Cash-Crunch Coverage


Reviewing the rules on overdraft programs and fee arrangements

By Mary Thorson Wright

Contemporary British author Johnny Rich once impishly wrote, “The future is certain. It is just not known.” The same might be said of bank overdraft programs and overdraft fees! Although overdraft programs have not recently received the hype surrounding some other areas of consumer compliance, regulatory interest has remained a constant with occasional tweaks.

Overdraft programs for covering insufficient funds activity in deposit accounts come in various forms. The most common are overdraft lines of credit, cash sweep programs and bounce programs. To effectively offer, open and maintain overdraft programs for consumers, your community bank should confirm the program’s type and all of its terms and conditions.

For review, a payment line established to advance funds to cover overdrafts is a true “overdraft line of credit” for which interest can accrue on unpaid balances. Credit approval is required for the lines, which are usually unsecured, and the bank executes a credit agreement with the customer to advance funds in specified amounts when needed.

A “sweep” account arrangement allows the customer to use funds already on deposit at the bank to cover insufficient funds occurrences. To execute the sweep arrangement, the bank agrees with the account holder to “sweep” funds from another account the customer maintains at the same bank. The funds could be swept from a noninterest- bearing account or from one that bears interest, like a savings account or money market deposit account.

The bank administers “bounce” programs on an ad hoc basis and makes decisions about items as they are presented. At account opening, the bank discloses the availability of the bounce protection program in the disclosures. If the accountholder doesn’t execute an opt-out provision, the protection becomes effective when the account meets the program’s disclosed parameters.

Know what’s required

Depending on the type of overdraft program your community bank offers, there are various variations in the operative laws and regulations:

  • Regulation Z (Truth in Lending Act) rules for open-end credit cover overdraft lines of credit.
  • Regulation B (Equal Credit Opportunity Act) applies to any credit-related application or extension, including overdraft lines of credit.
  • Regulation DD (Truth in Savings Act) applies to any fee that is imposed in connection with an account, including the conditions under which the fee will be charged.
  • Regulation E (Electronic Fund Transfers Act) disclosures and opt-in requirements for paying ATM and one-time point-of-sale overdrafts provided in exchange for a fee generally do not apply. However, for bounce programs, customers must receive a notice and a reasonable opportunity to opt in to payments of ATM, one-time and point-of-sale overdrafts provided in exchange for a fee.
  • Third-Party Arrangements that include overdraft payment program administration should conform to general vendor-management principles and bank compliance practices.
  • Unfair, Deceptive, or Abusive Acts or Practices Act (UDAAP) parameters are broad, subjective and can potentially apply to all activities, all bank employees, and certain third parties administering or offering overdraft programs on behalf of the bank.
  • Regulation CC (Expedited Funds Availability Act) applies to overdraft programs in two instances. First, when a bank extends the time when funds will be available for withdrawal because the bank doubts collectability, it may be prohibited from assessing any fees for subsequent overdrafts, including those from a line of credit, or for returning checks or other debits to the account. Second, the rule applies to holds on checks deposited into an account that has been repeatedly overdrawn.
  • Regulation D (Reserve Requirements of Depository Institutions) limits are effective for arrangements by which funds are debited from a savings or money market deposit account to cover insufficient funds activity, such as sweep accounts or bounce arrangements.

Guidance is also available from the federal bank regulatory agencies. The first is the “Joint Guidance on Overdraft Protection Programs” from the Federal Reserve, and the second is “Overdraft Payment Programs and Consumer Protection Final Overdraft Payment Supervisory Guidance” from the FDIC.

In June 2013, the Consumer Financial Protection Bureau published “CFPB Study of Overdraft Programs,” which details the results of the agency’s inquiry into checking account overdraft programs to determine how these practices affect consumers. Results of additional analyses of consumers’ experiences with overdrafts were published by the CFPB in July 2014, “Data Point: Checking Account Overdraft.” These publications offer current insights into industry practices, consumer habits and regulatory tolerance for overdraft practices.

To maintain compliant overdraft programs and reduce the risk caused by regulatory volatility, check your community bank’s overdraft compliance process on a periodic basis and whenever changes are made that affect them. Regulators’ interest in overdraft program compliance is certain. The level and specifics are just not known.

Mary Thorson Wright, a former Federal Reserve managing examiner, is a financial writer in Virginia.