By Cheryl Lawson, EVP-Compliance Review
It has been some time since regulators announced any new rulings on financial products and services, and it is unclear what their timeframe might be for further action. And of course, as regulatory agencies contemplate their next move, financial institutions must maintain their focus on providing compliant service options to meet needs of their account holders.
Yet while waiting for new regulatory input on overdraft strategies, some banks and credit unions have let their program become stagnant or have decided to forego implementing a compliant overdraft solution until a final ruling is announced. As a result, many existing programs are most likely outdated or obsolete creating increased risk for examiner scrutiny—in addition to missing out on a reliable, compliant revenue source. What’s more, account holders are most likely faced with less attractive choices for meeting their liquidity needs, such as resorting to high interest rate credit cards paying late charges or other less attractive alternatives.
Regulators continue to protect consumers against unfair practices
Since the implementation of initial consumer protection regulations and restrictions on overdraft strategies several years ago, there have been multiple instances of regulatory actions and fines against financial institutions using unfair and deceptive overdraft practices, including:
- failing to obtain affirmative opt-in consent from account holders before charging overdraft fees on ATM and electronic transactions;
- utilizing misleading advertising practices that don’t disclose fees;
- re-ordering transaction processing that results in maximizing overdraft charges; and
- implementing sales incentives that encourage deceptive product marketing practices.
For their part, consumer advocacy groups and the news media continue to keep an eye on practices that are confusing and often more costly for financially strapped consumers.
Best practices and transparency guard against compliance concerns and lead to greatest results
Regardless of when a final ruling is released, banks and credit unions can recover lost revenue with complete peace of mind by maintaining a fully compliant overdraft program. They also can make a positive impact in their account holders’ ability to maintain financial stability by offering a transparent overdraft program with the following built-in safeguards:
- reasonable, communicated fees;
- clearly established and reliable overdraft limits;
- transaction clearing policies that avoid maximizing overdrafts and related fees created by the clearing order;
- the ability to easily monitor excessive usage; and
- communications materials that promote responsible account holder use and outline alternative financial products that more appropriately fit the needs of excessive overdraft users.
In the end, a program that includes the latest analytical, data-driven insight to measure program performance and account holder use—along with robust reporting and tracking capabilities—can help banks and credit unions to maintain a strong bottom line with few new sources of non-interest income on the horizon.