Legal scrutiny against financial institutions relating to overdraft practices and disclosures is on the rise, according to industry sources. In some cases, attorneys have used websites and social media platforms to target consumers who have been charged overdraft fees, in an effort to initiate class action lawsuits.
And while the issues associated with recent litigation vary from case to case, most involve allegations of improper fee assessment, unclear or misleading terminology used on account agreements, and violations of opt-in requirements.
The following checklist provides advice on how your credit union can lessen the risk of potential legal scrutiny by implementing a proactive approach to overdraft program management which includes compliant overdraft procedures, transparent disclosures and next generation tools for better program tracking and maintenance.
✔ Maintain awareness of compliance concerns
Even though regulators aren’t currently pursuing new actions regulating financial products and services, it’s important not to be lulled into complacency. In the last couple of years, law firms have targeted financial institutions for such issues as:
- violations of the Electronic Funds Transfer Act and Regulation E, even when the institution used the Model Consent Form;
- breach of contract due to ambiguous terms used in account agreements, such as lack of clarity as to how the institution will determine when there are insufficient funds in the account; and
- violations of state consumer laws.
The best way to avoid such potential legal headaches is to make sure your processes and procedures are compliant and user friendly, and your fees are fair.
✔ Provide full disclosure in all member communications
When consumers can make informed financial decisions, there is no need to be concerned about the feedback they provide about your service. You can make this easier for your members with compliant communications policies and easy-to-understand disclosures. This includes information regarding how you obtain affirmative opt-in consent before charging overdraft fees on ATM and electronic transactions, and the specific details about how your overdraft program works.
To maintain full compliance and avoid possible legal consequences, make sure all account agreements, marketing materials and on-going communications provide clear, consistent messaging regarding fees, processing and procedures, and account holder responsibilities when using your overdraft program.
✔ Take advantage of improved technology
With advances in technology and data analytics, many established overdraft programs have become outdated…even obsolete.
Next generation overdraft program software offers improved automation for greater flexibility and improved program monitoring of issues that impact service quality, including:
- greater access to key program data;
- more in-depth analysis for improved program maintenance and risk management;
- increased core system monitoring capabilities; and
- updated tools to enhance member communication quality and consistency.
Implementing cloud technology also provides greater efficiency, improved IT security and the use of consistent software throughout the institution. Access to more comprehensive program data provides the ability to cultivate the most current account information and maintain a more complete picture of how a best-in-class overdraft program is performing.
✔ Maintain a proactive approach
To avoid increased workload for employees and possible damage to account holder relationships —when potential problems arise — review the processes, procedures and disclosures you are using to address issues related to overdraft opt-ins, fees and refunds on a regular basis. When a member question or complaint comes up, be sure the issue is covered thoroughly in your disclosures and communications materials.
For example, are your members aware of how your institution determines when to assess an overdraft fee? Are they familiar with how specific transactions — such as POS debit card preauthorization holds— can impact their balance? Make sure your disclosures are consistent, informative and unambiguous to prevent any member confusion around unexpected overdrafts and fees.
In the event a fee is charged in error by your institution, make sure procedures are in place to correct it quickly. Taking a pro-active approach to error resolution will help you to maintain compliance and lessen the possibility of a member complaint that could become a viral headache or lengthy legal concern.
Focus on continuous improvement to avoid unwanted risk
The best way to mitigate compliance and legal risk is to make sure your overdraft program
is a socially responsible option that provides a financial safety net for your members. A professional overdraft service provider will review your existing program to make sure your procedures are user- friendly and compliant, and your communications materials are comprehensive and easy to understand. They will monitor your program results on an on-going basis and recommend upgrades to help you concisely address any performance or service issues. And they will provide on-going staff education opportunities to ensure everyone is up-to-speed on program details and confident in their ability to present the program to your members.
Or, they can help you implement an updated, next generation overdraft program that will provide better service for your members and measurably better overall results for your credit union through improved, in-depth analytics, reliable tools for continuous program monitoring and reporting, on-going consulting advice and a 100 percent compliance guarantee.