On November 24, 2010 the FDIC published FIL-81-2010, Overdraft Payment Programs and Consumer Protection, with the expectation that FDIC-supervised institutions will be in compliance with the guidance contained therein by July 1, 2011. While this final guidance on automated overdraft payment (ODP) programs applies to FDIC supervised institutions, this guidance can be followed by any federally-regulated financial institution which offers an automated ODP program to assist in mitigating the risks associated with these programs.

Accordingly, the FDIC expects their supervised institutions with automated ODP programs to comply with all consumer protection laws and regulations in addition to the following:

• Provide clear and meaningful disclosures and other communications about ODP programs, fees, and other features and options;
    
• Demonstrate compliance with new opt-in requirements for automated teller machine (ATM) withdrawals and one-time point-of-sale debit card transactions;
    
• Promptly honor customers' requests to decline coverage of overdrafts (i.e., opt-out) resulting from non-electronic transactions;
    
• Give consumers the opportunity to affirmatively choose the ODP product that overall best meets their needs;
    
• Monitor accounts and take meaningful and effective action to limit use by customers as a form of short-term, high-cost credit, including, for example, giving customers who overdraw their accounts on more than six occasions where a fee is charged in a rolling twelve-month period a reasonable opportunity to choose a less costly alternative and decide whether to continue with fee-based overdraft coverage;
    
• Institute appropriate daily limits on overdraft fees; and consider eliminating overdraft fees for transactions that overdraw an account by a de minimis amount; and
    
• Not process transactions in a manner designed to maximize the cost to consumers.

On March 29, 2011, the FDIC held a webinar to provide explanation on their guidance and to answer questions. Shortly thereafter, the FDIC published their FAQ based on the questions from the webinar.

In short, the FDIC emphasized that the guidance only relates to “automated” ODP programs where there is limited, if any, human intervention with decisions. “Ad-hoc” programs where decisions are made on a case-by-case basis by institution staff are not covered by this guidance; however, application of this guidance to “Ad-hoc” ODP programs is not prohibited and might prove to provide good risk mitigation.

One of the risk mitigation steps within the guidance that seemed to cause the most angst to listeners was the meaningful and effective follow-up with a consumer who had six or more “occasions” where a fee was charged to the consumer for use of the ODP program within a rolling twelve-month period. As we know, six occasions can happen within a very short period of time, and follow-up with a consumer could turn into repeated follow-up. The FDIC FAQ provides two illustrations of what would be considered meaningful and effective follow-up.

One of the illustrations that may be the easiest for an institution and the least intrusive to a consumer is probably the use of the notification to the consumer on their statement. The FAQ even provides sample language that can be used. Of course this may mean some programming of core data systems to get the language to appear on statements of consumers for which the information is applicable. But in the long run, that is probably better than having staff contact consumers by phone and having conversations with consumers on their use of the ODP program and the alternatives available to them.

If you don’t have less costly alternatives to your ODP program, now might be the time to develop them since there is an underlying theme within the guidance that consumers are provided with less costly alternatives. One alternative may be to link another deposit account to the checking account for transfer of funds when the checking account becomes overdrawn. Another alternative may be to offer a low limit overdraft line of credit that is offered through the consumer loan department.

If you haven’t already read the Guidance and the FAQ and you are an FDIC-supervised institution, you should start to review it, consider it, plan, and make any necessary revisions to your automated ODP program in order to meet the expected compliance date of July 1, 2011.

By: Lorraine A. Williams, CRCM, CRP, CAMS
Director, Research & Development