By Richard Miller
Executive Vice President
As regulations on financial products and services continue to rank among the top concerns for banks and credit unions, many are re-evaluating the viability of the products they offer to their account holders.
Overdraft matrix systems are complicated algorithms that have come under increased scrutiny insofar as their effect on protected classes. These programs are not transparent and are based on an abstract set of parameters or a complex matrix of eligibility requirements that are suspected of having a disparate impact on certain account holder segments.
When program eligibility favors one group of potential users over others, or restricts access to the service based upon abstract or subjective factors, compliance violations as well as damage to account holder relationships may occur.
Avoid risk of disparate impact with consistent overdraft program eligibility criteria
When it comes to on-going regulatory review of overdraft solutions, banks and credit unions can rest easy if their program is fully disclosed and provides specific eligibility requirements for all customers. For example, the use of unbiased criteria that pertain to everyone reduces the likelihood of criticism or negative consumer impact.
Also, consider that programs based on ad hoc decisions were common in the days when a bank officer or branch manager would review account overdrafts early every morning and decide whose check to pay and whose to deny, often based on subjective criteria. Today that practice could be equated to having a disparate impact on account holders who were denied the service.
With the availability of fully transparent overdraft solutions, you can avoid inconsistent decisions when it comes to overdraft program eligibility requirements. The key is to select a program provider that uses criteria that are objective and based on conditions that are common to all account holders. This will help to alleviate any compliance concerns regarding discrimination or disparate impact against any particular customer or member segment.
For best results, look for a compliance-tested, regulator-approved program
Financial institutions and outside vendors that have created their own eligibility criteria – based on an abstract set of parameters or a complex matrix of eligibility requirements – run the risk of negative examiner reaction and the possibility of adverse action by a class of consumers.
Did your bank or credit union turn off your overdraft program as a result of increased regulatory scrutiny? Or, could your current eligibility requirements put the institution at risk of being cited for discrimination and disparate impact by examiners?
In either case, your overdraft program should provide you with regulatory peace of mind and an easy-to-manage, reliable source of non-interest income. Likewise, more of your account holders will have the opportunity to access a compliant service that helps them maintain a healthy bottom line, as well. If you have any concerns about the program you have in place, consider a review of your program to ensure it is the best solution for your bank or credit union as well as the market you serve.
Published on CB Insight and CU Insight
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