New federal guidance on "overdraft protection programs"
The Federal Deposit Insurance Corporation, the National Credit Union Administration and the other federal agencies that regulate financial institutions have issued a joint guidance dealing with so-called "overdraft protection programs" offered to customers.
The guidance makes clear that it does not refer to traditional overdraft lines of credit, but to a relatively new product often called "overdraft protection." The following are typical characteristics of such product, as pointed out in the guidance:
overdraft protection is featured as part of the deposit account;
the institution performs no credit underwriting;
overdrafts are paid up to an aggregate limit, typically from $100 to $500;
many times payment of the overdraft is discretionary on the part of the institution;
the service may extend beyond checks, to automated teller machine, debit cards, pre-authorized automatic debits and other similar types of transactions;
a flat fee is charged for each item paid, plus a daily fee for each day the account remains overdrawn;
- some institutions offer repayment plans to pay the overdraft in installments.
The federal agencies are concerned that customers may receive an incorrect impression with respect to the nature of the program: "Some institutions have promoted this credit service in a manner that leads consumers to believe that it is a line of credit by informing consumers that their account includes an overdraft protection limit of a specified dollar amount without clearly disclosing the terms and conditions of the service, including how fees reduce overdraft protection dollar limits, and how the service differs from a line of credit." The guidance adds: "These overdraft protection programs may be promoted in a manner that leads consumers to believe that overdrafts will always be paid when, in reality, the institution reserves the right not to pay some overdrafts."
The guidance indicates that financial institutions offering the service should adopt written polices and procedures that address the credit, operational and other risks inherent to it, including establishing express customer eligibility standards and overdraft limit criteria. Other items that should be addressed in the policy are timeframes to pay off overdraft balances and procedures for the suspension of the service.
The programs must also comply with federal laws, among them:
Federal Trade Commission Act advertising rules, which prohibit unfair or deceptive acts or practices;
Truth in Lending Act, pursuant to which lenders must provide borrowers with disclosures about the cost of the credit;
Equal Credit Opportunity Act, which prohibits discrimination;
Truth in Savings Act, that mandates disclosures regarding fees imposed on deposit accounts;
- Electronic Fund Transfer Act, that regulates electronic transfers of funds.
The federal agencies list a number of practices that they recommend be followed by institutions offering overdraft protection programs:
Do not encourage routine or intentional overdrafts. The program should only be marketed to cover inadvertent overdrafts.
Inform customers of other products available, such as overdraft lines of credit.
Specify if payment of an overdraft is discretionary on the part of the institution.
Do not promote "free" accounts and overdraft protection programs in the same advertisement, in a manner that suggests that the overdraft program is free of charges.
Clearly disclose program fees.
Alert customers that fees charged will reduce the overdraft limit.
Alert customers that checks may not be processed in the order received.
Specify which transactions trigger the program, e.g., checks, ATM withdrawals, etc.
Allow customers to opt-out of the program.
Prominently distinguish account balances from overdraft protection funds availability.
Notify customers when they trigger the program: date of the transaction, type of transaction, overdraft amount, fee and amount necessary to return the account to a positive balance.
Monitor excessive usage.
Do not report negative information to credit reporting agencies when overdrafts are paid.
© 2005 Goldman Antonetti