Reg Z: Bounce Protection v. Regulation Z

Bounce protection programs - those products put forward to banks as a significant generator of fee income - have come under the regulator's umbrella of concern. In its last Truth in Lending commentary update proposal, the Federal Reserve requested comments on whether the fees imposed in bounce protection programs should be included within the definition of credit and thus subject the programs to regulation under Regulation Z.

This request for comments comes on the coat tails of regulatory concerns. Many bounce protection programs are seen as predatory and/or deceptive. The programs have been carefully designed to avoid coverage by Regulation Z.

The imposition of a bounce protection program on unsuspecting consumers is the leading concern. Consumers may unwittingly trigger the coverage and incur significant costs before they realize what has happened.

Interestingly, there seems to be a consensus among regulators and consumer advocates that making these programs subject to Regulation Z may not be in anyone's best interest. The end result could be more harm than good. But don't get too excited about the program yet - consumers and regulators also share concerns.

When a bank shows the available bounce protection as an amount available for cash withdrawal, the bank is encouraging the consumer to overdraw the account. Some examiners also have concerns that such a program, if aggressively marketed, actually encourages consumers to bounce checks - not a good thing.We haven't heard the last of this yet. If your institution is looking seriously at a bounce protection program, give careful attention to how the program is marketed or introduced to consumers. Also look carefully at what information you give to the consumer. It should explain the real cost of using the protection.

Copyright © 2003 Compliance Action. Originally appeared in Compliance Action, Vol. 8, No. 4, 4/03