What we know now about overdraft privilege

Overdraft privilege appears to have been widely covered in the media over the past 12 months.  We wanted to address some of the most recent worries that have been raised in these news pieces because overdraft privilege programs have received a lot of negative attention and inaccurate information.

  1. Overdraft Privilege has not undergone any new regulatory changes: In July the U.S. House Committee on Financial Services passed the H.R. 4277, the Overdraft Protection Act. This legislation has been presented by Congresswoman Carolyn Maloney (NY) every year since 2009 to the House and has never pass the Senate.  Although the banking industry has evolved significantly since the initial version of the bill was introduced in 2009, its language has remained stagnant and does not take into account the realities faced by modern consumers.  Since the initial version of the bill was introduced, financial institutions have made considerable adjustments to their overdraft programs to be more consumer friendly.  Because overdraft privilege “remains one of the few short-term liquidity products available to consumers within the well-regulated, well supervised banking system,” financial institutions are expanding the flexibility of their product offerings to meet consumer demand and are emphasizing choice in an increasingly competitive market.  This is why it will be the same as the previous 10+ years in that this bill won’t go any farther than it already has.
  2. Almost all financial institution still have some sort of Overdraft Privilege Program: August 2021 we started hearing about financial institutions that were eliminating their overdraft fees. What we found that most financial institutions that were eliminating overdraft fees were doing it for specific accounts.  Most of these financial institutions created a ‘checkless’ checking account for consumers who did not want overdrafts/nsf on their checking accounts.  With these accounts, consumers would not have access to checks and also be limited on what they can do with their debit card transactions, providing no overdraft/nsf transactions. Unfortunately, these accounts are not always free accounts.  It seems most financial institutions are charging Monthly Maintenance fees for this account and some financial institutions are even charging excessive transaction fees.  This type of product is not for everyone because there are consumers that still want access to checks and don’t want to pay a monthly maintenance fee for their checking account.   This past year, through surveys we learned that consumers understand overdraft privilege, they would much rather their item be paid instead of returned, consumers believe od fees are reasonable, and they don’t want to see any reduction to their overdraft access. Overdraft Privilege is still a better product for consumers and consumers still want access to an overdraft limit.
  3. Regulatory groups have started to really focus on NSF fees and Re-Presentments: August 2022 FDIC released Supervisory Guidance on Multiple Re-Presentment NSF Fees. The FDIC stated that it is issuing the guidance because of its observations in consumers compliance exams where consumers are charged multiple NSF fees for the same transaction when a merchant resubmits the transaction for payment. The FDIC has also observed that some institutions’ disclosures did not adequately describe the institution’s re-presentment practice. Luckily for Strunk clients we have been sensitive to this issue for quite a while. In the Spring of 2020 Strunk issued suggested language for checking account agreements to all of our clients to provide enhanced disclosure regarding an arbitration provision.  Also, Strunk’s Overdraft Privilege Service Policy has always included specific language regarding re-presentments. These two things provide for a very strong argument that our client financial institutions are already handling disclosure regarding this issue properly.

Even though there have not been any changes to overdraft regulations, some financial institutions felt political and regulatory pressure to make changes to their overdraft privilege program.  We know that overdraft privilege is a much better service for consumers than returning their items.  Elimination of overdrafts, resulting in more payments being returned, which can lead to repercussions for the consumer such as late payment fees, merchant fees, and potential negative impacts to their credit.

How Strunk clients can properly handle the issue of re-presentment

Strunk has been closely monitoring and sensitive to the issue of re-presentment of declined transactions for the past several years. Strunk provides clients with suggested language for checking account agreements to include enhanced disclosure regarding an arbitration provision as well as a service policy that includes specific language regarding re-presentment. These documents allow Strunk clients to handle disclosure of this issue, and many others, properly.

The suggested language for checking account agreements includes a section on re-presentment of declined transactions which addresses the points regarding disclosure referenced in the FDIC guidance – this was one of the main reasons for including the arbitration clause. Through the use of these materials Strunk clients are already handling disclosure regarding this issue properly.

In addition to disclosure, the other point that should always be stressed with examiners is that an account holder with Overdraft Privilege will essentially NEVER be charged a re-presentment NSF fee because their item will be paid the first time. The only way an ODP customer could be charged for a represented item is if they have already exceeded their overdraft limit – i.e if they have a limit of $800 and their balance is already negative $800 or more, items will begin to be returned.

Strunk clients that require current copies of the ODP service policy or the language for checking account agreements should contact Strunk support at support@strunkaccess.com or visit the Strunk Access portal. Additionally, Strunk offers periodic reviews of client programs, which would include commentary on each of the suggested potential remedies from the FDIC regarding re-presented items. These reviews also consist of solutions to address compliance and to increase service charge income.

Monitor Fresh Start Loan Repayment Schedules using ODP Manager

After the daily import of information in the extract file from your core processor, the Letters, Reports, and Account Inquiry sections of ODP Manager are updated. In addition to this updated information, the hosted software also allows you to add additional information about repayment plans manually to facilitate monitoring of account’s Fresh Start Loan payments.

If you choose to use the Fresh Start Loan repayment plan feature, after completing your Fresh Start Repayment Plan assessment and approval process, you can enter the repayment schedule information directly in ODP Manager. The data in this schedule can be used to fill in your Fresh Start Loan agreement and will make it easier to generate the document to be signed by your customer.

Once the repayment schedule has been created, Strunk’s Reminder feature will create reminders for each payment. Your Strunk software users will be able to monitor each day whether any FSL payments are due and can then check your core system to see if the payments have been made as agreed. After verifying that a payment was received, your users will track the payment date and amount in the ODP Manager software. The repayment schedule is then updated to show the payments made and the outstanding balance on the Fresh Start Loan.

Repayment plans can be viewed not only for each account, but also on a summary list that can be exported to PDF or Excel for reporting purposes. The repayment plan tracking feature in ODP Manager can help your users streamline Repayment Plan Agreement generation, Fresh Start Loan payment tracking, and repayment plan reporting.

Please contact Strunk Support at support@strunkaccess.com with any questions or to find out more about using this feature.

Don’t Take Your Eye off of your Overdraft Program

With all that is going on in our world, it is more important than ever before for the community financial institution to stay focused on the overdraft programs they offer. Account holders that utilize these programs and follow the guidelines properly should not fear that they will lose access to a valuable benefit of their checking account. There are several things that should be considered when administering an overdraft program.

Strunk’s ODP Manager offers helpful information that your organization can use to properly run a successful program. The Status Tracking report has information on the annual dollar amount of overdraft fees charged per active checking account and the annual amount of NSF fees charged per active checking account. Your organization is able to separate out OD fees from NSF fees through the daily file that is uploaded into the software. The program is also able to track waives and refunds so that your organization may track fees charged versus fees received. This would also help to capture the total annual dollar amount consumers receive in overdraft coverage compared to the amount of fees charged.

Strunk Heavy OD Users report will illustrate the prevalence of frequent users of overdraft. The Utilization Analysis and Opt-In Impact reports show the share of active checking accounts that are opted into overdraft programs for ATM and one-time debit transactions and those that have limits on their accounts.

Please contact Strunk at support@strunkaccess.com to see how ODP Manager might assist your organization in running a more effective and efficient overdraft program.


Overdraft Privilege Provides a Solution for Charging Multiple NSF Fees

When a merchant transaction is presented for payment from a consumer account and is refused due to the customer’s insufficient funds to cover the transaction, financial institutions typically charge an NSF fee. When a merchant tries to present the same transaction again in order to recover the denied funds, he or she may be charged a re-presentment NSF fee. If a depository institution receives this type of repeated merchant payment transaction more than once, the depository institution may levy multiple NSF fees. If an Automated Clearing House (ACH) or other item is presented for payment and is denied owing to insufficient funds, certain financial institutions will levy an NSF fee for both the original presentment and each subsequent representation.

In recent class action lawsuits against financial institutions, the removal of key clauses pertaining to the assessment of representation fees was considered to be a violation of contract. Some lawsuits have been settled, with customers receiving refunds and legal fees.  Additionally, state, and federal financial regulators are reviewing DDA agreements searching for potential legal, regulatory and UDAP risks. With these potential risks it is important to review your deposit disclosures and contract language to ensure the way NSF fees are charged is being communicated clearly and consistent to what a consumer could reasonably expect.

This is a great time to make sure that you review your accounts and all of your customers/members that are eligible for Overdraft Privilege should be added to the ODP program unless they have opted out of the program.  By doing this it will minimize your risk for NSF fees being represented, because if your customers/members have an Overdraft limit their items will be considered for payment instead of returned.  Paying the item instead of returning it will ensure that the financial institution minimizes its risk for NSF re-presentments because the item is not returned.  Also, overdraft privilege provides a better service to your customers/members because they will not be faced with potential late fees, retailer fees and damage to their credit from returned items.

The Importance of Employee Training for your Overdraft Program

Does your front-line staff have a biased opinion regarding overdraft privilege and present it in a negative tone?  Is your front-line staff having a hard time explaining overdraft privilege to your customers/members and not really sure what to say to them? If you haven’t had a chance to listen to your employees’ present overdraft privilege to your customers/members, especially Reg. E, Strunk recommends doing it now.  Your staff should explain overdraft privilege and its options to your customers/members in a clear, consistent, compliant, and impartial way.

Sometimes front-line employees do not understand the true benefits overdraft privilege can provide to the customer/member.  Some employees often have a bad perception of overdraft privilege because they associate it with disgruntled or confused account holders. This misunderstanding is one of the main reasons why overdraft privilege training and education are so important!  It is important to provide your employees with a script on how to present overdraft privilege and the benefits of opting into Reg. E. Employees that have practiced and memorized a customer/member-focused overdraft privilege and Reg. E script, ensure that the approach is compliant, succinct, and easy to grasp.

Using the technique of allowing the customer to choose how the financial institution should manage a transaction that would overdraw the customers/members account before the due date ensures their happiness and loyalty.  Strunk’s Overdraft Privilege training will provide a clear understanding of the overdraft program and provide consistent talking points to your employees.  After overdraft privilege training your employees will be equipped with correct and thorough knowledge regarding your program.  Strunk will ensure your employees are equipped with a non-biased, clear and compliant script that provides account holders accurate information so they can make the best decision possible for their situation.  Overdraft privilege training will increase your employees’ confidence as a result of this approach, which will boost their performance, productivity, and level of service to your customers/members.


The consumer case for overdraft privilege

The last few years lawmakers have put extensive focus on overdraft privilege programs and are pushing for additional guidance on the way financial institutions handle overdrafts. It seems that the lawmakers that are pushing for changes only have one way of looking at overdraft privileges, so The American Bankers Association (ABA) wrote a response to the two overdraft research reports that the CFPB issued on December 1, 2021 with some additional data.

First, lawmakers have pushed the narrative that consumers do not want overdraft privilege and that the CFPB constantly gets complaints regarding overdrafts.  The facts show that in 2020 less than 0.15% of CFPB complaints were related to overdrafts.  The ABA reports found that 90% of adults find their bank’s overdraft protection valuable and that 23% of consumers intentionally overdraw their account to cover expenses. A Morning Consult study found that ½ of Americans think overdraft fees are fair and Curinos research found that 62% of consumers would reconsider their support for new regulation of overdraft if it limited access to the service.

Additionally, lawmakers believe that overdraft fees are not fair and are very expensive for consumers.  The ABA reports show that 62% of adults state overdraft fees are reasonable while only 21% state that overdraft fees are unreasonable.  Also, in the ABA report it states that 72% of adults were happy their payments were covered. The CFPB and lawmakers believe that low income consumers suffer the consequence of overdraft fees more than those who are financially comfortable by a large margin. The recent ABA report found that 25% of adults say they have paid an overdraft fee in the past year and that consumers across income brackets are equally likely to have paid an overdraft in the past year.  Post-grads are more likely to overdraw their account than regular college degree or those without a college degree.  According to an article that Indeed posted in 2021, employees who have a post-grad degree make well over double than that of an employee who only has a high school diploma.  The ABA reports found that lower-income households (<$24k annual deposits) avg 10 items paid into overdrafts annually versus 18 items for consumers in the highest income stratum (>$60k annual deposits).  Another point that the ABA report highlights is that lower-income consumers receive more fee waivers and refunds than higher-income consumers.

Before any new regulations around overdraft privilege are done, lawmakers need to look at the economic impact that such action will cause.  Currently overdraft users realize an economic benefit of over 7 to 1, providing annual stimulus to the economy of $65.6B.  Without overdraft privilege consumers lose $443 in purchasing power for each returned check or ACH transaction.  Some larger financial institutions have made changes to their overdraft privilege programs due to fear of potential changes in the regulation and because of competition.  The banks that have already announced changes are expecting hundreds of millions of dollars in lost revenue.  How will these financial institutions make up for this loss of revenue – will they increase other fees or will they have to decrease staffing to meet stockholders’ expectations? Only time will tell.

Overdraft Protection In a New Light

Over the past year, there has been a great deal of scrutiny surrounding overdraft privilege programs. Many news articles focus on the potential negative aspects of overdraft privilege programs. They make the generalization that users of these programs are not sufficiently educated on what usage truly means and that users are typically lower-income.

A 2019 survey from Fiserv shows that 91% of consumers report that they are familiar with their financial institution’s overdraft policy. Strunk has historically stated that clear communication with consumers regarding key elements of the financial institution’s overdraft privilege program is not only important from a compliance perspective, it will also improve program performance. This allows consumers to be more familiar with the program features and limits.

A research paper published by The American Bankers Association provides statistics that show the inconsistencies in data that most articles use characterizing heavy overdraft users as lower-income consumers. The paper states that lower-income households (<$24,000 annual deposits) averaged 10 items paid into overdraft annually vs 18 items for consumers in the highest income level (>$60,000 annual deposits). Lower-income account holders receive more fee waivers and refunds than higher-income consumers and paid lower effective average overdraft charges. Either way, this study shows that consumers of all income categories utilize overdraft programs.

Another argument commonly made in regards to overdraft programs is that consumers find the fees unfair. A common example given that usually describes an overdraft activity is a consumer might buy a $2 cup of coffee and get hit with a $35 fee. In reality, the average size of a purchase that triggers an overdraft fee has nearly quadrupled from $50 to almost $200 in recent years. It is simply not accurate that consumers are getting charged for small purchases. Additionally, a Morning Consult study found that about half of Americans think overdraft fees are fair.

A study by Curinos research found that more than 60% of overdrafts come from consumers who intend to use the service. Likewise, more than 80% of overdraft transactions come from consumers who opted-in to debit card overdraft transactions (Regulation E) with the clear intention of using it to cover their payments. Furthermore, two-thirds of consumers indicate that, while overdraft can be expensive, they don’t want to see reductions in their access to the service or limits. This indicates that consumers understand that if they overdraw their account, having the financial institution pay the overdraft item for them and charge them a fee is a greater benefit to them than returning that item and still charging the consumer a fee. This prevents the consumer from having to pay additional fees to the retailer and potential re-presentment fees.

Less than .15% of complaints to the CFPB were related to overdraft privilege in 2020. Overdraft privilege programs give consumers services that they need and want while also giving them options, which is best for all consumers.

Simple and Efficient Management of the Fresh Start Loan Process using ODP Manager

Fresh Start Loans can help customers resolve their overdrawn account status with up to four payments and can allow them to keep their checking account open. Fresh Start Loans are also a collection tool that can help financial institutions recover and collect on overdrawn accounts that might have otherwise charged off and been closed. Leveraging the tools included in ODP Manager can make managing the Fresh Start Loan process easier and more efficient.

A repayment schedule can be entered for each account with an approved Fresh Start Loan. It will include payment reminders that display when the FSL payment is due to remind your users to check if the payment has been made as agreed. Once verified, FSL payments can also be tracked in ODP Manager.

Instead of needing to create agreements outside of Strunk’s ODP Manager, the Fresh Start Loan Agreement document can be generated directly from the repayment schedule. In addition to generating the agreement from the repayment schedule, users also have an option to generate the agreement as an Ad Hoc letter.

If customers under a repayment schedule do not pay their Fresh Start Loan payments as agreed, the default close letter can be generated and tracked in ODP Manager as well. If any other Fresh Start Loan letters are needed for accounts in a repayment status, an Ad Hoc letter template can be created. By entering the deposit account number, ODP Manager will pre-fill the account information. After the letter is generated, it will be tracked and retained in ODP Manager just like the other Collection and Custom letters.

ODP Manager includes a report that lists all accounts currently under a Fresh Start Loan status. If details are needed about current repayment schedules, a Repayment Schedule summary report can also be exported to PDF or Excel.

Please contact Strunk Support at support@strunkaccess.com with any questions or for more details.

Finding the way through Regulatory Requirements

Recently, there has been a lot of confusion in regards to what is required for non-FDIC regulated financial institutions regarding their overdraft privilege program. Strunk has received several questions from our non-FDIC regulated clients (financial institutions that are regulated by either OCC, Federal Reserve or NCUA) regarding findings from either auditors or examiners.  It seems there is some inconsistency surrounding the messages these clients are receiving regarding their regulatory responsibility regarding overdraft fees.

Overdraft privilege programs are overly scrutinized from financial institutions, auditors and examiners.  It is very important for financial institutions to understand and implement applicable regulations to ensure an effective, compliant approach to their overdraft privilege program. Part of that process is knowing what your regulatory agency requirements are for your overdraft privilege program.

In 2005, the OCC, Federal Reserve, FDIC and NCUA published interagency guidance ‘Joint Guidance on Overdraft Protection Programs’ describing expectations and best practices for overdraft privilege programs. In 2010, the FDIC issued a final rule that focused on requirements and recommendations for FDIC-regulated institutions that utilized an automated overdraft privilege program. In this ruling it states that FDIC-supervised institutions should monitor their program for excessive or chronic customer use, and if a customer overdraws his or her account on more than six occasions where a fee is charged in a rolling 12 month period, then the financial institution should undertake meaningful and effective follow-up action.  Also, in this ruling the FDIC is requiring their regulated institutions to use a de minimis threshold before an overdraft fee is charged and set daily limits on how many overdraft fees that the institution can charge a customer.

To understand this, it means that financial institutions that are not regulated by the FDIC (OCC, Federal Reserve and NCUA) are not required to monitor for excessive use because these agencies have never defined what excessive use or high numbers of overdrafts are. Also, non-FDIC institutions are not required to impose a daily cap on overdraft fees, and they are also not required to set a de minimis. For non-FDIC institutions, auditors and examiners can recommend that an institution implement these items but they should never make it a requirement because there is no regulatory requirement for your institution.