In our January column, we discussed the ever-evolving regulatory environment surrounding what the NCUA describes as overdraft or bounce protection programs in credit unions. We noted that credit union executives need to stay on their toes and not become complacent in terms of maintaining their proper structure and design.
Let’s take this process a step further and look at your program through the eyes of the examiner. The NCUA prepared a questionnaire that poses real world questions about how your overdraft payment program is structured and implemented. It’s a comprehensive list used to examine these services.
While we won’t cover each and every question in this column, we’d like to pose several so you can put your program to a preliminary test.
Any program or service should be analyzed and evaluated relative to financial impact. Consider these three questions:
- Does the credit union advance funds to pay share overdrafts without a contractual agreement?
- Does the credit union charge a fee for extensions of credit through bounce protection to cover share overdrafts?
- Does the credit union advertise the availability of bounce protection, courtesy pay, or another type of share overdraft payment program which doesn’t rely on a written contract?
- Has your board of directors established a written policy addressing the payment of overdrafts?
- Does this policy set a cap on bounce protection advances?
- Does this policy establish a time limit for a member to deposit funds or to obtain an underwritten loan to cover overdrafts paid by bounce protection?
- Does the policy limit the dollar amount of bounce protection overdrafts?
- Does the policy establish the fee to be charged members for the use of bounce protection?
- Does this policy require the notification of members when an advance is taken through bounce protection?
The NCUA Guidance Document covers other areas in detail including disclosure and communication, accounting, third party service providers, reputation and compliance. Let’s take a look at the questions posed.
Disclosure & Communication
Six questions frame the properly designed and implemented program from a disclosure standpoint.
- Are all members automatically enrolled?
- Are members notified about their enrollment?
- Are members provided the opportunity to opt out?
- Has the credit union clearly disclosed program fees?
- Does the credit union describe the bounce protection program as “free”?
- Is the total dollar amount imposed for bounce protection fees and the total dollar amount imposed for returned fees shown on the account statement?
Consider the following when evaluating your program from an accounting standpoint.
- Does the credit union report outstanding share overdrafts as unsecured credit on the quarterly call report?
- Is the unused portion of the disclosed bounce protection credit line reported as an “unused commitment” on the quarterly call report?
- Are unpaid bounce protection overdraft amounts charged off against the Allowance for Loan and Lease Losses (ALLL)?
- Are unpaid bounce protection fee amounts charged off against income collected from the bounce protection program?
- After bounce protection overdrafts are charged off, are member payments recorded as recoveries and posted to the ALLL?
- Does the credit union aggregate the unused limits and reserve for this “pool” based on past loss experience?
Third Party Service Providers
Credit unions that employ third party providers to design and implement their bounce protection program are strongly encouraged to conduct proper due diligence on the outsource provider they select. However, the NCUA reminds credit unions that they are ultimately responsible in setting the parameters used to determine whose overdrafts will be paid.
There are certain fundamentals that every overdraft payment program should conform to.
- When an item is paid through a bounce protection advance, does the credit union charge both an NSF fee and a bounce protection advance fee?
- Is the fee for a bounce protection advance greater than the non-sufficient funds (NSF) fee charged by the credit union?
- When credit union reports charged off bounce protection advances, are unpaid bounce protection fees included in the reported amount?
- When the credit union converts an unpaid bounce protection advance to a written loan, are the disclosures required by Regulation Z provided?
Many of these questions posed by examiners simply require common sense. Others need more in-depth analysis. If you’re a client of Strunk & Associates, you’ve been provided our responses as well as insights based on years of research and experience. If you’re dealing with another Overdraft Payment Service provider who doesn’t have the answers, consider working with us. Our discretionary Overdraft Privilege Product and our ODP Plus are the best in the industry. They’re also designed to meet or exceed state and federal compliance standards. Call us at 1.800.728.3116 or email us at email@example.com.