The FDIC published the latest version of Consumer Compliance Supervisory Highlights which provides an overview of compliance activities and issues identified through FDIC examinations. These Supervisory Highlights should be a required read for all compliance or risk-management staff in any financial organization.
With the increased focus on junk fees and overdraft programs, one area in this issue that caught our attention was regarding converting overdraft programs from a static (fixed) limit to a dynamic (adjustable) limit. We are seeing more and more institutions changing to a dynamic limit for the amount of overdraft protection provided on an individual, case-by-case, basis.
The FDIC identified concerns with how these conversions were disclosed and cited Section 5 of the FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce.” This prohibition applies to all persons engaged in commerce, including financial institutions. Examiners found that institutions failed to disclose sufficient information regarding the conversion, and in some cases, institutions did not disclose anything to account holders about the change. Specifically, examiners found that institutions failed to disclose key changes such as:
- Replacement of the fixed amount with an overdraft limit that may change and could change as frequently as daily.
- Use of a new overdraft limit that may be lower or higher, at times, than the fixed amount to which the customer had become accustomed.
- Suspension of the overdraft limit when it falls to zero and how such a change may result in transactions being returned unpaid to merchants/third parties due to insufficient funds.
In order to mitigate risks involved with the conversion, the FDIC provided the following recommendations (along with others) to:
- Provide clear and conspicuous information to existing customers so they have advance notice of how the change from a fixed overdraft limit to a dynamic limit will affect them. This is especially important when the bank previously disclosed the amount of the fixed overdraft limit to customers.
- Disclose changes to overdraft limits in real time to consumers, as these vary, with the opportunity for consumers to adjust their behavior.
- Explain that the dynamic limit is established based on algorithms, or a set of rules, that weigh numerous variables and customer behaviors, how the limit may change (including the frequency of change), and how the limit may be suspended or reduced to zero when eligibility criteria are no longer met.
Institutions looking to convert to dynamic limits, and those institutions that already have, should review the recommendations provided in the Supervisory Highlights to keep from being targeted in an examination. This issue also contains information on re-presentment of unpaid transactions, Regulation E protections, and fair lending (another hot topic).
If you have questions, or we can help in any way, contact us.
Please be advised that CSG provides financial services compliance audit and consulting services to our clients. The services that we provide include certain tasks that may be characterized as “law-related services” under Rule 5.7 of the Rules of Professional Conduct governing lawyers. Since some of our employees are lawyers with an active bar license but are NOT engaged in the private practice of law, that Rule requires us to make disclosures clarifying that the services we perform may be law-related services, but they are not legal services. Because they are not legal services, those services and our relationship will not be governed by the Rules of Professional Conduct that guide the client-lawyer relationship, such as rules applicable to privileged communications and prohibitions of conflicts of interest. Notwithstanding this disclaimer, we will continue to govern our relationship with you using reasonable ethical and professional standards that are expected to meet your expectations.