When you need guidance on regulatory guidance you know you’re in trouble. We see the March 29 teleconference by the Federal Deposit Insurance Corp. (FDIC) on its Final Overdraft Payment Supervisory Guidance (FIL-81-2010) as confirmation that even the FDIC recognizes the difficulty in implementing its guidance exactly as written.
For example, the guidance speaks to contacting “in person or via telephone” consumers who overdraw their accounts “on more than six occasions where a fee is charged in a rolling twelve month period.” It is easy to see the problems with this. Now do I have to harass my account holder by phone or in person every single time the consumer has another six overdrafts? What if my account holder tells me it’s none of my business and to stop bothering him? Isn’t this just creating a big risk that I am alienating my account holders and driving them to a competitor? And what happens if I can’t get in touch with the account holder? Do I have to stop providing overdraft services until the consumer can be contacted?
Thankfully, the FDIC clearly said on the call that if the account holder does not want to be contacted any more, the bank can honor that request. The FDIC also said that if the consumer cannot be reached, the institution does not have to stop providing overdraft services in the meantime.
Most interestingly to us, the FDIC backed down from the insistence on “in person or via telephone” contact by allowing the information to be provided on bank statements. The agency suggested, for example, taking advantage of existing messaging on statements showing accrued overdraft fees by modifying these to also notify chronic and excessive users that they are incurring a high amount of overdraft fees and by giving information on how to contact the bank to discuss other options. The FDIC said that outreach should be initiated within a reasonable time period, such as 30 days, and that the monthly statement would satisfy this reasonable time guideline for notification.
The FDIC did indicate that it wants its supervised banks to be able to show that they monitor use and successfully let customers know when there is a period of chronic or excessive use. We believe it is important to have systems in place that will allow financial institutions to create this kind of paper trail and have on-demand report capability.
The FDIC also reiterated its desire that banks not charge a fee on “de minimis overdrafts” – that is, overdrafts that put an account “barely” into overdraft status making the fees charged “disproportionate” to the amount of the overdraft. The FDIC’s wishes would mean that their supervised banks would not charge an overdraft fee on items of less than $10, for example, or where an item overdraws the account by less than $10.
'Neutral' Check Posting
We think this is an awful idea. Once you have started down this slippery slope, you may be opening yourself up to all kinds of unfair and deceptive acts and practices (UDAP) liability that you did not have before when your policy said that an overdraft is an overdraft is an overdraft. If you say that $10 is de minimis, what do you do when a consumer challenges a charge for $10.10? How is that materially different from $10? Failing to refund that fee might get you into trouble since you now publicly have agreed to refund “de minimis” fees.
Another thing the FDIC decided to harp on in its call is posting order. I don’t have enough space here to fully expose all of the intricacies of this issue, but most bankers view it as a no-win situation. The FDIC says transactions should be processed in a “neutral order” (for example, in check number sequence, in the order in which the item was received, etc.). The agency says that reordering items and paying from high to low is not considered neutral, but that processing batches in a random order or in the order items are received is a neutral approach.
So, let’s use the FDIC’s “neutral” example and decide we are going to post by check number, and on our theoretical day, there are no electronic transactions affecting the account, which has a balance of $1,200. Let’s say we have check number 101 to the grocery store for $50, check number 102 to the power company for $200 for payment of a past due balance and a re-connect fee, and check number 103 made payable to cash for which the $1,000 check amount already has been passed across the bank’s counter in the form of cash directly to the account holder.
If you sat across the table from your examiner and asked which of these items should reduce the account balance first, my guess is that the examiner is going to say check number 103 for the cash in the account holder’s hands because the money already has left the bank. Clearly that’s not posting in the order of the check numbers.
If you sat across the table from your account holder and asked which of the remaining two items should be paid first, my guess is that the account holder is going to say check number 102 for the power company, because the consumer wants his power turned back on immediately. Again, this is not paying the items in the order of the check numbers. Life, and banking today, is not as black and white as the FDIC would have you believe.
Finally, while the FDIC also reiterated that the guidance is not being implemented as a regulation or a rule, we say to take that with a grain of salt. We think that line gets blurred in many examinations.
Our counsel is to have a clear overdraft policy that is communicated to your account holders; have “meaningful and effective” communication with heavy overdraft users; and have tools in place to justify your policies and procedures as fair; and be able to show proof of the communication efforts you have undertaken.
Mr. Leonard is chief operating officer and general counsel for Wilmington, N.C.-based Velocity Solutions, Inc., a provider of fee income enhancement strategies to community and regional banks and credit unions. He can be reached at christopher@myvelocity.com.
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