Have policies for managing members’ abuse of overdraft protection and be transparent to comply with CFPB.

by Dan Lozier

Not terribly long ago, financial institutions of all sizes spent a great deal of time and energy bringing their debit and ATM programs, specifically as they relate to overdraft policies and fees, into compliance with new regulations. Now, the Consumer Financial Protection Bureau and other regulatory bodies are checking in to be sure all that hard work is paying off for consumers.

The CFPB, in particular, is interested in determining if overdraft costs can be anticipated and avoided, even when members are the ones initiating them. A recent report by the agency found that consumers who opt in for overdraft coverage end up with more costs and more involuntary account closures. And, the agency found, overdraft and non-sufficient fund fees represent at least 60 percent of checking account fee income.

That figure is not surprising. Revenue from checking accounts has taken a beating over the past 12 months, particularly for large financial institutions. (There has been slight per-transaction interchange decline for Credit Unions, but overall Credit Union debit programs are growing, which is offsetting this decline for Credit Unions.) First, overdraft regulations limited the way banks and credit unions could charge overdraft fees. Next, the Durbin Amendment capped debit interchange for large banks and a handful of credit unions, reducing the profitability of debit programs across the country. Even exempt credit unions were told to expect some trickle-down impact on their own interchange income.

While it may seem more than fair to charge a fee for covering a member when he or she makes a mistake, regulatory bodies may not agree. Be sure your credit union is being as transparent as possible, and providing an “out” for members who no longer want that coverage. Regulators may also want to see policies and procedures in place for managing members’ abuse of overdraft protection. I recommend taking three steps in this regard.

Perhaps the best advice I’ve heard is for debit card managers to think like bartenders. Much in the way a responsible bartender will “cut off” an overindulgent patron, credit unions should keep an eye on members who may be misusing overdraft protection. By developing policies and procedures for managing chronic overspenders, credit unions not only prevent members from getting into hot water, they also demonstrate to examiners a commitment to the spirit of the regulations.

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