The FDIC has issued final guidance (entitled FDIC Overdraft Payment Supervisory Guidance) addressing risks associated with overdraft payment (ODP) programs, which includes specific supervisory expectations for the management of automated ODP programs. The guidance released on November 24 says that the FDIC expects depository institutions to monitor accounts for excessive, chronic use of ODP coverage and, if a customer overdraws his or her account on more than 6 occasions where a fee is charged in a rolling 12-month period, “undertake meaningful and effective follow-up action.” The FDIC suggests that in such cases the institution should consider contacting the customer to discuss less costly alternatives to the automated ODP program and giving the customer a reasonable opportunity to decide whether to continue the fee-based ODP program or choose another alternative. According to the guidance, the FDIC expects institutions to promptly honor customers’ requests to opt out of ODP coverage for non-electronic transactions and give customers the opportunity to affirmatively choose the ODP product that overall best meets their needs. The guidance says that the FDIC also expects institutions to impose daily limits on overdraft fees and to consider eliminating overdraft fees for transactions that overdraw an account by a de minimis amount. The guidance also warns institutions not to process transactions in a manner designed to maximize the cost to consumers, such as by processing checks from the largest to the smallest. The FDIC expects institutions to take any additional efforts necessary to mitigate risks posed by ODP programs in conformity with the new guidance by July 1, 2011.

Notes: Although the guidance focuses on automated OPD programs, it also provides information about compliance with existing regulatory requirements, including requirements to identify, manage and mitigate risks associated with ODP programs, such as risks that could result in serious financial harm to consumers. According to the guidance, the FDIC expects that compliance and risk management systems, policies, and procedures will ensure that an institution’s ODP programs will be managed in accordance with the 2005 Joint Guidance on Overdraft Protection Programs (FIL-11-2005) and the Federal Reserve’s November 12, 2009 amendments to Regulation E. Under the new Regulation E requirements that took effect on July 1, 2010, depository institutions must provide notice and a reasonable opportunity for customers to opt-in to the payment of ATM and point-of-sale (POS) overdrafts for a fee. The new FDIC guidance says that institutions should avoid steering frequent users of fee-based overdraft products to opt-in to ODP programs while obscuring the availability of alternatives and that any such steering activity raises potential legal issues, including fair lending, and concerns about unfair or deceptive acts or practices, and will be closely scrutinized by examiners. The guidance also states that overdraft payment programs that are found to pose unacceptable safety and soundness or compliance risks will be factored into examination ratings.