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Words (or the lack of them) CAN Hurt! Taking a Look at Overdraft Programs and UDAAP

By Cindy LeBlanc, CRCM 2 Aug 2017

Have you seen the commercial with the cowboy riding off in the sunset and the written words "THE END" knock him off his horse? Silly me, I laugh at that every time I see it. But the commercial has a good point; words (or the lack of them) can HURT. This can happen with the words used to communicate Overdraft Programs and it can really hurt a financial institution's bottom line when UDAAP knocks you off the horse.


Let's take a look at a few of these "hurtful words" and ways to avoid getting knocked off the horse.


Privilege, Protection, Program, Service or Coverage

When describing a discretionary overdraft program, many institutions refer to their program as protection. The word "protection" provides a false perception that all overdrafts will be paid when that is not the case. You would not want your home security "protection" to work only some of the time. Using the word program, service or coverage will provide a clearer description of the overdraft program and does not make false promises that all overdrafts will be covered. Also, emphasize in your disclosure that the service is discretionary. The emphasis on discretionary will provide a clear message that financial institutions are not required to/nor will they always pay all overdrafts.


Describing How Fees Are Charged

Stating fees for the overdraft service can also lead to UDAAP issues if those statements are not clear and consistent. If you state that a fee of $25.00 will be charged for an overdraft or returned item and then you make a decision to waive that fee for an account, you may be penalized for stating you will charge a fee but choosing not to do so. Even though you are providing a courtesy and giving credit relief to a consumer in an overdraft situation, it may still be considered a UDAAP. Therefore, we recommend using the words "up to" or "may" when describing the charge for the overdraft or returned item fees. For example "A fee up to $25.00 may be charged for an Overdraft or Returned Item". That way the financial institution has the discretion to waive the fee and is not locked into charging the fee every time. When describing the fees, don't refer to a returned item fee as an overdraft fee, call it what it is. Returned item fees and overdraft fees are two separate types of fees.


Another item to consider is the continuous daily overdraft fee. If your institution has implemented a continuous daily overdraft fee, you must take into consideration whether you are charging the fee on a non-banking day. Whether you begin charging on a non-banking day or charge a fee on any non-banking day, this could be a potential UDAAP as the consumer may not be able to cure on such a day. You must allow the consumer the opportunity to clear the overdraft before implementing the fee. Reviewing the institution's processing systems and monitoring the way fees are calculated and assessed to the accounts will mitigate risks and assist institutions in catching and resolving any discrepancies early on. 


NSF vs Returned Item fee

Although the commentary in Regulation DD speaks to both "Returned Items" and "NSFs", some examiners have expressed preference for the use of the descriptive phrase "Returned Items" rather than "NSFs". The phrase "Returned Items" is also required on the periodic statement Aggregate Overdraft Fee box. Providing consistency in naming fees and charges is necessary to ensure consumers understand for what they are being charged, thus risk of confusing or misleading the consumer is mitigated. 


Eligibility Requirements

When explaining your financial institution's specific Overdraft Program, you must include any eligibility requirements for inclusion in the program. Stating the account must be in "good standing" does not describe the financial institution's eligibility requirements. Using specific, directional words to define "good standing" will keep your institution a bit more steady in the compliance saddle. For example, must have three deposits post per month; must bring account balance positive at least once every thirty days; must be current on all outstanding loans with the account holding institution.


Conditioning Payments

Using the word "NO" in some situations can push a financial institution off the compliance horse immediately. Denying payments of overdrafts for checks, ACH transactions and other types of overdraft transactions because the consumer did not "opt in" to one time debit card and ATM overdraft payments is one example. This conditioning of payments is specifically prohibited by Regulation E. Financial institutions are required to apply the same criteria when decisioning overdrafts for all consumer accountholders, regardless of whether the consumer has opted in or opted out to one time debit card and ATM overdraft payments. Taking this one step further, the financial institution cannot refuse to offer certain features, terms or conditions of an account to a consumer because the consumer did not "opt in" to one time debit card and ATM overdraft payments. Review your processes and ensure you are not penalizing a consumer because they did not want to opt in.


To sum it all up, monitor your overdraft program, disclosures and practices to ensure you are doing what you disclose and disclosing what you do. 


Cinch that saddle, check those stirrups, keep your balance and stay on that Compliance Horse.

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