Bounce Protection: The Issues Bouncing Around Bounce Protection

Some hot new products are wonderful ideas and come with complicated issues. Bounce protection is such a product. The bounce protection product is being sold as a generator of fee income. Because of the income potential, management tends to look at the product with excited anticipation of significant improvements to the bottom line. Unfortunately, improvements to the bottom line tend to come with compliance issues attached. Bounce protection is no exception.

Regulatory Concerns
The leading concern raised by examiners is the possibility that, in seeking to increase fee income, financial institutions may encourage customers to break the law. Strictly speaking, writing a check without funds to cover the check is a crime. Examiners think that encouraging customers to do this is not a great idea. Keep this concern in mind in considering a bounce protection program.

Regulators have also expressed concerns that the structure of some bounce protection programs may be predatory. The cost of the program to the customer and the advance notice to the customer are two problems that regulators have noted.

Notice
Advance notice to the customer is a key determinant between a predatory program (imposing the "service" with a high cost in fees to the consumer is generally considered a dirty trick) and one that is acceptable. Consumers should know, before it happens, what the institution will do if one of their checks isn't covered.

Notice is a basic component of all consumer protection laws. No matter how you implement this program, you should be sure that clear and conspicuous disclosures go to the customer before they incur any consequences. Regulators get most upset when they see bounce protection imposed on customers who were unaware of the program and its costs.

The best practice is to treat this program as a change in terms for purposes of Truth in Savings. This means a clear change in terms disclosure with attention drawn to the change - i.e., the bounce protection and its costs.

A corollary of disclosure is that you shouldn't try to fool anyone - not mother nature and certainly not your customer. If you implement a bounce protection program, do so only after sending notices to affected customers that are clear. The notices should explain both how bounce protection works - you are free to tout benefits - and the cost to the consumer. When it comes to cost, total honesty is required.

Costs
The specter of predatory practices rises from the costs to the consumer, particularly if the consumer doesn't know the costs are coming. The result may be a nasty surprise to the customer that some customers won't take passively. They will call, complain and write letters - which is how new compliance laws always begin.

In addition to notice, the measurement of whether the practice is predatory lies in the cost to the consumer. Here is where the rubber hits the road. Management wants to implement the program for the fee income. Guess who is expected to pay that fee income?

Bounce protection can be a useful customer service or it can be a predatory consumer rip-off. Your job is to design and implement a program that benefits both your institution and the consumer - while avoiding practices that could be predatory.

There are several steps to take to evaluate the fairness of the program. These turn on the circumstances under which fees may be imposed on the customer and the reasonableness of those fees. Customers should have control of whether the fees are incurred. This means that if they knowingly bounce a check they know the fee consequences. Yes, we all make mistakes, but for the most part, the customer should understand the choices available when they are running the balance close to $0.

Second, assess the reasonableness of the fees in the context of the other choices available to the customer. In the case of a customer on a tight budget, they might be facing the choice of making a late payment on a credit card (and paying your late payment fee), obtaining a payday loan to make the payment, or bouncing a check using bounce protection or an overdraft line of credit. If you want CRA credit for whatever business decision your institution makes, you will know who the bounce protection customer candidates are, what their options are, the cost of those options, and why the service you offer them is their best option.

ACTION STEPS

Compare the cost to a customer of bouncing a check under your current services and pricing to the cost under bounce protection.
Take a hard look at the customers that bounce checks. Determine whether they fit any pattern, such as high income or low income.
Calculate the average period of time that an account stays overdrawn and what the bounce protection fees would be compared to your current fees.
Study the overall banking relationship of customers that bounce checks and look for alternative product options.
Review your deposit contracts and all account notices to compile a list of promises or disclosures you have already made to customers and what new disclosures would be required.
If you plan to offer bounce protection, develop a clear, informative notification procedure to advise customers about the costs of the plan and their options.
Don't force bounce protection on anyone.