Aspirin for the Compliance Headache

Financial institutions are facing a number of issues in today’s volatile market. Declining income opportunities due to lower interest rates and more consumer loan options have both had a major impact nationwide.




Financial institutions are facing a number of issues in today’s volatile market. Declining income opportunities due to lower interest rates and more consumer loan options have both had a major impact nationwide. One solution that increases both non-interest income and member satisfaction is overdraft privilege.

Just thinking about the recent changes in regulations with these programs can give anyone a headache. However, overdraft privilege programs have many benefits that should be considered, including:

  • Reduces Staff Labor – If the list of NSF items were reduced by 75% each day, branch officers would have more time to respond to new members. (The percentage of items reduced from manual decision-making is variable, but most NSF items are small and can be easily paid by an overdraft privilege program.)
  • Increases Member Loyalty – These timesavings result in more than expense savings to the financial institution. An added, though unintentional, benefit is enhanced member service.
  • Offers a Competitive Advantage – To attract new members, overdraft privilege services are becoming standard in the marketplace and are offered by financial institutions of all sizes. Multiple ATM locations, Internet banking and overdraft privilege demonstrate solutions that many members are no longer surprised to get – in many cases they expect them.
  • Saves Members Money and Embarrassment – Overdraft privilege programs enable credit unions to cover member share drafts (or checks) up to a pre-defined overdraft limit while charging the standard NSF fee. When the item is paid by the credit union and doesn’t go back to the merchant unpaid, the member pays only one fee to the financial institution and is not charged a returned check fee by the merchant. That saves the member excessive fees since they avoid merchant fees. More importantly, the member is spared the embarrassment of having an item returned to the retailer and the repercussions to their reputation.
  • Increases Non-Interest Income – Overdraft privilege users include existing NSF-writers and those who currently use other resources to address occasional shortfalls (e.g., borrowing from family, payday lenders, or payroll advances). Statistics indicate that financial institutions generally don’t experience a significant increase in the amount of NSF’s written by a single accountholder. Instead, the institution makes available a resource that more accountholders will be able to use.

Regulatory Perspective

Whether you currently offer an overdraft program, or occasionally pay overdrafts, you will want to know how regulatory issues will affect your institution or you will wind up dealing with major headaches related to overdraft privilege compliance.

Recent regulations relating to overdraft privilege programs have raised the bar for financial institutions and vendors. Regulators have provided direction regarding the operation of overdraft privilege programs. In some cases, the direction involves changes to regulations (e.g., changes to 12 CFR Part 707) whereas in other cases the direction may be considered optional (e.g., Final Guidance on Overdraft Protection programs or InterAgency Guidance).

InterAgency Guidance

The InterAgency Guidance, introduced in February 2005 was established to provide financial institutions with guidelines to follow when offering overdraft programs to consumers as an alternative to traditional ways of covering overdrafts. The guidance helps eliminate such abuses as discriminatory availability, over-promotion, lack of communication with participants and any under-education of consumers on the program’s proper use.

Within the guidance, there are three primary sections: safety and soundness considerations, legal risks and best practices.

  • The first section of the Interagency Guidance, safety and soundness considerations , seeks to ensure that depository institutions offering overdraft protection adopt adequate policies and procedures to address credit, operational and other associated risks.
  • The second section on legal risks addresses how financial institutions need to comply with all applicable federal and state laws. State laws also may be applicable, including usury and criminal laws and laws on unfair or deceptive acts or practices.
  • Finally, the best practices section addresses the marketing and communications that go along with the offering of overdraft programs, as well as the disclosure and operation of these programs.

12 CFR Part 707

12 CFR Part 707 implements the Truth in Savings Act that requires the disclosure of the amount of any fee charged for paying a share draft written on an account. The regulation changes that take effect on October 1, 2006 have caused a great deal of discussion. Some institutions are uncertain about whether to disclose overdraft programs in light of these regulatory changes. To avoid the new disclosure requirements, they may decide to stop disclosing their overdraft programs on October 1, 2006. Compliance experts do not think that the recent regulatory direction is intended to stop financial institutions from providing their members with information about overdraft privilege program. Regulators are not in the business of preventing financial institutions from providing their members with accurate information.

Federal Brochure

The third element of regulatory response to overdraft programs is the brochure, Protecting Yourself from Overdraft and Bounced-Check Fees, which was issued in December 2004.

This brochure is one of many designed to protect the consumer. It is written in language that is straightforward and easy to read so consumers can educate themselves about what they need to know about overdraft protection plans.

The brochure goes into detail covering: How overdrafts occur, how to avoid overdraft fees, understanding overdraft protection plans and the costs, what other methods there are to cover overdrafts, and what to do if there is a problem or complaint with overdraft programs/plans. 

Reg B and ECOA

Regulation B implements the Equal Credit Opportunity Act (ECOA), which prohibits creditors from discriminating in providing credit to applicants based on race, color, religion, national origin, sex, marital status, age or if an applicant’s income is derived from public assistance. FDIC comments regarding the application of the Equal Credit Opportunity Act and Regulation B to overdraft privilege programs raised the issue of discrimination against consumers on a prohibited basis. This discussion may appear to discourage the use of overdraft privilege for selected accounts.

In fact, offering overdraft privilege to all eligible accountholders, regardless of protected class (race, color, religion, national origin, sex, marital status, age, or the fact that all or part of the applicant's income derives from a public assistance program and the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act), is appropriate. Overdraft privilege programs should not steer or target certain consumers. Instead, all eligible accounts should be given overdraft privilege and financial institutions should inform consumers of other overdraft services and credit products.

Reg Z

Regulation Z implements the Truth in Lending Act, requiring the disclosure of consumer credit terms and costs, regulating certain credit card practices and providing ways to resolve credit billing disputes. Some financial institution executives have disputed whether overdraft privilege programs should be treated as loans. According to the InterAgency Guidance issued in February 2005, the following description of why overdraft privilege is not a loan appears under the heading Truth in Lending Act in the subsection Legal Risks: “Under Regulation Z, fees for paying overdraft items currently are not considered finance charges if the institution has not agreed in writing to pay overdrafts.  Even where the institution agrees in writing to pay overdrafts as part of the deposit account agreement, fees assessed against a transaction account for overdraft protection services are finance charges only to the extent the fees exceed the charges imposed for paying or returning overdrafts on a similar transaction account that does not have overdraft protection.” Since overdraft privilege programs are discretionary services when properly implemented, they are not lending products subject to Reg Z.

Regulatory Conclusion

These regulations are not in place to give you a headache, but to guarantee that overdraft privilege programs are a win-win for both the credit union and its members. Regulators want to protect consumers by ensuring credit unions offering overdraft privilege programs are accurately reflecting the financial impact of the program on the consumer’s account. This not only means providing detailed member statements but also educating members on how the plan works, the fees associated with the plan and alternatives available to overdraft privilege. Plus, it means ensuring that members understand their own responsibility to return their accounts to a positive balance.

When you combine compliance efforts for overdraft privilege-related regulations with compliance related to all the other regulations your credit union must address, it can seem overwhelming. The bottom line is an overdraft privilege program can be a great product offering for your credit union if you dedicate the time and resources necessary for compliance related issues. (or hire an experienced third party to manage that process for you.) By doing so, it just might be “the aspirin for your overdraft privilege compliance headaches.”

About John M. Floyd & Associates

John M. Floyd & Associates is a leading provider of overdraft privilege programs, implementing more than 1,000 of such programs and servicing more than 2,000 banks and credit unions in 49 states and Central America. JMFA is also recognized nationally for training, incentive and earnings enhancement programs as well as product, service, pricing and technology improvement consulting.

To learn more about JMFA, visit or call 800-809-2307.





June 5, 2006



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