraft fees, and will be reviewed as one possible element of the institution’s overall approach for addressing chronic or excessive use of automated overdraft payment programs. For example, some institutions have implemented limits on the number of transactions that will be subject to a fee (e.g., no more than three per day) or on total allowable fees (e.g., a specific maximum dollar amount of allowable fees per day).

2. What is an example of an appropriate de minimisoverdraft amount?

Institutions should consider the use of a de minimis threshold before an overdraft fee is charged in order to reduce reputational risk related to charging fees that are disproportionate to the item being cleared. For example, some institutions have implemented de minimis limits whereby they do not charge overdraft fees for underlying transaction amounts of less than $10, while some have declined to charge overdraft fees for transactions of any amount that overdraw an account by less than $10.

3. What is a reasonable and proportional overdraft fee?

As noted in FAQ # III.2 (de minimis), institutions may increase reputational risk when overdraft fees are significantly greater than the amount of the item being cleared. Institutions should review the amount charged for the overdraft payment compared to the amount of the underlying transaction that triggered the overdraft, and assess whether the charge is reasonable and proportionate in comparison. Institutions should consider de minimis limits to reduce the reputational risk of overdraft fees that are disproportionate to the cost of the underlying transaction.

Appendix Page 18



4. How can institutions and their third-party vendors work to process transactions in a manner that addresses risks identified in the Guidance?

Transactions should be processed in a neutral order that avoids manipulating or structuring processing order to maximize customer overdraft and related fees. Examples of a neutral order include order received, check number, serial number sequence, or other approaches when necessary based on sound business justification.

Re-ordering transactions to clear the highest item first is not considered neutral because this approach will tend to increase the number of overdraft fees. By contrast, processing batches of transactions in a random order or order received is a neutral approach; however, institutions should not arrange the order of types of transactions (i.e., batches) cleared in order to increase the number of overdrafts and maximize fees.

IV. Other Questions 1. Is an institution required to provide new alternatives to automated overdraft payment programs?

No. Banks are not required to develop new products in response to the Guidance. However, most banks offer some form of short-term alternative, including lines of credit, fixed-term small dollar loans, and linked savings accounts, and the FDIC encourages institutions to provide linked accounts or responsible, short-term credit products (such as those offered under the FDIC’s small dollar loan pilot). Banks are expected to inform excessive or chronic users of overdraft payment programs about alternative products that the institution has available for its customers, and to make these programs available to customers that qualify. Such products may qualify for CRA consideration under the service or lending tests.21

2. Is an institution required to terminate or suspend a customer’s access to the automated overdraft payment program if the customer engages in chronic or excessive use?

No. Institutions are expected to monitor usage and engage in meaningful and effective follow-up to inform excessive users of available alternatives. However, as discussed in the Guidance, a number of risks are associated with chronic or excessive use of automated overdraft programs, including reputational, compliance, safety-and-soundness, and litigation risks. If such risks are identified during the course of an institution’s monitoring and oversight of an automated

21 See Affordable Small Dollar Loan Guidelines, FIL-50-2007 (June 19,

2007), available at: http://www.fdic.gov/news/news/financial/2007/ fil07050.html, and Interagency Questions and Answers Regarding Community Reinvestment, 75 Fed. Reg. 11642 (Mar. 11, 2010), available at: http://www.ffiec.gov.

overdraft program, institutions should take appropriate action to mitigate risks, as has been the case in the past.

3. The Guidance states that the FDIC believes institutions should allow customers to decline overdraft coverage (i.e., opt-out) for payment of overdrafts resulting from non-electronic transactions such as paper checks or automated clearing house (ACH) transfers. Can you clarify to which transactions this recommendation applies?

To promote consumer choice and awareness, institutions are encouraged to permit customers to decline overdraft coverage (i.e., opt-out) for transactions that are not subject to the Regulation E opt-in requirements, including checks, ACH transactions and recurring debits. As part of an institution’s on-going relationship with its customers, the FDIC recommends that institutions consider occasional communications to remind customers of available options to terminate overdraft coverage.

4. How can small or rural institutions provide information about financial education?

In addition to educational resources identified in the Guidance, institutions may want to consider using Web-based resources or referrals to reputable, non-profit organizations.

5. When are institutions expected to have reviewed and responded to the Guidance?

As stated in the Guidance, the FDIC expects that institutions will have approved, responsive compliance and risk management action plans, policies and procedures by July 1, 2011.

Meaningful and Effective Follow-Up Illustrations

The following information is provided to illustrate two examples of ways in which institutions may demonstrate meaningful and effective follow-up with excessive or chronic users of overdraft payment programs.

An enhanced periodic statement approach would involve augmenting existing, required disclosures for overdraft fees under Regulation DD (Truth in Savings), which requires disclosure of the total amounts of fees charged for overdrafts during the statement period and calendar year-to-date, by prominently highlighting how excessive or chronic users of automated overdraft programs could contact the institution to discuss available alternatives, and encouraging meaningful and effective contact.

A targeted outreach approach would involve contacting excessive users in person or via telephone to discuss less costly alternatives to automated overdraft payment programs.

Appendix Page 19




Approach #1: Enhanced Periodic Statements

If an institution chooses to take an enhanced periodic statement approach that augments the requirements of Regulation DD for overdraft fees charged during the current statement period and calendar year-to-date, and if a customer incurs more than six overdrafts in a rolling twelve-month period, an institution could include a message on the periodic statement that describes how the customer could contact the institution to discuss alternative options. An effective approach could be to include the name or names of specific employee(s) who have knowledge of alternative credit products for which the customer might qualify and are able to assist the customer in determining whether he or she qualifies for them. For example, the following statement could be used: “You have been paying multiple overdraft fees and there may be cheaper alternative products that may be better suited for your needs. Please call [name of employee] at xxx-xxx-xxxx to discuss other options with a customer service representative or visit us at your local branch.”

Under this approach, it would be reasonable for an institution to continue to send enhanced periodic statements to a customer for as long as the customer continues chronic or excessive usage.

Approach #2: Targeted Outreach

If an institution chooses to take a targeted outreach approach, an institution would initiate outreach within a reasonable time period (e.g., 30 days) when a customer incurs more than six overdrafts in a rolling twelve-month period, to discuss overdraft usage and available alternatives to the overdraft payment program. If a customer decides to remain in the automated overdraft payment program, the institution should also engage the customer to determine the customer’s preferences for future contact regarding participation in the automated overdraft payment program. Absent an indication of customer preference regarding subsequent contact, a targeted outreach approach would involve contacting a customer whenever there is a cycle of repeated, excessive use (e.g., subsequent occurrences of more than six overdraft occasions where a fee is charged in a rolling twelve-month period).

References FIL-81-2010: Overdraft Payment Programs and Consumer Protection: Final Overdraft Payment Supervisory Guidance

FIL-11-2005 Overdraft Protection Programs Joint Agency Guidance

FIL 44-2008 Third-Party Risk: Guidance for Managing Third-Party Risk

FDIC Industry FAQs (April 1, 2011

Appendix Page 20







Appendix Page 21

Comptroller’s Handbook 42 Deposit-Related Credit

Appendix B: Checklist for Deposit Advance Products

Yes No Examiner comments

Does the bank monitor for repeated or extended use of DAP credit?

Are eligibility and underwriting criteria designed to assure that the extension of credit, including all associated fees and expenses, can be repaid according to its terms while allowing the customer to continue to meet typical recurring and other necessary expenses, as well as other outstanding debt obligations?

Does the bank maintain appropriate criteria to prevent churning and prolonged use of DAP credits?

Does underwriting for DAP credits occur prior to opening such accounts and does monitoring occur on an ongoing basis?

Are bank policies regarding the underwriting of DAPs written and approved by the bank's board of directors and consistent with the bank's general underwriting standards and risk appetite?

Do written underwriting policies for DAPs include:

The length of a customer's deposit relationship with the bank(no less than six months)?

Ineligibility for DAPs for customers with delinquent oradversely classified credits with the bank that is offering theDAP?

An analysis of the customer's financial capacity includingincome levels?

An analysis of the customer's account for recurring deposits(inflows) and checks/credit/customer withdrawals (outflows)over at least six consecutive months?

The exclusion of items from lines of credit, includingoverdrafts, and drafts from savings, from inflows (these itemsshould not be counted as inflows)?

Consideration of the customer's net surplus or deficit at theend of each of the preceding six months without reliance on asix-month transaction average?

A cooling off period of at least one monthly statement cycleafter the repayment of a DAP should be completed beforeanother advance may be extended in order to avoid repeateduse of the short-term product?

A full underwriting reassessment in compliance with the bank'sunderwriting policies before determining whether the amountof credit available to a customer can or cannot be increased?

That any increase in the credit limit should not be automaticand should be initiated by a request from the customer?

As part of the underwriting for this product, that the bankshould, no less than every six months, reevaluate thecustomer's eligibility and capacity for this product?

Appendix Page 22

http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/drc-checklist.docx



That a bank should identify the risks that could negativelyaffect a customer's eligibility to receive additional DAPs (suchas repeated overdrafts or evidence that a customer isoverextended with respect to total credit obligations)?

Higher capital requirements generally apply to credit portfolios that exhibit higher-risk characteristics and are subject to less stringent credit underwriting characteristics. How does the bank arrive at the capital level held for the DAP portfolio?

Fees associated with DAPs should be based on safe and sound banking principles. What fees or fee structure does the bank utilize for DAPs and does it appear reasonable?

Does the bank monitor for any undue reliance on fees generated by DAPs for its revenue and earnings? If it does monitor for undue reliance on fees, how does it monitor and how frequently does it monitor for undue reliance on fees?

Is the ALLL adequate for estimated credit losses for the DAP portfolio?

Does the bank have methodologies and analyses in place to demonstrate and document that the level of the ALLL is appropriate?

Has the bank implemented effective compliance management systems, processes, and procedures to mitigate risks appropriately?

Is the bank in compliance with applicable consumer protection statutes and regulations, including TILA, EFTA, TISA, ECOA, and Section 5 of the FTC Act?

In the review of a bank's relationships with third parties involved in the bank's DAP, is the bank assuming more risk than it can identify, monitor, and manage?

Has bank management allocated sufficient and qualified staff to monitor risks posed by third-party relationships, excessive usage by customers, and excessive risk taking by the bank?

Have examiners identified high-risk situations associated with third-party relationships that necessitate examiners conducting on-site third-party reviews under specific authorities granted to the OCC?

Has bank management established controls and implemented a rigorous analytical process to identify, measure, monitor, and manage the risks associated with DAPs?

Does the bank maintain adequate oversight of DAPs and adequate quality control over products and services to minimize exposure to potential significant financial loss, reputation damage, and supervisory action?

Does the bank's compliance management system ensure continuing compliance with applicable federal and state laws, and regulations, as well as internal policies and procedures?

Has management provided the appropriate oversight and allocated sufficient and qualified staff to monitor deposit advance programs?

Appendix Page 23




Are results of oversight activities, including identified weaknesses that should be documented and promptly addressed, reported periodically to the bank's board of directors or designated committee?

Appendix Page 24


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Estimate and Closing Disclosure Asset size threshold for exclusion from mandatory escrow

beginning January 1, 2016 Escrow and force placed insurance Flood insurance escrow highlights Avoiding “OOPS” in Your Overdraft Protection Programs Recording Now Available – Aired On: Tuesday, August 25, 2015 Overdraft Protection (ODP) programs conjure images of sunburned bodies on the rocky beach of supervisory focus in today’s regulatory landscape. Make sure you have plenty of sunblock to manage the heat that comes along with too much ODP exposure. We’ll take a deep dive into the applicable regulatory requirements and recent enforcement actions. Get tips on how to successfully walk the fine line between offering consumers a cost-effective

program and encouraging reckless behavior that a small portion of your depositors who are willing to live well beyond their means. This briefing will also provide you with helpful suggestions on how to actively manage the legal, compliance, operations and reputation risk that accompanies ODP programs today. This briefing will cover: Ad hoc decision making, lines of credit, overdraft bounce free

protection, and other ODP programs Electronic Funds Transfer Act (EFTA) Reg E Opt-in

Requirements Truth in Savings Act (TISA) Reg DD Disclosures and Rules Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) and

Fair Lending Implications Recent enforcement actions Who Should Attend? Risk Managers and Auditors Compliance Officers and

Managers Chief Lending Officers Mortgage Lenders

Mortgage Loan Managers

Operations Managers Credit Managers Senior Bank Managers

Registration/Site License Fee PER Briefing Purchased ABA/ICB Member/Service Member: $265 Non-Member: $395 These ABA Briefings include streaming audio over the Internet, where an unlimited number of listeners can participate in one room. Audio over the telephone can be provided as an alternative. Any transmission, retransmission or publishing of these briefings is strictly prohibited. Register Today! Register online at www.aba.com/briefings or call 1-800-BANKERS (1-800-226-5372). Continuing Education Credits? These programs are being reviewed for continuing education credit eligibility. Questions? Contact Linda Shepard at [email protected]. Or, call 1-800-BANKERS (1-800-226-5377).

http://www.aba.com/briefings


Documents

Avoiding “OOPS” in Your Overdraft Protection Programscontent.aba.com/briefings/3012594.pdf · Avoiding “OOPS” in Your Overdraft Protection Programs Tuesday, August 25, 2015