As the level of regulatory hand-wringing over overdraft programs continues to grow, each bank’s senior management needs to ask themselves how well they measure and manage the risks that come with their particular program. Since we work in the financial industry, we tend to think of monetary or credit risk, but those risks are largely absent from overdraft programs as offered by most banks.
In thinking about what risks there are with overdraft programs of various types, it is important to look back at last year in terms of major developments.
Enhanced guidelines and best practices were offered by the FDIC over a year ago, along with conference calls to clarify the guidance. Then in June of 2011, the OCC offered substantially different guidelines, which have yet to be made official at this writing. The CFPB has often said that overdraft programs will be squarely in their sights, and the recent recess appointment of a new Director and his appointment’s questionable legality adds nothing but confusion to the mix. The result of all of this flailing is a substantial level of inconsistency and confusion, not only among banks, but among examiners as well.
One of the most notable developments of last year was the consolidation of over thirty lawsuits against financial institutions regarding their overdraft programs into a Multidistrict Litigation to be heard by a Florida Federal Court. While these cases are currently wrestling with largely technical issues, no less than seven institutions have settled out of court prior to any actual litigation of the facts. Those seven banks have settled for a total of almost $500 million. To that particular set of banks, that outcome is already a much more serious reputation risk issue than a financial issue.
Those banks were not singled out because they offered overdraft programs, but because they were perceived to have triggered the relatively new trip-wire of UDAAP (Unfair, Deceptive, Abusive Acts and Practices) regarding the manner in which they artificially arranged the presentment of various transactions against a consumer’s account in order to maximize fee income.
The vast majority of banks do not engage in that kind of behavior, but I would suggest that the UDAAP trap could be sprung by any substantive difference between what a bank discloses about its overdraft program and its actual day-to-day practices.
Over the past decade, the three things that have gotten banks in the most trouble have been:
- “Bumping the balance” – Consciously or otherwise, allowing the customer’s actual balance to be inflated by any overdraft facility. That’s about as “unfair and deceptive” as you can get.
- Paying “High to Low” – A case can be made for different approaches, but the regulatory guidance over recent years clearly increases the risk of a bank who clears debits in that order.
- Lack of transparency and the fullest possible disclosures.
The things that must be considered in order to manage regulatory risk in the coming year (in my opinion) are:
- Establish “caps” on fees and have meaningful procedures to ensure that those processes are consistent and non-discriminatory.
- Implement a “de minimus” cushion to avoid charging fees on small items. The “$35 cup of coffee” argument needs to be taken off the table. Run your numbers and determine the potential impact of your decision – don’t just “pick a number”.
- Determine what should be done with the habitual “overdrafters or abusers” of your program. How are these customers going to be identified and how will you communicate alternatives to them?
- Provide meaningful management information regarding your program that receives attention all the way up to the board of directors.
If some of the largest financial institutions in the country can’t get it right, with their almost unlimited resources, how can your bank assure ongoing compliance in this atmosphere of confusion and regulatory inconsistency? Strunk & Associates is the original developer of the discretionary overdraft program and has almost twenty years of experience. Strunk has put its program and compliance support in more than 1,760 financial institutions, and we’d be happy to help your bank navigate the risk management minefield.
No bank can be fully successful without an effective overdraft program that strengthens fee income and provides bank management with up-to-date guidance, best practices, and reporting that ensures consistent oversight. Let us help your bank with a free review of your overdraft program. Please call me, or check out our new website at www.strunklp.com.
Mike Sobba
President & CEO
Strunk & Associates, L.P.
Download Mike Sobba’s letter, Managing Risk, in Microsoft Word Format.
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