The Federal Deposit Insurance Corporation is the latest federal banking agency to issue proposed guidance on overdraft practices. In a Financial Institution Letter dated August 11, 2010, the FDIC outlines its expectations for overdraft protection programs offered by institutions it supervises and also invites comments.
The new guidance sets forth actions the FDIC expects its supervised institutions to take to mitigate safety and soundness risks posed by automated overdraft protection programs. The FDIC supervises state-chartered banks that are not members of the Federal Reserve system. Highlights of the FDIC's guidance include the following:
- Institutions are expected to monitor their programs for "excessive or chronic" use. The FDIC specifically invites comments on whether an effective way to monitor for such use would be for an institution to contact a customer who overdraws his or her account more than six times where a fee is charged on a rolling 12-month basis to discuss less costly alternatives to overdraft protection.
- Institutions are expected to provide daily cost limits, such as a limit on the number of overdrafts that will be subject to a fee or a cap on total daily fees.
- In an apparent attempt to prohibit institutions from clearing checks in a "high-to-low" order, the FDIC states that it expects that the check-clearing procedures used by institutions will operate in a way that avoids maximizing overdraft fees through the clearing order, such as by clearing items in the order received or by check number. Not only is the FDIC's apparent position on "high-to-low" processing more restrictive than the position taken by the other federal banking agencies, it is also inconsistent with well-settled law under the Uniform Commercial Code that allows a bank to clear checks in any order it sees fit. While stating its expectations for check clearing, the FDIC incongruously omits any reference to the order in which institutions process ATM and one-time debit card transactions.
- Institutions are expected not to steer frequent users of overdraft products to opt in to overdraft protection programs while "obscuring" the availability of alternatives. The FDIC notes that steering activity raises concerns about unfair or deceptive practices and could also raise concerns under fair lending statutes and regulations.
- The FDIC believes institutions should allow customers to opt out of overdraft protection for transactions outside the scope of Regulation E's opt-in requirement, such as paper checks and ACH transactions.
- The FDIC warns that overdraft protection programs will be reviewed at each examination and that programs found to pose unacceptable safety and soundness risk or compliance risk will be factored into examination ratings. It also warns that inconsistent overdraft fee waivers will be evaluated under fair lending statutes and regulations.
- Institutions are reminded that they will continue to receive positive CRA consideration for offering alternatives to overdrafts, particularly where such alternatives are responsive to the needs of low- and moderate-income individuals.
Comments on the FDIC's guidance must be submitted by September 27, 2010. Proposed Supplemental Guidance on Overdraft Protection Programs was issued by the Office of Thrift Supervision in April 2010, and is summarized in an earlier Ballard Spahr legal alert. Dozens of class actions have been filed around the country involving claims by depositors that the overdraft practices used by their banks were unfair, deceptive or otherwise improper. One of these cases recently resulted in a $203 million lower-court judgment (which will certainly be appealed).