Recent action by the Office of Thrift Supervision (OTS) regarding overdraft practices requires attention from all banks.
On April 23, 2010, the OTS proposed Supplemental Guidance on Overdraft Protection Programs and simultaneously announced an Order imposing severe sanctions against Woodforest Bank, a small Texas thrift, for alleged unfair and deceptive overdraft practices. We suspect that the other federal banking agencies will be looking to the OTS’ proposed best practices to inform their examinations.
In its action against Woodforest, the OTS found that the bank failed to adequately identify, monitor, and control the risks inherent in its overdraft protection program and that it violated Section 5 of the FTC Act, prohibiting unfair and deceptive acts and practices, and the OTS’ advertising regulation. Woodforest neither admitted nor denied liability. Nevertheless, it consented to pay a $400,000 penalty and $12 million in restitution to consumers allegedly harmed by the bank’s overdraft protection program. Woodforest had less than $13 million in equity as of December 31, 2009, before the OTS action.
Highlights of the Supplemental Guidance are outlined below.
- The Supplemental Guidance notes that the OTS’ original Guidance advised "institutions to consider providing a daily cap on the overdraft fees charged against any one account." (Emphasis added.) The Supplemental Guidance goes much further, stating, "In some circumstances, failure to impose a reasonable limit on aggregate overdraft fees is an unfair practice under the FTC Act." (Emphasis added.) Without expressly specifying that overdraft fees may not exceed such levels, the OTS expressed particular concern about aggregate overdraft fees that exceed the average daily balance of the consumer’s account or the overdraft limit on the account. Where overdraft usage becomes excessive, institutions are directed either to limit it or offer consumers any lower-cost services that may be available.
- The Supplemental Guidance requests comment on reasonable per transaction overdraft fees. The OTS asked whether its standards should be similar to proposed Federal Reserve Board rules under Regulation Z for penalty charges on credit cards. Among other things, the FRB rules would limit penalty charges to an amount that is "reasonable and proportional" to the consumer’s violation and could not exceed, in the case of an overlimit transaction, the amount by which the post-transaction balance exceeds the credit limit.
- The Supplemental Guidance states that it would be a "material misrepresentation" (and, hence, unlawful) "to use marketing that focuses on account features that are 'free' or inexpensive, but omits information about the cost of each overdraft transaction." It would also be deemed a "deceptive" (and illegal) practice for an institution to represent that overdraft protection is "free" when it is only provided "for accounts with higher costs for other services or less favorable terms." By contrast, without mentioning overdraft fees, Regulation DD only prohibits marketing accounts as "free" or "no cost" if there are any "maintenance" or "inactivity" fees.
- The Supplemental Guidance provides that it is "deceptive" (and, hence, unlawful) to fail to promptly notify consumers each time overdraft protection is used. It goes on to state, "Where technologically feasible to do so, real-time notification should be provided." It is unclear whether failure to provide real-time notification, where feasible, constitutes a violation of law or "merely" a violation of OTS best practices.
- The Supplemental Guidance recommends as a best practice (but not as a flat legal requirement) that an institution provide its "customers with the opportunity to affirmatively choose or 'opt in' to overdraft protection for transactions outside the scope of Regulation E’s opt-in requirement" with regard to ATM and everyday debit card transactions—for example, checking and ACH transactions.
- Other practices that would be deemed "deceptive" under the Supplemental Guidance include failure to adequately explain
- the effect of overdraft fees on overdraft limits,
- the possibility of multiple overdraft fees,
- the circumstances when suspended overdraft privileges will be restored, and/or
- the effect of the institution’s policy for processing items on overdraft fees.
Significantly, the Supplemental Guidance does not prohibit posting transactions in high-to-low order.
In light of these developments, one OTS recommendation, from the preamble to the original OTS Overdraft Guidance and the Supplemental Guidance, bears repeating: "It is important that savings associations [and banks] have their overdraft protection programs reviewed by counsel for compliance with all applicable laws prior to implementation" and "monitor applicable laws and regulations for revisions" thereafter.