In our last Regulatory Update to our clients dated March 9, 2011 regarding the Overdraft Payment Program Supervisory Guidance (FIL-81-2010), we identified the following three areas that appeared to warrant further clarification from the FDIC:
- Clarification of "more than six occasions" of overdrawing an account
- Monitoring for excessive use in a rolling twelve-month period
- Meaningful and effective follow-up action
We also identified additional questions that did not appear to have clear answers, but would potentially impact our clients' management of their overdraft programs. Those questions included:
- What impact will a high to low posting order have during a compliance or safety and soundness exam if this posting order is maintained for checks and ACH but ATM and POS items are posted first?
- How will daily or recurring overdraft fees be considered in relation to "occasions"?
- What length of time is considered "reasonable opportunity" for customers to decide how they would like their overdrafts covered in the future, if at all?
- How should additional overdraft items that can be covered under the limit be handled when they are presented while the customer is in his/her "reasonable opportunity to decide" period?
- How can financial institutions conform to the guidance when customers say they want to continue with their overdraft coverage but want the financial institution to stop contacting them?
On March 29, 2010 staff from the FDIC's Division of Depositor and Consumer Protection (DCP) hosted a teleconference to discuss the Overdraft Payment Program Supervisory Guidance (FIL-81-2010). FDIC staff provided an overview of the Guidance and discussed examination and implementation issues gleaned from their discussions with financial institutions. In addition they addressed some of the questions sent in by FDIC-supervised banks. The issues and questions noted in our last Regulatory Update as requiring further clarification were discussed during the teleconference and are included in the FDIC Overdraft Payment Program S upervisory Guidance Frequently Asked Questions document that was published after the teleconference and posted at www.fdic.gov/news/conferences/overdraft/FAQ.html on April 1, 2011.
In their review of the Guidance, FDIC staff reiterated that the Guidance is primarily targeted to automated overdraft programs. However, all financial institutions authorizing overdrafts, whether through an automated or an ad hoc approach, must manage potential reputational, compliance, and litigation risks regarding certain overdraft payment practices, such as check clearing practices designed to maximize overdraft fees.
The FDIC staff stressed that the Guidance is not a formal regulation and will not be managed as such, citing the need for financial institutions to have flexibility in managing their programs. Rather, they view the Guidance as "supervisory expectations" regarding mitigation of risk in furtherance of the FDIC's safety and soundness examination authority under the Federal Deposit Insurance Act.
One of the objectives of the Guidance is to ensure institution management and employees, including boards of directors, are fully aware of the potential risks associated with automated overdraft programs and have controls in place to mitigate those risks.
According to the staff, FDIC examiners are being trained on the Guidance with the stated objective of achieving consistency among examiners in the application of the Guidance. The staff gave no indication as to whether examination guidelines or guidance would be available to bankers.
Expectations of FDIC regulated banks
Board oversight and procedures
FDIC regulated banks with automated overdraft payment programs are clearly expected to have plans, policies and procedures that address excessive use, customer communication and overdraft payment program administration in place by July 1, 2011. Absence of these plans, policies and procedures may raise "red flags" in an examination and could result in an "expanded review" of the risk management of an ODP program. Bank Boards of Directors should be aware of and periodically review key elements of their overdraft programs.
Management of fees
An important clarification by the FDIC staff regarding fees is that an NSF fee charged for returning an item is not a fee covered by the Guidance, is not prohibited and does not count in the computation of excessive usage. The Guidance, as it relates to fees, is specific to overdraft (OD) fees, or fees for paying items that result in or increase a negative balance.
An effective key to mitigating the reputational and litigation risks associated with overdraft programs is by managing the OD fees associated with such programs. The Guidance recommendations are similar to Pinnacle's Critical Success Factors.
- Place appropriate daily limits on the number of OD fees that will be assessed, either by limiting the number of fees that can be assessed in a day or by limiting the total dollar amount of fees that can be assessed in a day.
- Provide a tolerance on de minimus overdraft amounts based on a transaction amount or an end-of-day balance.
- Charge fees that are reasonable and proportionate to the transaction amount.
- Process transaction in a neutral order or in an order not designed to maximize overdraft fees. For example, posting in serial or sequence number order, or posting in batches as long as the batches are not arranged and processed in a manner designed to increase overdraft fees. The FDIC views re-sequencing transactions to a high to low order as an attempt to maximize overdraft fees.
FDIC staff also noted in the teleconference that institutions should carefully consider the practice of paying overdrafts for customers who have opted out of their overdraft privilege programs. The FDIC staff stated that it is their belief that customers who have opted out of the program reasonably believe they will not incur OD fees for paid items. They encouraged banks to tread lightly and carefully when considering whether to charge OD fees if items are being paid as a courtesy to these customers. However, the FDIC made clear that NSF fees for returned items of such customers is permissible.
Excessive or chronic use
The Guidance defines "excessive or chronic use" as a consumer using overdraft privilege on more than six occasions in a rolling 12-month period ("+6/12 mark"). An "occasion" is defined as an overdraft item that is paid and charged a fee. Additionally, each subsequent fee that is assessed in relation to the original charged item, such as a daily or recurring fee, is considered an occasion.
Note: An NSF fee for returning an item is not a fee covered by the Guidance, is not prohibited and does not count toward the "+6/12 mark".
Meaningful and effective follow up
The Guidance requires financial institutions to take steps to have meaningful and effective follow up with excessive, or chronic, users of overdraft privilege. FDIC staff indicates this follow up should take place within a "reasonable period of time" after the customer hits the "+6/12 mark". According to FDIC staff, they consider a reasonable time generally to be within 30 days of the customer hitting the "+6/12 mark".
Each time meaningful contact has been made with the customer, the rolling 12-month period is reset.
Meaningful and effective follow-up means that the institution has made reasonable efforts to provide customers with information on alternatives to overdraft payment programs that may be better-suited to their needs, as well as a clear mechanism for customers to avail themselves of those alternatives. The key is to ensure that customers are able to make informed choices among available options to manage their finances.
The FDIC supports two approaches to alert customers to seek less expensive alternatives to overdraft privilege. They are the Enhanced Periodic Statement and Targeted Outreach approaches.
Enhanced Periodic Statement Approach
Institutions should consider using customer communication tools already in place. For example, statement messages used in conjunction with the Reg DD required disclosure of statement cycle and year-to-date overdraft fees paid may help educate or prompt customers to contact a knowledgeable employee of the financial institution to discuss overdraft protection options. The FDIC Overdraft Payment Program Supervisory Guidance Frequently Asked Questions document implies the statement message would appear on the statements of those customers meeting the "excessive use" criteria ("+6/12 mark") and would be repeated as often as the customer meets those criteria.
Targeted Outreach Approach
Targeted outreach involves contacting "excessive users" in person or via telephone to discuss alternatives to overdraft payment programs.
- Communication may be effectively delivered by telephone, in person, by mail or electronically, such as via text messages.
- If communication is not with customers personally, institutions should provide customers with a clear and simple manner for contacting bank employees who are fully knowledgeable about their overdraft privilege programs and the alternatives available to their customers so meaningful discussions can be held and customers can make informed choices.
- After the first contact future contacts should be made each time the customer again reaches the +6/12 threshold unless the customer has previously indicated a preference to discontinue future contacts and has not revoked that preference.
Banks are not required to develop new alternative products to overdraft privilege programs in response to the Guidance. However, many banks already do offer some form of short-term alternative, including lines of credit, fixed-term small dollar loans, and linked savings accounts. Banks are expected to inform customers of these services and make them available if the user qualifies.
The FDIC will assess an institutions level of effort to reach its customers who reach the "+6/12 mark", the institution's program for providing notice to customers of available alternatives, and the ease with which customers are able to select alternative products. While no specific format for documenting or recording customer contact and discussions was prescribed by the Guidance, FDIC staff indicates the financial 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 customers who use overdraft payment programs frequently of the high cumulative costs of the program and the availability of alternative programs or services.
Managing accounts with excessive use
There is currently no expectation that institutions will remove customers from overdraft privilege programs or stop charging OD fees during the 30 day period after customers have reached the "+6/12 mark", as long as efforts to have meaningful contact with the customers are taking place.
The FDIC staff stated the Guidance is not suggesting that banks go beyond the requirements of current laws and regulations. As a result, they cannot expect banks to have all customers opt-in for overdraft coverage for transactions not covered under Reg E (ATM and everyday debit card transactions). However, customers should be permitted to opt-out of overdraft privilege programs and banks should consider periodically reminding customers who reach the "+6/12 mark" of this option.
Many smaller or rural banks do not have the same opportunities as large financial institutions to provide financial education. The FDIC staff responded that web-based training is an acceptable option under the Guidance. Pinnacle's new "Checking Navigator" provides this type of web-based financial education.
As we have noted in previous updates, the Guidance is focused on helping institutions operate overdraft payment programs as they are intended to protect consumers against occasional errors, funds shortfalls or emergencies. Clients who are following our Critical Success Factors in managing and administering their overdraft privilege programs have the benefit of providing a service that already, for the most part, reflects the expectations outlined by the FDIC. And Pinnacle's new Financial Education Solution will help you address the FIL intent to communicate with, educate and protect consumers. Preview it at www.pinnstrat.com.
While we will continue to provide you our insights and recommendations on the guidance to help you prepare for the July 1, 2011 effective date, our recommendations or suggestions should be adopted only with the concurrence of your institution's legal and compliance advisors, and your board of directors.
We will continue to keep you informed on the impact of any updates, changes or revisions to the guidance that may occur between now and the July 1, 2011 effective date. Please contact your Client Service Manager if you have any questions about your program under the new Guidance.