Regulators Issue Joint Guidance on Overdraft Protection

The federal financial institution regulatory agencies recently issued final guidance on a product many institutions offer under the name "bounced-check protection" or "overdraft protection." These programs ensure that a customer's check or point-of-sale transaction will be covered up to a certain amount even when the account has insufficient funds. They are offered as an alternative to traditional ways of covering overdrafts, such as lines of credit or linked accounts, and banks typically charge
a fee.

The regulatory agencies acknowledged that customers want and accept such programs, but expressed concern about the way they've been marketed and handled. For example, the agencies said they feared some institutions have promoted overdraft programs in a way that might lead consumers to think the overdrafts are lines of credit or that actually encourage people to use the accounts.

For example, some institutions have suggested to customers the accounts might be used as an advance for an incoming pay check, the guidelines say. The guidelines outline penalties for disclosing or marketing overdraft dollar limits in a way that might lead consumers to believe they have a line of credit.

The guidance says that overdraft accounts also expose banks to more credit risk than overdraft lines of credit and other traditional overdraft programs. It mandates that institutions underwrite their overdraft protection programs and says those institutions should adopt written policies and procedures to address the risks involved.

The guidelines also outline how federal consumer compliance laws apply to such accounts including Federal Trade Commission advertising rules; Truth-in-Lending and Regulation Z; the Equal Credit Opportunity Act and Regulation B; the Truth in Savings Act; and the Electronic Funds Transfer Act.

The agencies also outline what they believe are best practices for handling such accounts such as:

• avoiding promotion of poor account management;
• providing clear explanation that overdrafts may be at the discretion of the institution;
• clearly disclosing that such accounts are not free and what the charges might be;
• clarifying that fees are included in the dollar limit
• clearly disclosing the types of transactions covered.

The final guidance reflects technical changes made to a proposed guidance issued in June 2004. For example, in response to comments, the final guidance extended the proposed charge-off period from 30 days to 60 days to provide consumers more time to repay the overdraft (credit unions, by law have a 45-day charge-off period).

Copyright © 2005 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 15, No. 3, 4/05