The FDIC has proposed guidance on how depository institutions should implement and maintain robust oversight of automated overdraft payment programs. The proposal released on August 11 encourages banks to find effective ways to monitor overdraft programs for the purpose of identifying excessive or chronic use by customers as a form of short-term, high-cost credit rather than as protection against occasional, inadvertent overdrafts. The proposal also provides an overview of how banks can avoid compliance and safety-and-soundness risks. According to the proposal, the FDIC expects a bank’s board of directors and management to ensure that the bank mitigates the risks associated with offering automated overdraft payment programs and complies with all consumer protection laws and regulations. In particular, that would mean providing clear and meaningful disclosures and other communications about overdraft payment programs, features and options, and demonstrating compliance with new overdraft fee disclosure requirements as well as new regulations that require notice and opt-in for customers to choose fee-based overdraft coverage of ATM withdrawals and one-time point-of-sale debit card transactions. Comments on the proposed guidance may be submitted until September 27, 2010.

Nutter Notes: Under new requirements in Regulation E that recently took effect, banks already must give customers an opportunity to opt in to programs that charge a fee to cover ATM and point-of-sale overdrafts. The proposed guidance states that the FDIC expects banks to promptly honor customers’ requests to decline coverage of overdrafts (opt out) in non-electronic transactions, give consumers the opportunity to opt in to the overdraft payment product that overall best meets their needs, and monitor accounts and take meaningful and effective action to limit excessive or chronic use of overdraft payment products. For example, the guidance recommends giving customers who overdraw their accounts on more than 6 occasions where a fee is charged in a rolling 12-month period a reasonable opportunity to choose a less costly alternative and decide whether to continue with fee-based overdraft coverage. The proposal would also suggest that banks institute daily limits on overdraft fees, and not process transactions in a manner designed to maximize the cost to consumers. The proposed guidance resulted from the FDIC’s November 2008 Study of Bank Overdraft Programs that disclosed growing use of overdraft payment programs in the financial services industry, and a spike in consumer complaints to the FDIC related to overdraft protection programs, which almost doubled from 2008 to 2009.