FDIC Final Overdraft Payment Supervisory Guidance

Final Overdraft Payment Supervisory Guidance

On November 24, 2010, the FDIC issued its Financial Institution Letter on Overdraft Payment Programs and Consumer Protection Final Overdraft Payment Supervisory Guidance (FIL-81-2010).

The guidance sets out the agency's expectations for how its supervised institutions should prudently oversee their overdraft payment programs. It advises institutions to mitigate risks, incorporate the 2005 Joint Guidance on Overdraft Protection Programs into their overdraft program operations and provides specific guidance with respect to automated overdraft payment programs. 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.

As a Pinnacle Financial Strategies client, you have the benefit of an overdraft privilege program that already, for the most part, reflects the guidance in this FIL, and we are developing a new solution that will help you address the FIL intent to educate and protect consumers.

The FDIC expects you to:
Provide clear, meaningful disclosures and communications about program features, fees, Reg E opt-in requirements, the right to opt-out at any time, and alternatives to overdraft privilege.

Pinnacle's response:
Clear customer communication has always been an essential part of Pinnacle's programs. As part of our partnership, we've provided you the training, letters, disclosures, brochures and tools to communicate fully and effectively with your customers, at account opening, whenever an overdraft occurs and whenever your account holders have questions about your program. Promptly honor customers requests to opt-out of your overdraft privilege program.

Promptly honor customers' requests to opt-out of your overdraft privilege program.

We advised you to inform account holders, at account opening and any time they ask, of their right to opt-out of your program at any time and to honor their requests expeditiously as a matter of good customer service.

Train your staff to fully explain your overdraft privilege program and alternatives to it that are available to customers.

When we implemented your program, one of the critical factors was ensuring that all officers and employees attended our training so they can explain and represent your ODP program and the alternatives you offer. We provided training for your employees at implementation. With our Mystery Shopping services you can validate, at any time, that your staff understands and accurately explains your overdraft privilege program, including opt-in requirements, the right to opt-out at any time, and any alternatives to the overdraft privilege service you offer.

Consider eliminating overdraft fees for minimal or small overdrafts.

Again, this is consistent with our guidance on successful program operation. At implementation, we recommended that you establish a tolerance limit to avoid charging fees for minimal overdrafts.

Institute daily limits on overdrafts by either limiting the number of transactions subject to the fee or by capping the fees paid per day.

Our Critical Success Factors include removing any daily overdraft fees and assigning a daily cap on the number of items for which your institution charges an NSF or OD fee.

Ensure check-clearing procedures avoid operating in a way that maximizes overdrafts.

At implementation we advised you to retain your current posting sequence and not to increase your current NSF fee. We also recommended that you set up your ODP limit as the final option for those account holders who have overdraft lines of credit and/or sweep accounts. Again, nothing new for your Pinnacle overdraft privilege program.

Prominently distinguish account balances from available overdraft privilege limits (Reg DD).

At implementation, your Client Services Manager worked with you to test all communication points to ensure proper communication of inquiry balances and access balances to your account holders.

Monitor overdraft privilege program operations in light of applicable laws and regulations, and mitigate credit, legal, reputational, safety and soundness, and other risks as needed.

When you implemented Pinnacle's ODP program, we advised you to maintain written policies and procedures to manage risk, to formally evaluate any third-party vendors to ensure compliance with current laws and regulations, to routinely monitor accounts and program activity especially for excessive usage, and to track account holder comments and concerns. Your Pinnacle ODP program notifies account holders when their accounts are overdrawn prior to suspension of their overdraft privilege and, in most cases, automatically suspends the privilege when accounts are overdrawn for 30 consecutive days.

Consider using cost effective, existing technology to alert customers of the potential for an overdraft.

Our Critical Success Factors recommend that anytime customers will create an overdraft at an ATM, your system, when capable, allows them to cancel the transaction.

Provide customers, especially "excessive" users, information on financial education that can help them better manage their checking accounts.

We will offer institutions our "Checking Navigator" turnkey solution, designed to help all consumers better understand how to effectively manage their checking accounts and choose the right overdraft coverage for them.

If you have implemented and maintained your ODP program consistent with our Critical Success Factors and the recommendations of your Client Services Manager, there are only two elements of the new Supervisory Guidance that are new to your program.

  1. Board of directors review of ODP programs, including an annual review of the ODP program's key features.
  2. The interpretation of "excessive or chronic customer use" as an account holder overdrawing "his or her account on more than six occasions where a fee is charged in a rolling twelvemonth period" which requires meaningful and effective follow-up action to include, for example, contacting the customer (e.g., in person or via telephone) to discuss less costly alternatives such as a linked savings account or line of credit, or a small dollar loan arrangement; and giving the customer a reasonable opportunity to consider continuing ODP coverage or choosing an available alternative.

While our Critical Success Factors that address routinely monitoring program compliance, maintaining appropriate documentation and producing and reviewing reports on ODP program performance do not specifically include an institution's board of directors, we believe this to be simply a prudent business practice. We will be revising our Critical Success Factors to incorporate this aspect of the guidance and to address what we view as the intent of the FDIC for board review in areas like account holder communication and education, excessive usage, risk mitigation, and program features and operations.

The issue of the interpretation of and response to excessive use is a bit trickier.

More than six occasions of overdrawing an account

How does an institution determine when an account holder has overdrawn his or her account "on more than six occasions where a fee is charged in a rolling twelve-month period?" Our interpretation of this trigger is that the initial transaction on a given day that overdraws the account is an "occasion" and any subsequent overdrafts that day merely increase the initial overdraft amount. Our rationale is that multiple overdrafts on the same day most likely result from a single error in the account holder's assumption of his or her available account balance and do not indicate that the account holder is using the service excessively.

Monitoring for excessive use in a rolling twelve-month period

Today, the industry does not have the technology to track "occasions" on a rolling twelve-month calendar. All tracking is done on a fiscal or calendar year basis depending on your core system. Unless your institution has custom code or a special software application, you will have to track "occasions" manually. When an account holder overdraws his or her account as described above more than six times, the guidance suggests that this is excessive usage. Excessive usage requires intervention on the part of the financial institution to communicate with the account holder about potentially less costly alternatives to overdraft privilege and to provide a reasonable opportunity to continue overdraft privilege coverage or choose an available alternative.

Meaningful and Effective Follow-up Action

While the guidance gives examples of in-person or telephone contact, it doesn't exclude mail or electronic communication to provide information on available alternative coverages and opt-out or opt-in choices. To be considered "meaningful and effective", the communication should be a straightforward, easily understandable message discussing alternatives and the ability to opt-out of coverage. The message should come from a senior bank officer with an invitation to call him or her or another specific knowledgeable customer representative, for further discussion. We recommend a follow-up telephone call if there is no response from the account holder within a reasonable period of time.

Once you have been in actual communication with the account holder and you have offered the choice between overdraft privilege and an alternative option, you must give the account holder a reasonable opportunity to decide.

While we are providing you with our assessment 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 keep you informed on the impact of any changes or revisions to the guidance that may occur between now and the July 1, 2011 effective date. Please contact your Client Service Manager or call our main office for additional information on our soon-to-be-available "Checking Navigator" solution or if you have any questions about your program under this new guidance.

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