Overdrafts

Question 1

What laws and regulations apply to overdraft payment programs? (7)

Answer 1

• TILA
• TISA
• EFT
• EFA
• UDAP
• ECOA
• CRA

Question 2

What are the general overdraft requirements under regulation E?

Answer 2

Banks must provide notice and reasonable opportunity for customers to opt-in to the payment of ATM and one time POS overdrafts provided in exchange for a fee.

Banks must also inform the customer if alternatives are available and should not attempt to steer frequent overdraft users to opt into these programs while obscuring the availability of alternatives.

Question 3

What are the general overdraft requirements under TISA?

Answer 3

Banks must disclose on periodic statments the aggregate dollar amounts charged for overdraft fees and for return items fees for the statement period and YTD.

Banks that provide account balance information through an automated system must provide a balance that does not include the additional funds that may be made available to cover overdrafts.

Question 4

True or false:

Inconsistent waiver of overdraft fees will be evaluated in light of all applicable fair lending statues and regulations.

Answer 4

True

Question 5

How does the CRA relate to overdraft payment programs?

Answer 5

Banks can receive favorable CRA consideration under the service or lending tests for offering financial education and positive alternatives to overdrafts that are responsive to the needs of customers, particularly LMI customers.

Ex: lower cost transaction accounts and credit alternatives, such as a linked savings account, a small reasonably priced line of credit, or a safe and affordable small dollar loan.

Question 6

What are some examples of third party overdraft programs the present significant risk? (2)

Answer 6

• Promotion of programs that encourage generation of fee income by linking that amount or volume of overdraft fees charged to the percentage of incentive compensation paid to the vendor.
• Third party programs where the vendor will take a reduced percentage of compensation if the bank implements transaction processing order of largest to smallest. (potential UDAP violation if bank is manipulating transaction processing for vendor to generate fees)

Question 7

What is an automated overdraft program?

Answer 7

Automated overdraft payment programs typically rely on computerized decision-making and use pre-established criteria
to pay or return specific items. There is little to no case-by case review and decision-making with respect to an individual customer or item

Question 8

What is an ad hoc overdraft program?

Answer 8

ad hoc programs typically involve the exercise of bank employee judgment in making a specific decision about whether to pay or return an item, as an accommodation and based on the employee’s knowledge of a particular customer.

Question 9

True or false:

Ad Hoc overdraft payment programs are typically subject to the type of product overuse concerns that can be associated with automated overdraft programs.

Answer 9

False: Ad Hoc programs have been around for years and typically are not subject to the same overuse as automated programs.

Question 10

Does the 2010 overdraft guidance apply to ad hoc or automated OD programs?

Answer 10

It only applies to automated programs

Question 11

What can the FDIC do in response to automated OD programs that are found to pose unacceptable S&S or compliance risks? (4)

Answer 11

• Will be factored into examination ratings, including the CMS conclusions, with appropriate corrective action.
• Violations should be cited
• Other concerns regarding practices that are inconsistent with guidance should be discussed on the ECC page of the ROE.
• Examiners should make appropriate recommendations to bank management on the MRBA page of the ROE, when applicable.

Question 12

What does the 2010 guidance expect of banks with automated OD programs? (11)

Answer 12

• Board and management oversight of the program including an annual review of overdraft program key features.
• review of marketing, disclosures, and implementation
• Staff training to explain program features and alternatives
• prominently distinguish account balances from OD coverage limits.
• Monitor program for excessive or chronic customers use
• institute appropriate daily limits on customer costs
• consider eliminating OD fees for transactions that overdraw an account by a de minimis amount
• Consider implementing technology to alert customers when their account balances is at risk of generating a fee for NSF.
• Consider providing info to customers on how to access free or low cost financial education workshops or individualized counseling to learn how to more effectively manage personal finances.
• review check clearing procedures of the bank and any third party vendor to ensure operation in a manner that avoids maximizing overdrafts and related fees through a clearing order. (ex: clearing by check number or order received)
• monitor and mitigate legal, reputational, and other risks.

Question 13

The 2010 guidance recommends the bank take what actions with regard to monitoring?

Answer 13

-monitor programs for excessive use and if a customer overdraws their account on more than 6 occasions in a 12 month period, undertake meaningful and effective follow up action

Ex:
-Contact the customer to discuss less costly alternatives to OD such as a draw account or LOC, or small dollar loan

-give the customer a reasonable opportunity to decide whether to continue fee based overdraft coverage or choose an alternative.

Question 14

What are ways in which a bank can institute appropriate daily limits on customer costs according to the 2010 guidance?

Answer 14

• Limiting the number of transaction that will be subject to a fee per day
• Dollar limit on the total fees that will be imposed per day.

Question 15

If fees are charged for low dollar transactions, what does the 2010 guidance say about such fees?

Answer 15

-The guidance recommends the bank not charge fees for a diminimis amount.

But,

-If a fee is charges, such fee should be reasonable and proportional to the amount of the original transaction.

Question 16

What are examples of appropriate check clearing procedures?

Answer 16

-Clearing items in the order received or by check number.

Question 17

Although regulation E does not adress the payment of OD resulting from non-electronic transactions, such as paper checks, or ACH transfers, what does the 2010 guidance recommend about such transactions?

Answer 17

The FDIC believes banks should allow customers to decline overdraft coverage (opt-out) for these transactions and honor any opt out requests.

Additionally FDIC encourages banks to remind customers, especially chronic users, that even if they have choses to opt in to ATM and POS overdrafts, at any time they can still choose to opt out of ATM and POS overdraft programs.

Question 18

What are the concerns with ODP programs under ECOA?

Answer 18

Under the Equal Credit Opportunity Act (ECOA) and Regulation B, creditors are prohibited from discriminating against an applicant on a prohibited basis in any aspect of a credit transaction. This prohibition applies to overdraft protection programs. Thus, steering or targeting certain consumers on a prohibited basis for overdraft protection programs while offering other consumers overdraft lines of credit or other more favorable credit products or overdraft services, will raise concerns under the ECOA.

In addition to the general prohibition against discrimination, the ECOA and Regulation B contain specific rules concerning procedures and notices for credit denials and other adverse action. Regulation B defines the term “adverse action,” and generally requires a creditor who takes adverse action to send a notice to the consumer providing, among other things, the reasons for the adverse action. Some actions taken by creditors under overdraft protection programs might constitute adverse action but would not require notice to the consumer if the credit is deemed to be “incidental credit” as defined in Regulation B. “Incidental credit” includes consumer credit that is not subject to a finance charge, is not payable by agreement in more than four installments, and is not made pursuant to the terms of a credit card account. Overdraft protection programs that are not covered by TILA would generally qualify as incidental credit under Regulation B.

Question 19

Automated overdraft payment programs typically include what characteristics? (3)

Answer 19

• partially or fully computerized
• used by banks to determine if NSF transactions qualify for overdraft coverage based on pre determined criteria
• the decision to pay or return specific items is pre established and generally does not rely on bank employee decision making with respect to any individual customer or item.

Question 20

Ad Hoc programs or practices typically consist of what characteristics? (3)

Answer 20

• bank employee exercises judgement in paying or returning an item
• decisions are made based on specific considerations and knowledge of a particular customer
• they are provided as an accommodation, not on a pre determined basis.

Question 21

True or false:

Customer contact and chronic use guidance should be applied to ad hoc programs

Answer 21

False: the 2010 guidance on excessive users and customer contact only applies to automated OD programs.

Question 22

In addition to the knowledge of the bank’s ODP program, practices, and policies (including applicable laws regulations, and guidance) employee training should cover what topics? (5)

Answer 22

° Information on alternative and less costly products and options,

° How customers opt-in or opt-out (if the institution chooses to allow customers to opt-out) of various programs,

° How to monitor for excessive use,

° How and when to conduct meaningful and effective follow-up with customers, and

° How to respond to customer complaints.

Question 23

ODP policies and procedures should cover what topics?

Answer 23

• ensure compliance with applicable laws and regulations
• take into account ODP guidance
• prompt handling of requests to opt-in to ODP programs and transactions
• monitor the use of overdrafts by customers and associated charges
• outlines a process that facilitates meaningful and effective follow up with customers who have been identified as chronic users
• outlines responding to consumer complaints

Question 24

Are banks required to maintain the same definition of excessive user?

Answer 24

No. Guidance indicates an excessive user is 6 ODP fees in 12 month period.

If an institution maintains a different
standard for excessive use, this standard is expected to be reasonable and designed to implement the supervisory expectation that institutions monitor
and take meaningful and effective follow-up action when customers use the overdraft payment program
excessively.

Question 25

What are some examples of risks with ODP programs identified in the 2005 Guidance? (6)

Answer 25

• Promotion of ODP in a manner that leads consumers to believe it is a line of credit, by informing customers that their account includes an overdraft protection limit without clearly disclosing the terms and conditions of service.
• Marketing practices that appear to encourage consumers to overdraw their accounts (ex: informing customers that the service may be used to take an advance on their next paycheck, even though bank’s have the right to not pay every overdraft)
• Advertising ODP accounts as “Free” accounts making customers believe there are no fees associated with the account.
• Not disclosing that the program may cover instances when consumers overdraw their accounts by means other than checks (ATMs, and POS).
• ATMs that don’t alert the customer of ODP fee, when the bank knows the transaction will overdraw the account. Thereby preventing the consumer from cancelling the transaction before overdrawing the account.
• ODP amounts included in the consumers “account balance” at an ATM or online.

-

Question 26

What are the TILA requirements for Overdraft lines of credit?

Answer 26

TILA and Regulation Z require creditors to give cost disclosures for extensions of consumer credit. TILA and the regulation apply to creditors that regularly extend
consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments.

Under Regulation Z, fees for paying overdraft items currently are not considered finance charges if the institution has not agreed in writing to pay overdrafts. Even where the institution agrees in writing to pay overdrafts as part of the deposit account agreement, fees assessed against a transaction account for overdraft protection services are finance charges only to the extent the fees exceed the charges imposed for paying or returning
overdrafts on a similar transaction account that does not have overdraft protection.

Some financial institutions also offer overdraft repayment loans to consumers who are unable to repay their overdrafts and bring their accounts to a positive balance within a specified time period. These closed-end loans will trigger Regulation Z disclosures, for example, if the loan is payable by written agreement in more than four installments. Regulation Z will also be triggered where such closed-end loans are subject to a finance charge.

Question 27

Under the 2005 Guidance, what are the best practices recommended regarding Marketing and Communications with Consumers? (10)

Answer 27

• Avoid promoting poor account management. Institutions should not market the program in a manner that encourages routine or intentional overdrafts. Institutions should instead present the program as a customer service that may cover inadvertent consumer overdrafts.
• Fairly represent overdraft protection programs and alternatives. When informing consumers about an overdraft protection program, inform consumers generally of other overdraft services and credit products, if any, that are available at the institution and how the terms, including fees, for these services and products differ. Identify for consumers the consequences of extensively using the overdraft protection program.
• Train staff to explain program features and other choices. Train customer service or consumer complaint processing staff to explain their overdraft protection program’s features, costs, and terms, including how to opt out of the service. Staff also should be able to explain other available overdraft products offered by the institution and how consumers may qualify for them.
• Clearly explain discretionary nature of program. If payment of an overdraft is discretionary, make this clear. Institutions should not represent that the payment of overdrafts is guaranteed or assured if the institution retains discretion not to pay an overdraft.
• Distinguish overdraft protection services from “free” account features. Institutions should not promote “free” accounts and overdraft protection programs in the same advertisement in a manner that suggests the overdraft protection program is free of charges.
• Clearly disclose program fees. In communications about overdraft protection programs, clearly disclose the dollar amount of the fee for each overdraft and any interest rate or other fees that may apply. For example, rather than merely stating that the institution’s standard NSF fee will apply, institutions should restate the dollar amount of any applicable fee or interest charge.
• Clarify that fees count against the disclosed overdraft protection dollar limit. Consumers should be alerted that the fees charged for covering overdrafts, as well as the amount of the overdraft item, will be subtracted from any overdraft protection limit disclosed.
• Demonstrate when multiple fees will be charged. If promoting an overdraft protection program, clearly disclose, where applicable, that more than one overdraft fee may be charged against the account per day, depending on the number of checks presented on, and other withdrawals made from, the consumer’s account.
• Explain impact of transaction clearing policies. Clearly explain to consumers that transactions may not be processed in the order in which they occurred, and that the order in which transactions are received by the institution and processed can affect the total amount of overdraft fees incurred by the consumer.
• Illustrate the type of transactions covered. Clearly disclose that overdraft fees may be imposed on transactions such as ATM withdrawals, debit card transactions, preauthorized automatic debits, telephone-initiated transfers or other electronic transfers, if applicable, to avoid implying that check transactions are the only transactions covered.

Question 28

Under the 2005 Guidance, what are the best practice recommendations given regarding Program Features and Operations? (7)

Answer 28

• Provide election or opt-out of service. Obtain affirmative consent of consumers to receive overdraft protection. Alternatively, where overdraft protection is automatically provided, permit consumers to “opt out” of the overdraft program and provide a clear consumer disclosure of this option.
• Alert consumers before a transaction triggers any fees. When consumers attempt to withdraw or transfer funds made available through an overdraft protection program, provide a specific consumer notice, where feasible, that completing the withdrawal may trigger the overdraft fees (for example, it presently may be feasible at a branch teller window). This notice should be presented in a manner that permits consumers to cancel the attempted withdrawal or transfer after receiving the notice. If this is not feasible, then post notices (e.g., on proprietary ATMs) explaining that transactions may be approved that overdraw the account and fees may be incurred. Institutions should consider making access to the overdraft protection program unavailable through means other than check transactions, if feasible.
• Prominently distinguish balances from overdraft protection funds availability. When disclosing a single balance for an account by any means, institutions should not include overdraft protection funds in that account balance. The disclosure should instead represent the consumer’s own funds available without the overdraft protection funds included. If more than one balance is provided, separately (and prominently) identify the balance without the inclusion of overdraft protection.
• Promptly notify consumers of overdraft protection program usage each time used. Promptly notify consumers when overdraft protection has been accessed, for example, by sending a notice to consumers the day the overdraft protection program has been accessed. The notification should identify the date of the transaction, the type of transaction, the overdraft amount, the fee associated with the overdraft, the amount necessary to return the account to a positive balance, the amount of time consumers have to return their accounts to a positive balance, and the consequences of not returning the account to a positive balance within the given timeframe. Notify consumers if the institution terminates or suspends the consumer’s access to the service, for example, if the consumer is no longer in good standing.
• Consider daily limits on the consumer’s costs. Consider imposing a cap on consumers’ potential daily costs from the overdraft program. For example, consider limiting daily costs from the program by providing a numerical limit on the total overdraft transactions that will be subject to a fee per day or by providing a dollar limit on the total fees that will be imposed per day.
• Monitor overdraft protection program usage. Monitor excessive consumer usage, which may indicate a need for alternative credit arrangements or other services, and inform consumers of these available options.
• Fairly report program usage. Institutions should not report negative information to consumer reporting agencies when the overdrafts are paid under the terms of overdraft protection programs that have been promoted by the institutions.

Question 29

What does meaningful and effective follow up mean?

Answer 29

Meaningful and effective follow-up means that the
institution has made reasonable efforts to provide the
customer with information on alternatives to automated
overdraft payment programs that may be better-suited
to the individual’s need for short term credit, and a
clear mechanism for the customer to avail him or
herself of those alternatives.

° The key goal is to ensure that customers are able to
make informed choices among available options to
manage recurring needs for short-term credit.

° An institution should be able to demonstrate it
monitors account usage, undertakes programs
designed to address excessive or chronic use, and
monitors its success in informing frequent users of
overdraft payment programs of the high cumulative
costs of the program and the availability of less
costly or otherwise more appropriate alternatives.

° Although institutions are encouraged to provide
responsible alternatives, and most institutions offer
some form of short-term alternative, including lines
of credit, fixed-term small dollar loans, and linked
savings accounts, they are not required to develop new products in response to the 2010 guidance.

Question 30

What are some key areas examiners should focus on when evaluating a bank’s meaningful and effective follow up with excessive users? (4)

Answer 30

• Institutions are encouraged to be proactive in
contacting customers, clearly communicating available
options and giving a meaningful choice among options.

• Institutions may employ a variety of techniques, based
on individual customer profiles and general business
practices, to contact excessive or chronic users of
overdraft payment programs.

• While examples of meaningful and effective follow-up
could include contacting a customer via telephone, in
person, by mail, or through electronic notifications, a
single action may or may not necessarily show
appropriate follow-up. When evaluating meaningful
and effective follow-up, examiners should consider the
institution’s overall process for providing notice to
excessive use customers and the circumstances at that
institution.

• Although institutions should use their judgment in
determining what risk mitigation response is
appropriate for their particular institution, two specific
examples of ways in which an institution could
demonstrate meaningful and effective follow-up
regarding excessive or chronic use of automated
overdraft programs are: 1) providing enhanced periodic
statements; or 2) employing a targeted outreach
approach.

Question 31

When evaluating meaningful and effective follow-up, examiners should consider the institution’s overall process for providing notice to excessive use customers and the circumstances at that institution. Factors to consider include whether: (6)

Answer 31

° The institution has a regular program to inform
excessive or chronic users of overdraft usage and
cumulative costs in a prominent or conspicuous
fashion;

° The institution highlights availability of alternatives
to overdraft payment programs that may be lower cost
or more appropriate;

° The institution provides a clear and simple manner
to contact the institution to discuss available
alternatives;

° Contact with the customer was cursory;

° The customer and the institution engaged in relevant
dialogue or exchanged correspondence; or

° Other information provided by the institution that
documents meaningful and effective follow-up.

Question 32

What are two specific examples of ways a bank can provide meaningful and effective follow up?

Answer 32

• Enhanced periodic statements

- Targeted outreach

Question 33

What is the enhanced periodic statement approach of meaningful and effective follow up for excessive users?

Answer 33

° Under the enhanced periodic statement approach, an
institution would augment existing, required
disclosures for overdraft fees under Regulation DD
(requiring disclosure of the total amounts of fees
charged for overdrafts during the statement period
and calendar year-to-date), by:
– Prominently highlighting how excessive or
chronic users of automated overdraft programs
can contact the institution to discuss available
alternatives, and
– Encouraging meaningful and effective contact.

° If a customer incurs more than six overdrafts in a
rolling twelve-month period, the institution would
prominently display on the periodic statement
information describing how the customer can
contact the institution to discuss alternative options.
– An effective method is to include the name or
names of specific employee(s) who have
knowledge of alternative credit products for
which the customer might qualify and are able
to assist the customer in determining whether
he or she qualifies for them.
– For example, the following statement could be
used: “You have been paying multiple
overdraft fees and there may be cheaper
alternative products that may be better suited
for your needs. Please call [name(s) of
employees] at xxx-xxx-xxxx to discuss other
options with a customer service representative
or visit us at your local branch.”

° Under this approach, institutions should continue to
send enhanced periodic statements to customers for
as long as the customer continues to exhibit chronic
or excessive usage.

Question 34

What is the targeted outreach approach to meaningful and effective follow up of excessive users? (4)

Answer 34

° A targeted outreach approach would involve
contacting excessive users in person or by telephone
to discuss less costly alternatives to automated
overdraft payment programs.

° An institution would initiate outreach within a
reasonable time period (e.g., 30 days) when a
customer incurs more than six overdrafts in a rolling
twelve-month period to discuss overdraft usage and
available alternatives to the overdraft payment
program.

° If a customer decides to remain in the automated
overdraft payment program, the institution should
also engage the customer to determine the customer’s preferences regarding future contact regarding participation in the automated overdraft
payment program.

° Absent an indication of customer preference
regarding subsequent contact, a targeted outreach
approach would involve contacting a customer
whenever there is a cycle of repeated, excessive use
(e.g., subsequent occurrences of more than six
overdraft occasions where a fee is charged in a
rolling twelve-month period).

Question 35

Regardless of how a bank conducts meaningful and effective follow up with excessive users, what are some best practices or considerations they should take into account? (5)

Answer 35

• Institutions should establish a reasonable period of time
in which to reach the customer to discuss less costly alternatives (e.g., 30 days).

• Institutions are not expected to suspend the availability
of or limit access to overdraft coverage during the period in which they are engaging in good faith efforts to reach customers.

• Once successful contact with the customer occurs,
institutions should evaluate the appropriate course of
action. Before pursuing a course of action, institutions
should consider the overall risks and circumstances,
including whether the customer has expressed a desire
to pursue alternatives or continue participating in the
overdraft payment program.

• An occasion occurs when an overdraft fee is charged
(e.g., a per-transaction, sustained daily, or other overdraft fee, but not an NSF fee charged where payment for an item is rejected). If three overdraft fees are charged in one day, that constitutes three occasions. If four overdrafts occur in one day but only three fees are charged for three transactions that day (e.g., if the institution waives fees after a daily limit of three is met), that similarly constitutes three occasions.

• If a financial institution posts a single $105 fee to an
account for three, per-transaction overdrafts (i.e., a $35
fee is charged for each overdraft), this would still constitute three overdraft fees and, consequently, three occasions.

Question 36

What should banks do if a customer does not wish to receive follow up contact for excessive use?

Answer 36

-Regardless of customer choice, banks should continue to monitor account usage.

Question 37

How can an institution implement appropriate daily limits on customer costs as recommended in the 2010 guidance?

Answer 37

• Limit the number of transactions that will be subject to a fee (e.g., no more than three per day), or
• Provided a dollar limit on total fees that will be imposed per day.

Daily limits should be reviewed as one element of the institution’s overall overdraft payment program. Failure to institute daily limits on customer costs with respect to overdraft payment programs does not in and of itself mean that the institution is not acting in a manner that is consistent with the expectations set out in the 2010 Supervisory Guidance.

Question 38

What procedures should examiners follow when reviewing a bank’s transaction clearing order for ODP risks? (4)

Answer 38

• Determining clearing order does not in and of itself necessarily indicate whether an institution is or is not acting consistent with the expectations set out in the 2010 Supervisory Guidance. Examiners should review
and consider whether the processes, practices, policies, and procedures of the financial institution and their third-party vendor provide an overall compliance management system or framework that is consistent with those expectations.

• To the extent that institutions make decisions regarding transaction processing order, transactions should be processed in a neutral order that avoids manipulating or structuring processing order to maximize customer
overdraft and related fees.

• Institutions are discouraged from implementing systems that re-order transactions to clear the highest item first, as this approach will tend to increase the number of overdraft fees. In addition, although processing batches of transactions in a random order or order received is a neutral approach, institutions are discouraged from arranging the order of types of transactions (i.e., batches) cleared in order to increase the number of overdrafts and maximize fees.

• Compliance examiners should consider the overall risk-profile of the institution and the following factors or characteristics:
° Is the transaction order neutral (e.g., by order
received, check number, serial number sequence, or other potentially equitable approaches)?
° Has the institution established that their transaction processing order is necessary for sound business reasons and is not manipulated so as to maximize fees?

Question 39

What are some examples of further risk mitigation efforts a bank can implement outside of the 2010 Guidance? (5)

Answer 39

1. The institution has an appropriate process in place for
   eliminating overdraft fees for transactions that overdraw
   an account by a de minimis or very low amount. Examples of possible de minimis limits that could be implemented include: transaction amounts of less than $10, or an institution could decline to charge overdraft fees for transactions that overdraw an account by less than
   $10.
2. The institution has effectively employed cost effective,
   existing technology, as appropriate, to alert customers
   when their account balance is at risk of generating a fee
   for NSFs.
3. The institution has provided information to customers
   about how to access free or low-cost financial education
   workshops or individualized counseling to learn how to
   more effectively manage personal finances. Small or rural
   institutions may want to consider using Web-based
   resources or referrals to reputable, non-profit organizations.
4. The institution has appropriate policies and procedures in place for allowing customers to decline overdraft coverage (i.e., opt-out) for non-electronic transactions (meaning transactions that are not subject to the Regulation E opt-in requirements), such as paper checks, automated clearing house transfers and recurring debits, and honor an opt-out request (required by reg E).
   ° It is recommended that institutions consider occasional
   communications to remind customers of available
   options to terminate overdraft coverage.
5. The institution has appropriate policies and procedures in place for reminding their customers, especially chronic or excessive users of overdraft programs, that even if they
   have chosen to opt-in to the payment of ATM and onetime
   POS overdrafts for a fee, at any time they can still choose to opt-out of ATM and one-time, POS overdraft programs.

Question 40

2010 Guidance:

Do the specific supervisory expectations about customer
contact apply to ad hoc overdraft payments?

Answer 40

No. The FDIC’s November 2010 Guidance is focused on
assisting institutions in identifying, managing, and mitigating
the particular risks posed by automated overdraft payment
programs. Ad hoc overdraft payments have been authorized by banks for years as an accommodation based on specific
considerations and knowledge of a particular customer, and
they have generally not been the subject of the type of product over-use concerns that can be associated with automated overdraft programs. Consequently, the specific supervisory expectations set out in the Guidance regarding customer contact for excessive or chronic users of automated overdraft payment programs do not apply to ad hoc overdraft practices.

Question 41

Should institutions monitor and manage risks associated

with ad hoc payments of overdrafts?

Answer 41

Yes. While the 2010 Guidance’s specific supervisory expectations relate only to automated overdraft payment programs, institutions that authorize overdrafts on an ad hoc basis should manage potential reputational, compliance, and litigation risks regarding certain overdraft payment practices, such as check clearing practices designed to maximize overdraft fees. In addition, the Guidance provides updated information on the laws, regulations, and other guidance that apply to all types of overdraft payment practices and programs.

Question 42

The 2010 Guidance states that FDIC-supervised institutions
should monitor programs for excessive or chronic customer
use, and if a customer overdraws his or her account on more
than six occasions where a fee is charged in a rolling twelve month period, undertake meaningful and effective follow-up action. What is an “occasion” where a fee is charged?

Answer 42

An “occasion” occurs each time an overdraft transaction
generates a fee. For example, this would include a per transaction overdraft fee or a daily fee for an outstanding
overdraft status. As a result, potentially more than one
“occasion” can occur per day. If three overdraft fees are
charged as a result of three transactions (even if the fees are
aggregated), that would constitute three occasions. If a fee
itself triggers an overdraft, that event would count if a further
overdraft fee is charged as a result.

By contrast, overdraft items paid where no fee is charged (for example, if a bank pays an item after a daily limit is met on overdraft items paid and the bank waives additional fees)
would not be included. Thus, if four overdrafts occur in a day
but the bank only charges three fees as a result of a per-day
limit on fees charged, this would constitute three occasions.

Question 43

What is meaningful and effective follow-up for chronic or
excessive use and how can an institution demonstrate it has
made meaningful efforts to reach chronic or excessive users
of automated overdraft payment programs?

Answer 43

Meaningful and effective follow-up means that the institution has made reasonable efforts to provide the customer with information on alternatives to overdraft payment programs that may be better-suited to the individual’s need for short-term credit, as well as a clear mechanism for the customer to avail himself or herself of those alternatives. The key goal is to ensure that customers are able to make informed choices among available options to manage recurring needs for short term
credit. The FDIC will assess the institution’s level of effort to reach customers, the institution’s program for providing notice to customers of available alternatives, and the
ease with which customers are able to select alternative
products.

Institutions may employ a variety of techniques, based on
individual customer profiles and general business practices, to contact excessive or chronic users of overdraft payment programs. For example, the institution’s overall approach could incorporate contacting a customer via telephone, in person, by mail, or through electronic notifications. Relevant factors include whether the institution:
• Has a regular program to inform excessive or chronic
users of overdraft usage and cumulative costs in a
prominent or conspicuous fashion;
• Highlights availability of alternatives to overdraft payment
programs that may be lower-cost or more appropriate; and
• Provides a clear and simple manner to contact the
institution to discuss available alternatives.

The institution should be able to demonstrate that it monitors account usage, undertakes programs designed to address excessive or chronic use, and monitors its success in informing frequent users of overdraft payment programs of the high cumulative costs of the program and the availability of less costly or otherwise more appropriate alternatives.

Two examples of ways in which an institution could
demonstrate meaningful and effective follow-up regarding
excessive or chronic users of overdraft programs are to
provide enhanced periodic statements or employ a targeted outreach approach. Specific information discussing meaningful and effective follow-up when utilizing these approaches is described in the attached Illustrations. Institutions may employ other approaches for engaging in effective and meaningful follow-up with chronic or excessive users.

Question 44

What is an example of an appropriate daily limit on

overdraft fees?

Answer 44

Daily limits can help prevent a customer’s individual lapse in
financial management from triggering a cascade of overdraft
fees, and will be reviewed as one possible element of the
institution’s overall approach for addressing chronic or
excessive use of automated overdraft payment programs.

For example, some institutions have implemented limits on the number of transactions that will be subject to a fee (e.g., no more than three per day) or on total allowable fees (e.g., a
specific maximum dollar amount of allowable fees per day).

Question 45

What is an example of an appropriate de minimis

overdraft amount?

Answer 45

Institutions should consider the use of a de minimis threshold before an overdraft fee is charged in order to reduce reputational risk related to charging fees that are
disproportionate to the item being cleared. For example, some institutions have implemented de minimis limits whereby they do not charge overdraft fees for underlying transaction amounts of less than $10, while some have declined to charge overdraft fees for transactions of any amount that overdraw an account by less than $10.

Question 46

What is a reasonable and proportional overdraft fee?

Answer 46

institutions may increase reputational risk when overdraft fees are significantly greater than the amount of the item being cleared. Institutions should review the amount charged for the overdraft payment compared to the amount of the underlying transaction that triggered the overdraft, and assess whether the charge is reasonable and proportionate in comparison. Institutions should consider de minimis limits to reduce the reputational risk of overdraft fees that are disproportionate to the cost of the underlying transaction.

Question 47

How can institutions and their third-party vendors work to
process transactions in a manner that addresses risks
identified in the Guidance?

Answer 47

Transactions should be processed in a neutral order that avoids manipulating or structuring processing order to maximize customer overdraft and related fees. Examples of a neutral order include order received, check number, serial number sequence, or other approaches when necessary based on sound business justification.

Re-ordering transactions to clear the highest item first is not
considered neutral because this approach will tend to increase the number of overdraft fees. By contrast, processing batches of transactions in a random order or order received is a neutral approach; however, institutions should not arrange the order of types of transactions (i.e., batches) cleared in order to increase the number of overdrafts and maximize fees.

Question 48

Is an institution required to provide new alternatives to

automated overdraft payment programs?

Answer 48

No. Banks are not required to develop new products in
response to the Guidance. However, most banks offer some
form of short-term alternative, including lines of credit, fixed term small dollar loans, and linked savings accounts, and the
FDIC encourages institutions to provide linked accounts or
responsible, short-term credit products (such as those offered under the FDIC’s small dollar loan pilot). Banks are expected to inform excessive or chronic users of overdraft payment programs about alternative products that the institution has available for its customers, and to make these programs available to customers that qualify. Such products may qualify for CRA consideration under the service or lending tests.

Question 49

Is an institution required to terminate or suspend a
customer’s access to the automated overdraft payment
program if the customer engages in chronic or excessive
use?

Answer 49

No. Institutions are expected to monitor usage and engage in meaningful and effective follow-up to inform excessive users of available alternatives. However, as discussed in the
Guidance, a number of risks are associated with chronic or
excessive use of automated overdraft programs, including
reputational, compliance, safety-and-soundness, and litigation risks. If such risks are identified during the course of an institution’s monitoring and oversight of an automated overdraft program, institutions should take appropriate action to mitigate risks, as has been the case in the past.

Question 50

The Guidance states that the FDIC believes institutions
should allow customers to decline overdraft coverage (i.e.,
opt-out) for payment of overdrafts resulting from nonelectronic transactions such as paper checks or automated clearing house (ACH) transfers. Can you clarify to which transactions this recommendation applies?

Answer 50

To promote consumer choice and awareness, institutions are
encouraged to permit customers to decline overdraft coverage (i.e., opt-out) for transactions that are not subject to the Regulation E opt-in requirements, including checks, ACH
transactions and recurring debits. As part of an institution’s
on-going relationship with its customers, the FDIC
recommends that institutions consider occasional
communications to remind customers of available options to
terminate overdraft coverage.