Question & Answer

Question: We have a policy of providing overdraft protection but have done so on an informal basis. Now we are considering whether to use a formal agreement with customers. What regulatory issues should we consider?

Answer: Two regulations are at the top of the list. First, overdraft protection is credit. All of your documents, marketing practices, contract terms, and operations must comply with Regulations B and Z. One issue under Regulation B are whether the product is available on non-discriminatory terms and open to all qualified applicants. How you market and explain the product to customers is crucial. You should review carefully the requirements that you consider important for qualifying for such a credit line. Then review it for any discriminatory impact in your market. Be sure to advertise or promote the overdraft credit line product in ways that reach your entire market.

Second, changes in the program, such as reducing the amount of credit available or stopping the product, are adverse action. When these actions are taken, you must send the customer a notice explaining the action.

The overdraft line of credit would be an open end line of credit subject to Regulation Z disclosures. It would not be subject to the special rules for credit cards, simply the more basic open end disclosures. But this means initial disclosures, periodic statements, and attention to calculating APRs and the other technical realities of Z.

Finally, if the line could be accessed by debit card or at points of sale, the product should be reviewed for compliance with Regulation E. The notices and statements should include disclosures required by Regulation E.

Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 12 & 13, 10/97