Consumer Financial Services Alert - November 30, 2010

The FDIC finalized guidance it proposed on August 11, 2010 regarding how banks it supervises should monitor and oversee automated overdraft payment programs.

Supervisory Expectations

The FDIC expects banks it supervises to implement effective compliance and risk management systems, policies, and procedures for their automated overdraft payment programs. As changes are made to such programs in response to regulatory developments or to implement additional recommendations, the FDIC reminds its supervised banks to ensure that customer communications (e.g., agreements, correspondence, marketing materials, etc.) are updated accordingly, present information accurately and are not misleading. To mitigate safety and soundness and compliance risks, and avoid violations of law, the FDIC expects its banks to take the following actions regarding automated overdraft payment programs:

• Ensure that boards of directors provide appropriate oversight of programs, consistent with their ultimate responsibility for overall compliance, and that on an ongoing and regular basis management provides oversight of program features and operation. Appropriate steps include an annual review of an overdraft program’s key features.
• Review their marketing, disclosure, and implementation of such programs to minimize potential consumer confusion and promote responsible use.
• Train staff to explain program features and other choices.
• Prominently distinguish account balances from any available overdraft coverage amounts.
• Monitor programs 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, undertake meaningful and effective follow-up action, including, for example:
• Contacting the customer (e.g., in person or via telephone) to discuss less costly alternatives to the automated overdraft payment program such as a linked savings account, a more reasonably priced line of credit consistent with safe and sound banking practices, or a safe and affordable small-dollar loan; and
• Giving the customer a reasonable opportunity to decide whether to continue fee-based overdraft coverage or choose another available alternative.
• Institute appropriate daily limits on customer costs by, for example, limiting the number of transactions that will be subject to a fee or providing a dollar limit on the total fees that will be imposed per day.
• Consider eliminating overdraft fees for transactions that overdraw an account by a de minimis amount.
• Consider employing cost effective, existing technology, as appropriate (e.g., text message, e-mail, telephone or cell phone) to alert customers when their account balance is at risk of generating a fee for nonsufficient funds.
• Consider providing information to consumers about how to access free or low-cost financial education workshops or individualized counseling to learn how to more effectively manage personal finances.
• Review check-clearing procedures of the institution and any third-party vendor to ensure they operate in a manner that avoids maximizing customer overdrafts and related fees through the clearing order. Examples of appropriate procedures include clearing items in the order received or by check number.
• Monitor and, where necessary, mitigate credit, legal, reputational, safety and soundness, and other risks, as appropriate. Legal and compliance risks associated with overdraft payment programs include: Section 5 of the Federal Trade Commission Act, the Equal Credit Opportunity Act, the Truth in Savings Act, the Electronic Fund Transfer Act, as well as related implementing regulations and any changes to those regulations or statutes.

Regulation E Requirements

Under new Regulation E requirements that took effect on July 1, 2010, banks must provide notice and a reasonable opportunity for customers to opt-in to the payment of ATM and POS overdrafts for a fee. In complying with these requirements, the FDIC stresses that banks should not attempt to steer frequent users of fee-based overdraft products to opt-in to these programs while obscuring the availability of alternatives. Targeting customers who may be least able to afford such products such as through aggressive advertising or other promotional activities can, according to the FDIC, raise safety and soundness concerns about potentially unsustainable consumer debt. Any steering activity with respect to credit products may raise potential legal issues, including fair lending, and concerns about unfair or deceptive acts or practices, among others, and, according to the FDIC, will be closely scrutinized.

Although the FRB in its Regulation E rulemaking did not address the payment of overdrafts resulting from non-electronic transactions, such as paper checks or ACH transfers, the FDIC believes banks should allow customers to decline overdraft coverage (i.e., opt-out) for these transactions and honor an opt-out request. In addition, the FDIC encourages its supervised banks to remind their customers, especially chronic or excessive users of overdraft programs, that even if they have chosen to opt-in to the payment of ATM and POS overdrafts for a fee, they can still choose to opt-out of ATM and POS overdraft programs at any time.

Examinations

According to the FDIC, it will review overdraft payment programs at each examination. Overdraft payment programs that are found to pose unacceptable safety and soundness or compliance risks will be factored into examination ratings and corrective action will be taken where necessary. The FDIC insists that banks using third party arrangements should follow the 2008 Guidance for Managing Third-Party Risk.

The FDIC expects any additional efforts to mitigate risks covered by the guidance to be in place by July 1, 2011. Click here for the guidance.

HUD is considering issuing guidance under the Real Estate Settlement Procedures Act to address possible changes in warehouse lending arrangements that have occurred since HUD issued regulations on table funding and secondary market transactions in 1992 and 1994.  In order to assist HUD in determining whether such guidance is needed and to formulate such guidance, HUD issued a notice soliciting information on how warehouse lending has evolved in recent years, and especially on how warehouse lending currently operates within residential mortgage transactions.  HUD’s suggested topics for comment include, among other things: (1) how a warehouse lender provides funding to loan originators; (2) what mechanisms are used by a warehouse lender to assure repayment of the funding; (3) whether ownership of a mortgage loan that is originated by a loan originator who is funded by the warehouse lender ever transfers to the warehouse lender; (4) the extent to which a warehouse lender is involved in the credit approval decision; and (5) the characteristics that indicate a bona fide transfer of the loan such that the transaction would be a secondary market transaction that is not covered by HUD’s RESPA regulations.  Comments are due by December 27, 2010.  Click here for the Federal Register notice.