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* Take a hard look at your overdraft policies
Tags: Financial Institutions, Compliance
< Return to Blogs
TAKE A HARD LOOK AT YOUR OVERDRAFT POLICIES
May 24, 2023
By: Amanda L. Knudsen
Financial Institutions
In a recent conversation with coworkers, we were discussing who carries around a
checkbook these days, and even more revealing, who carries a check register with
them and uses it to balance their checkbook on a regular basis.
Only a few admitted to entering every transaction into their register as it
occurs. Those would include every check written, every debit card transaction
and even ATM withdrawals.
The rest of us — and we’re all experienced financial industry professionals —
felt a little guilty as we know this is the responsible way to monitor accounts.
The consensus was that we can check our balances anytime using online banking,
so we no longer feel the need to use the old paper registers. We know we are not
alone as many other consumers monitor their accounts the same way.
The ongoing dilemma with monitoring accounts via technology is activity delays
in displaying the actual available balance in an account, which can result in
unpleasant surprises.
The available balance of the account takes into consideration pending debit and
credit transactions and is considered the most current balance, whereas the
ledger balance on the account only reflects transactions that have settled to
the account.
Without knowing the available account balance, a consumer could perform a
transaction that would cause an overdrawn account — even if the consumer had
checked their balance prior to making the transaction.
OVERDRAFT FEE GUIDANCE
Given the importance of consumers being aware of their available balance at any
point, the FDIC and OCC recently issued guidance for financial institutions
related to charging overdraft fees for authorize positive, settle negative
(APSN) transactions.
The APSN transactions may sound complicated, but here is a simple example: An
account had enough funds in it to cover a consumer’s dinner bill, so a debit
card transaction was authorized to pay the bill, due to the positive available
balance at the time of the transaction.
But the transaction did not immediately settle. That evening, two checks were
submitted for payment, based on the available balance (which included the
pending dinner bill/debit card transaction). The account balance was not
adequate to pay for one or both of the checks. The checks were paid and an
overdraft fee was assessed for each check that was an overdraft.
The next day when the dinner bill settled, the available balance in the account
was not sufficient to cover the transaction because the balance had been reduced
by the amount of the two checks, therefore an overdraft fee was charged on the
debit card (dinner bill) transaction.
Even though the dinner bill was authorized when the account had a positive
balance, the timing of settlement and the negative balance due to the
intervening checks caused it to incur an overdraft fee.
REDUCING CONSUMER RISK
The guidance issued states that overdraft fees related to APSN transactions are
unfair because the consumer may not be able to reasonably void the fees as the
overdraft and payment processing systems are out of the consumer’s control.
The guidance explains that even clear disclosures of the institution’s overdraft
fees cannot avoid the potential UDAAP risk on APSN transactions and related
overdraft fees.
So, what can you do? Institutions should reach out to any third-party provider
that participates in processing transactions and overdraft fees to see if they
offer options the institution can implement to address APSN overdraft
transactions. This may include a change to the balance used for processing
overdrafts.
Institutions should review their policies, processes and control systems related
to overdrafts to ensure that all possible risk mitigation practices are
implemented. In addition to enhancing disclosures or account agreements to
clearly describe the balances used to assess overdraft fees, institutions should
consider the potentially unfair practices related to the timing of their fees.
To ensure consumers have ample opportunities to remain aware of their available
account balance, we recommend institutions clearly (and frequently) communicate
all options available for consumers to access an account’s available balance as
well as overdraft protection products or services.
These options may include, but are not necessarily limited to, online and mobile
account access for balance inquiries and transfers, possible automated balance
alerts, remote check deposit, automatic balance transfers and overdraft
protection lines of credit. And yes, consumers still have the option of entering
a transaction in a register and balancing it.
HOW WIPFLI CAN HELP
Wipfli advisors are ready to help you review and determine your overdraft
program’s compliance to help reduce potential UDAAP risks. Our team of
compliance professionals can provide an independent review of your overdraft
program and provide current guidance based on regulatory requirements and
current industry trends.
Contact us to learn more about our regulatory compliance services. Sign up to
receive additional financial institutions content in your inbox or continue
reading on:
* Overdraft and NSF fees are receiving scrutiny
* How to mitigate risk around overdraft and NSF fees
* Podcast: Keeping up with compliance
AUTHOR(S)
Amanda L. Knudsen
Manager
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