What Are the Regulators’ Expectations?

Federal regulators have set stringent guidelines for the selection of overdraft service providers. Learn how your CU can conduct due diligence to meet regulator expectations.


In our last article we asked if your overdraft service program had lost its vitality and needed a tune-up. We explained ways in which your service could be rejuvenated as well as sharpened up in light of the impending July 1 regulations. In this article we’ll be talking to credit unions that will be initiating -- or revitalizing – their overdraft payment service with the help of a 3rd party provider. Specifically, we’ll be looking at the discretionary overdraft service providers and what their clients should expect of them.

Not all decision makers are aware of it but federal regulators have set stringent guidelines for the selection of 3rd party providers of overdraft protection services. And what may not be news is the fact that some providers, both large and small, fall woefully short in providing programs that will stand up to the due diligence the regulators require. What’s more, when asked about their programs, these 3rd party providers may not be forthcoming in explaining what is required. As the old saying goes, “let the buyer beware”. The responsibility to conduct due diligence falls squarely on the shoulders of the credit union.

Due Diligence Process

Federal regulators have added clarity to the selection process of an overdraft payment provider by outlining a due diligence process that identifies areas decision makers should consider. This information is covered in the November 2000 Risk Management of Outsourced Technology Services. This document covers 32 steps in the process. This process is not optional although some providers may lead the client to think it is.

The due diligence process categorizes these 32 steps under four sections: Risk Assessment, Selection of Service Providers, Contract Review and Monitoring of Service Providers.

When evaluating the first area, Risk Assessment, consider the following nine areas:

  1. Strategic goals, objectives and business needs of your financial institution
  2. Ability to evaluate and oversee outsourcing relationships
  3. Importance and criticality of the services to the financial institution
  4. Defined requirements for the outsourced activity
  5. Necessary controls and reporting processes
  6. Contractual obligations and requirements for the service providers
  7. Contingency plans, including availability of alternative service providers, costs and resources required to switch service providers
  8. Ongoing assessment of outsourcing arrangements to evaluate consistency with strategic objectives and service provider performance
  9. Regulatory requirements and guidance for the business lines affected and technologies used

The second area is Selection of Service Providers. Three of the most important considerations that financial institutions should evaluate when performing due diligence on a provider are:

  1. Technical and industry expertise
  2. Operations and controls
  3. Financial condition

The third area is Contract Review. The contract is the written centerpiece that spells out all aspects of the service. Consider it carefully from all angles including:

  1. Scope of service
  2. Performance standards
  3. Security and confidentiality
  4. Controls
  5. Audit
  6. Reports
  7. Business resumption and contingency plans
  8. Sub-contracting and multiple service provider relationships
  9. Cost
  10. Ownership and license
  11. Duration
  12. Dispute resolution
  13. Indemnification
  14. Limitation of liability
  15. Termination
  16. Assignment

Monitoring of Service Providers. Some of the oversight activities that should be considered when one administers the service provider relationship include the following:

  1. Monitoring financial condition and operations
  2. Assessing quality of service and support
  3. Monitoring contract compliance and revision needs
  4. Maintaining business resumption contingency plans

We welcome you to put Strunk to the test if you’re looking for an overdraft service provider. We’re confident our organization will stand up to the most rigorous due diligence process. Give us a call or send an email. Our phone number is 1-800-728-3116, email is information@strunklp.com or check our web site at www.strunklp.com.

In business since 1976, Strunk & Associates, LP is a financial advisory service recognized nationally for its innovative design, development and implementation of The Original “Overdraft Privilege Service Program”. Strunk & Associates, LP currently has over 1250 verifiable Overdraft Privilege Service clients throughout the United States and the Caribbean.



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