Preventing Bouncing Problems (Best Practices)

by Lucy Griffin, BOL Guru
Guru Bios

With the agencies' warnings about bounce protection programs come some best practices. Having ignored the agencies' earlier advice about bounce protection problems, it would be wise to pay careful attention to the best practices guidance that the agencies are now providing. Essentially, the best practices guidance represents what they expect a responsible industry member to do.

Best Practices: Bounce Protection

Marketing and Customer Expectations

Do not use marketing or account explanations to encourage customers to write overdraft checks. Customers should not intentionally write an overdraft check or make a regular practice of using the overdraft to "balance" their checking needs.
In all marketing materials, provide clear, accurate explanations of the product. Be sure that materials are not misleading. Both marketing materials and product explanations provided by staff should explain both the advantages and risks of the program.
Make sure all customers understand that the bank is not obligated to pay the overdraft, but has discretion in deciding whether to pay it. This is critical for customer understanding and use of the product.
Explain and disclose all costs and fees. Do not present the overdraft feature as part of a "free" account. Disclosures and explanations should include the dollar amount of fees, when and how they are incurred, when they are imposed, and the cost of a continuing overdraft. This should include a clear disclosure that there may be multiple fees for a single overdraft.
Disclosures and explanations should make clear that overdraft fees are part of the customer's overdraft limit.
Disclose when and how checks clear so that customers can understand how many checks may be subject to the overdraft fees.

Procedures

Establish clear policies and procedures for the overdraft program, taking into account all the issues raised by the agencies.
Establish clear policies and procedures for the order of paying and posting checks.
Establish clear procedures for ATM use that triggers overdraft fees.

Operations

Implement check clearing procedures to deliver the promises made in disclosures. Review operations systems periodically to be sure the policies and procedures are followed.
Establish policies and procedures for ATM use that may trigger the overdraft program. Test ATMs for compliance with the procedures. Include a process for alerting the customer if an ATM withdrawal will trigger the overdraft program and fees.
Ensure that all account balances clearly distinguish between the real account balance and the amount available in the overdraft line.
Notify customers promptly each time the overdraft program is used. Periodic statements should include the overdraft fees for the statement period and for the entire calendar year.
Monitor each customer's use of the overdraft program.

Training

All staff that will have responsibility for opening accounts, selling the overdraft product, or be called upon to answer questions should be trained to explain the overdraft feature, including risks as well as benefits, and the fact that the bank's choice to pay is discretionary.
Train operations staff on the terms and conditions of the overdraft program. Make operations staff aware that they are accountable for the accuracy of the program.

Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 7, 7/04

Editor's Note: These practices are advisable but institutions must also now be moving in the direction of compliance with the Reg. DD changes, as they will affect you. These changes are mandatory effective July 1, 2006. Details are here.