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Courtesy Overdraft Programs Revisited

By Blair Rugh 6 Sep 2017

Since the beginning of banking, banks have paid the items of good customers that overdrew the customer's account. In the old days, each morning the bank got a list of items that it received the previous day that were overdrafts and someone in the bank made a decision whether to pay the item or not. Checks of good customers were paid and those of questionable customers did not. Then several years ago a company developed an automated system for the payment of overdrafts. The system was pretty rudimentary. Fundamentally, all customers who had had an account for 90 days and had handled the account responsibly got their overdrafts paid up to a dollar limit. The company packaged the system with literature on how to handle accounts where the overdraft was not paid and suggested advertising and marketed the package to the banking industry.


The company's initial success was overwhelming. The bankers that used it discovered three things. First revenue increased dramatically, second customers loved it. It was a lot cheaper and more convenient to pay an overdraft fee than to pay the bank's NSF charge and go through the cost and embarrassment of redeeming the check from the payee. Third, the losses were a lot less than anticipated. Very shortly bankers learned one other thing; regulators hated, I mean really hated the program. They felt that bankers were abusing their customers by encouraging them to write checks for amounts greater than their account balances.


Over time other automation companies began offering more sophisticated overdraft systems that made dynamic decisions based on the offending customer's account activity. More importantly, the regulators published a "strongly suggested" list of do's and don'ts for banks offering courtesy overdraft programs. In part, bankers brought the rules upon themselves. The original advertising provided by the first company was pretty egregious. I remember at the time I cautioned banks not to use it because it did encourage customers to overdraw their accounts and to act irresponsibly.


The next shoe to fall was an amendment to Regulation E, requiring that before a bank enable an overdraft by a debit card initiated transaction, it get the customer's written opt-in to the program. That was followed by an amendment to Regulation DD codifying some of the strongly suggested courtesy overdraft do's and don'ts. Because of the regulatory scrutiny of the programs many banks who initiated courtesy overdraft programs dropped them. I thought that was a mistake at the time and I feel it is a mistake now. There are not a lot of things that banks can do that are profitable and their customers actually appreciate. I know for myself that if I overdraw my account I would much rather my bank pay the item than return it. The cost of the overdraft fee is the same as the NSF fee so the charge in either case is the same but both are marginal compared with the embarrassment I would feel if someone I wrote a check to contacted me and told me the check bounced. As a matter of fact, bouncing one of my checks is one of the few things my bank could do that would make me consider changing banks.


In any event, now the CFPB has stuck its oar in the water. It conducted research of the overdraft protection on consumers and came to the conclusion that what it perceived as the greatest burden of the fees were imposed on debit card and ATM transactions. It therefore has developed and published four different tabular format customer disclosures to replace the current Appendix A-9 to Regulation E. I have always thought the current Appendix A-9 was pretty good, but the CFPB likes tabular formats, so tabular formats it will be. It will be a while before one of the formats (or all of the formats as alternatives) will be adopted, but be on the lookout for the change.


In the meantime it appears that this is the only tweaking of the courtesy overdraft rules that the CFPB can think to make so the environment now appears to be settled and the rules established. If you provide a courtesy overdraft program to your customers, follow all of the rules, use one of the new tabular disclosure formats when they are formally adopted and enjoy the results along with your customers. If you do not offer a courtesy overdraft program, I suggest your reconsider your decision. Maybe your initial decision was correct for your institution at the time it was made, but possibly now that the dust has settled and the issues are better defined a different decision would be more appropriate.

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