The CFPB and Overdraft Programs

The CFPB just announced its rule-making agenda for Fall 2015. Contained within its agenda the Bureau is preparing for a rulemaking concerning overdraft programs on checking accounts. A prior white paper and report by the Bureau highlighted a number of possible consumer protection concerns, including how consumers consent (or “opt in”) to overdraft coverage for certain electronic transactions, overdraft coverage limits, transaction posting order practices, overdraft and insufficient funds fee structures, and involuntary account closures. Regulations that took effect in 2010 require that consumers opt in before banks can charge overdraft fees for ATM and one-time debit card transactions, but opt in rates vary widely. In preparation for the rulemaking, the Bureau is conducting additional research and has begun consumer testing initiatives related to the opt in process.

Regulatory guidance “reaffirms” best practice documents issued by the major banking regulatory agencies. These documents provide specific risk-mitigation techniques expected to be implemented by regulated financial institutions. 

Herein are some specific risk-mitigation techniques from the FDIC guidance:

• The institution's Board of Directors must be involved with its ODP program. Expected; is regular oversight including an annual board review of an ODP program’s key features.
• Reviewing ODP advertising to minimize confusion and to promote responsible use.
• Monitor programs for excessive or chronic customer abuse. What is abuse? When a customer overdraws the account on more than six occasions where a fee is charged in a rolling twelve-month period. If and when that occurs, the bank must undertake “meaningful and effective” follow-up action, which may include, for example:

1. Contacting the customer to discuss less costly alternatives; and
2. Giving the customer a reasonable opportunity to decide whether to continue fee-based ODP coverage or choose another available alternative.

• Instituting appropriate daily limits on customer costs by, as an example, limiting the number of transactions that will be subject to a fee or providing a dollar limit on the total fees that will be imposed per day.
• Considering the elimination of overdraft fees for transactions that overdraw an account by a small amount.
• Considering the use of cost effective, existing technology, as appropriate (e.g., text message, e-mail, telephone or mobile phone) to alert customers when their account balance is at risk of generating a fee for non-sufficient funds.
• Reviewing check-clearing procedures and any third-party vendor to ensure they operate in a manner that avoids maximizing customer overdrafts and related fees through the clearing order.

The guidances will create downward pressure on ODP revenue streams.

If your credit union earns income from an ODP program, that income is now at risk. How much is at risk is yet to be determined, but one may want to consider the following.

• How much ODP income do you receive from smaller transactions. If the small dollar amount transaction cutoff for fees take effect, ODP fees from those transactions could go away. What is the impact?
• How much ODP income do you earn from consumers who are charged more than 6 ODP fees in any 12-month rolling period? If this applied to you, you’d have to reach out to them and show them alternatives. Let’s say only 10% of those consumers opted out of your ODP program. How much money would that be?
• Do you clear items from largest to smallest in terms of dollar amount? If you had to clear items based on the order received or by check number, how might that affect your income?
• Imagine you implemented a daily limit of $25 or $50 for ODP programs. How would that have affected your income?

Credit unions are member-centric organizations. It is recommended those credit unions with an ODP program begin to develop and deploy several of the risk-mitigation techniques above if they already have not. That said, it is widely anticipated many executives will be revisiting this area once again.

What you have just read was written by Edward Lis who is a former senior executive from the Credit Union industry.  If you enjoyed this article, please learn more about Edward by visiting www.cuadvisorygroup.com.