The Overdraft Product Craze

Management may be excited about the fee income opportunities with an overdraft product. In fact, fee income is the carrot that the vendors are using to sell the product. But think carefully before you jump in on this one. There are a lot of negatives that accompany the possible fee income.

First, the product does not treat the overdrafts as credit. There are therefore no Truth in Lending disclosures that go to the customer. The product developers have skated a very fine line to avoid the definition of credit. Increasingly, regulators (who don't like this product) are observing that this looks like credit and quacks like credit and it ought to be treated as credit. Credit treatment consequences could be severe. First, without disclosures, consumers have no real sense of what their overdraft is costing them. When they realize how costly the product is, there is likely to be consumer backlash. That usually means new regulations.

Second, if the overdraft product is treated by states as a credit product, the fees charged would have to comply with state usury laws.

Finally, there are serious concerns that the product encourages customers to bounce checks. The service assures customers that they won't suffer the consequences of returned checks. Actually, in most states, writing a check without the funds to cover the check may be a crime. The question becomes whether the customer intended to commit fraud. That could be a question of fact for a jury, but you don't really want your examiner deciding it. At best, the product leaves banks "encouraging" customers to write bad checks.

Copyright © 2002 Compliance Action. Originally appeared in Compliance Action, Vol. 7, No. 14, 12/02