Regulatory Agencies Issue Joint Guidance on Overdraft Protection Programs

The Federal Financial Institutions Examination Council (FFIEC) on Feb. 18, 2005, released final guidance on overdraft protection programs to assist insured financial institutions in the responsible disclosure and administration of all types of overdraft services. (Office of Thrift Supervision guidance was issued separately.) Unlike traditional overdraft programs, some new programs are marketed essentially as short-term credit facilities; consumer groups and others have raised issues about the marketing, disclosure and implementation of some of these new programs. The principal elements of the FFIEC's final guidance are centered on three primary areas: safety and soundness considerations, legal risks and best practices.

Safety and Soundness Considerations:

The final guidance reaffirms that overdrafts are credit; therefore, institutions must adopt policies and procedures to address credit risks. Banks should also establish account eligibility standards/dollar limits, monitor accounts and identify customers who are undue credit risks, develop management reports to manage program performance and adopt prudent risk management practices. One important distinction exists between the proposed and final guidance, however. The agencies have extended the charge-off period from 45 to 60 days.

Legal Risks:

Overdraft programs must comply with all applicable federal/state laws and regulations, and institutions should have their programs reviewed by legal counsel. Converting an overdraft line to a closed-end loan triggers the Truth in Lending Act (TILA) consumer disclosure requirements; the Board will make decisions about TILA disclosure coverage of future overdraft programs on a case-by-case basis.

Best Practices:

Most practices relate to customer marketing, communication and account management; however, a new best practice was included, recommending that institutions provide ATM customers a specific notice that they are triggering an overdraft protection program.

More information can be found on the Board's web site, www.federalreserve.gov/boarddocs/SRLETTERS/2005/sr0503.htm.

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