Pub. 2 2013 Issue 3

28 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s Protect Your Bank Against Potential Regulatory Pitfall Full disclosure and consumer focus lead to compliance peace of mind By: JohnM. Floyd, Chairman & CEO I n an effort to provide the Consumer Financial Pro- tection Bureau (CFPB) with a more realistic look at how disclosed overdraft programs benefit consum - ers, JMFA partnered with Washington D.C.-based Morrison Foerster LLP, to gather feedback from a group of 50 financial institution leaders representing banks and credit unions from across the country. Their responses, gathered through a series of forums and surveys, focused on the following areas the CFPB has identified as concerning: • patterns of overdraft program use; • posting order that increases consumer costs; • opt-in rates based on misleading statements and exces sive pressure; and • disproportionate impact on low-income and young con sumers. Who uses overdraft services? According to the study results, there appear to be two distinct patterns of overdraft use: consumers who use the program occa- sionally – and in many cases inadvertently – and those who regu- larly rely on overdrafts to meet their near-term liquidity needs. Because they do not incur frequent overdrafts, occasional users are less likely to understand their financial institution’s overdraft practices. This includes individuals who have incurred significant overdraft fees for debit card and ATM transactions because they were relying on their financial institution to reject these transac - tions if they would lead to an overdraft. Providing these account holders with easy-to-understand information about how your overdraft program works is essential to maintaining compliance. On the other hand, it is important to counsel customers who regularly overdraw their accounts about the risks of excessive overdraft usage and to advise them on alternative strategies that might be better suited for their needs. Transaction posting order Posting transactions in a high-to-low sequence is one of the biggest consumer complaints regarding overdraft programs. Contrary to reports by consumer groups and the media, the study did not find that participating institutions intentionally manip - ulated the transaction posting order to increase revenue. Banks can avoid customer complaints, negative regulatory action and possible fines by maintaining transaction posting procedures that do not increase account holder costs. Program opt-in rates While the study found that opt-in rates for ATM and POS debit card transactions vary greatly from institution to institution, par- ticular focus on the wording of account holder materials revealed that participants followed regulatory guidelines that require clear, easy-to-understand explanations regarding opt-in and opt-out procedures. Make sure you are providing your customers with the choice to opt in to overdraft services for ATM and debit card transactions and to opt out of the service for check and ACH transactions. Addressing the impact on low-income and young consumers Due to the economic reality that many Americans live from paycheck to paycheck, a majority of the institutions we spoke to agree with the FDIC’s position that most regular overdraft users were disproportionately low and moderate income and more likely to be young adults. However, they noted that some middle- and high-income account holders are also regular overdraft users. Regardless of the income level, it is essential to maintain on-go- ing communications with all account holders carrying negative balances to inform them of the situation and encourage them to make a deposit. A roadmap to full compliance As financial institutions anticipate the CFPB’s final overdraft program ruling, there are steps that can be taken now to ensure that your overdraft processes and procedures are compliant. The key is to provide your customers with a clearly defined overdraft program that includes: • complete transparency regarding fees and information about how the program works; • reasonable, communicated overdraft fees; • clearly established overdraft limits; • transaction clearing policies that avoid maximizing over drafts and related fees created by the clearing order; • the ability to easily monitor excessive usage; and • communications materials that outline alternative finan cial products that more appropriately fit the needs of excessive overdraft users. When implemented and managed correctly, a fully compliant overdraft program will provide peace of mind for your customers and your institution. John M. Floyd & Associates (JMFA), an Associate Member of the Kansas Bankers Association, is a leading provider of profitability and performance-improvement consulting. For more than 30 years, JMFA has been recognized as one of the most trusted names in the industry, helping financial institutions enhance their bottom line with programs like JMFA Overdraft Privilege®. To learn more about JMFA, please contact Andre Branning, JMFA regional director, at Andre.Branning@ JMFA.com or (314) 440-9095.