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Dreher Tomkies LLP
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OVERDRAFT PAYMENT PROGRAM GUIDANCE FOR FDIC-SUPERVISED INSTITUTIONS

On November 24, 2010, the FDIC issued final guidance on overdraft payment programs provided to consumers. The FDIC believes that many overdraft payment programs present significant reputational and safety and soundness risks. The final guidance is intended to assist FDIC-supervised institutions in identifying, managing and mitigating risks associated with overdraft payment programs, including risks that could result in serious financial harm to certain consumers. The FDIC previously issued its guidance in proposed form on August 11, 2010, and received more than 900 written comments. The FDIC indicates that its final guidance incorporates suggestions from commenters to refine and clarify expectations.

Supervisory Expectations

In order to avoid harming consumers or creating risks, the FDIC expects institutions to implement effective compliance and risk management systems, policies and procedures to comply with the FDIC's 2005 "Joint Guidance on Overdraft Protection Programs" and the Federal Reserve Board's November, 2009 amendments to Regulation E, which had a mandatory compliance date of July 1, 2010. With respect to automated overdraft payment programs in particular, the FDIC expects supervised institutions to take certain specific actions outlined in the guidance, which include generally:

  • Ensuring appropriate oversight of programs by boards of
  • directors
  • Reviewing the marketing, disclosure and implementation of programs to promote responsible use by consumers
  • Training staff
  • Prominently distinguishing account balances from available overdraft coverage amounts
  • Monitoring programs for excessive or chronic customer use and taking follow-up action if a customer uses a fee-based overdraft product six times in a 12-month period
  • Instituting appropriate daily limits on customer costs
  • Considering certain fee reduction measures
  • Reviewing check-clearing procedures to avoid maximizing customer overdrafts and related fees through the clearing order
  • Monitoring and mitigating credit, legal, reputational, safety and soundness and other risks

The FDIC considers legal and compliance risks associated with overdraft payment programs to include Section 5 of the Federal Trade Commission Act, the Equal Credit Opportunity Act, the Truth in Savings act and the Electronic Fund Transfer Act and their regulations.

Regulation E

In complying with new Regulation E requirements [see DTS Alert "Board Issues Final Overdraft Protection Opt In Rules," dated November 12, 2009], the guidance cautions institutions not to attempt to steer frequent users of fee-based overdraft products to opt-in to these programs while obscuring the availability of alternatives. Any steering activity with respect to credit products raises potential legal issues (e.g., fair lending, concerns about unfair or deceptive acts or practices, etc.) and will be subject to close scrutiny. The FDIC encourages institutions to remind customers that they may at any time change their minds with respect to their decision to opt-in to the payment of ATM and POS overdrafts for a fee.

Examinations

Overdraft payment programs will be reviewed at each examination. Institutions using third parties are expected to follow the FDIC's 2008 "Guidance for Managing Third Party Risk." Additionally, institutions should review the FDIC's 2004 guidance on "Unfair or Deceptive Acts or Practice by State-Chartered Banks." FDIC examiners will continue to give favorable CRA consideration to institutions offering positive alternatives to overdrafts that are responsive to local customer needs.

Effective Date

In order to allow sufficient time for institutions to review, consider and respond to the expectations in the final guidance, the FDIC expects that any additional efforts to mitigate risk will be in place by July 1, 2011.

Affected institutions should review any existing or proposed overdraft payment programs in light of this final guidance.

  • Judy Scheiderer and Margaret Stolar