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Overdraft regulation: Risks extend beyond the fines

August 2, 2022 Article 2 min read
Brad Birkholz James Siegel
Recent press releases suggest that this year’s regulator exams will have a particular focus on overdraft programs. Will your current practices hold up to increased regulatory scrutiny?
Business executive standing in front of a conference room table.Are overdraft programs just a convenient form of short-term credit for consumers, or are they a predatory money-grab as regulators suspect? New federal guidance has taken aim at overdraft programs to limit consumer risk. Whether overdraft fees generate a multimillion-dollar revenue stream for your institution or simply serve as a perk for your customers, you’ll need to review your program to ensure compliance. The alternative? Fines, administrative costs, and even potential lawsuits.

Review your overdraft program

It may have been years since you last reviewed your overdraft or insufficient fund program, but now that the goalposts have changed, you may fall short of regulatory expectations. That might mean enforcement actions, monetary penalties, increased scrutiny of your entire organization—and potentially hundreds of hours spent on remediation. You could also become a target of plaintiff attorneys searching for a lucrative class action lawsuit. Drastically reduce your risk by reviewing a few key areas of your program.

Regulatory risk

Every institution is willing to accept a different level of regulatory risk. Whatever your risk tolerance, review your program to make sure recent regulatory guidance changes haven’t put you into a risk category you’re not comfortable with. If you give regulators the impression that you don’t care about their latest guidance, they’ll start to wonder what else you’re not complying with.

Review your program to make sure recent regulatory guidance changes haven’t put you into a risk category you’re not comfortable with.

Dynamic vs. static overdraft programs

If you have a dynamic program for calculating overdraft fees, you’ll need to determine whether the software you rely on to determine limits should be subject to model risk management expectations. If regulatory guidance would classify it as a model, you’ll need to validate it to make sure it’s up to current standards.

If you have a static overdraft program but you’re thinking of switching to a dynamic model, take caution — there are additional regulatory requirements to consider, like customer disclosure of the change and fair lending and banking rules.

Fees for represented items

Are you charging insufficient fund fees for represented items? If so, you’ll need to review your account disclosures closely to make sure you’re accurately portraying your practices to customers. Recent class action suits against community banks have targeted this specific issue, so review your disclosures and adjust as soon as possible.

Get help before problems arise

Perhaps the trickiest part about adhering to the latest guidance is that it’s simply guidance, not hard-and-fast rules. But just because these rules aren’t codified doesn’t mean you can ignore them without potentially serious and long-lasting repercussions.  If you’d rather not deal with the hassle that extra scrutiny brings, get started before it’s too late.

Don’t hesitate to bring in an expert to make sure you’re appropriately addressing the issue. We help clients make sure their programs are not only meeting regulatory guidance but creating the greatest benefit for their institution.

There’s no one-size-fits-all overdraft risk solution — whatever your unique situation, we’ll help you take the right steps forward.

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