Federal Reserve Board and FFIEC Propose New Rules for Bounce-Protection Programs

For several years, bounce-protection programs have been the center of controversy. Regulators are concerned about misleading and abusive lending practices because consumers may not have accurate and/or complete information to make informed decisions. Consumer advocates and others compare the programs to payday loans and argue they should be regulated as such. Bankers, on the other hand, have embraced these programs because they address a customer need and also provide fee income with less supervision, maintenance and cost than traditional overdraft-protection plans.

Previously, institutions automated the payment of overdrafts by treating the overdrafts as lines of credit covered under Regulation Z; however, the new program will not be considered a line of credit. Recently, third-party vendors have developed software packages, which may market a new program that promotes fee income by encouraging consumers to use the service as a line of credit.

To address these concerns, both the Board and the FFIEC recently published guidance for public comment, and comments for both were due Aug. 6.

The Board proposed amendments to Regulation DD to regulate bounce-protection programs. These revisions state that depository institutions offering overdraft payment services must provide more complete information about these services. Depository institutions would be required to:

  • provide account-opening disclosures and other marketing materials that describe in detail how fees may be triggered,
  • provide the total dollar amount of overdraft and returned-item fees on periodic statements and year-to-date totals, and
  • prohibit certain advertising practices.

The proposed FFIEC guidance includes best practices addressing the marketing and operation of bounce-protection programs, which affect safety and soundness aspects and consumer issues.


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