As I have been visiting credit unions across the nation, several questions have been posed to me. Here’s one that may offer some helpful guidance:
Question: Are we still at risk of penalties and litigation even if we don’t offer a formal overdraft service?
Answer: Yes. Even if you do not offer a formal overdraft program, you are still subject to fines and penalties related to the assessment of fees due to multiple re-presentments and AP/SN.
Banking and credit union regulatory bodies have been taking a closer look at overdraft practices — specifically re-presented transactions and those that are “authorized positive, settled negative” (AP/SN).
An October 2022 circular from the Consumer Financial Protection Bureau (CFPB) focuses on “unanticipated overdraft fee assessment practices,” which they define as occurring when:
“…financial institutions assess overdraft fees on transactions that a consumer would not reasonably expect would give rise to such fees. […] Even if a consumer closely monitors their account balances and carefully calibrates their spending in accordance with the balances shown, they can easily incur an overdraft fee they could not reasonably anticipate because financial institutions use processes that are unintelligible for many consumers and that consumers cannot control.”
This points directly to fees related to how your credit union handles re-presented items and AP/SN transactions.
The CFPB signaled its intention to ramp up supervision around fair lending laws and unfair, deceptive and abusive acts and practices (UDAAP); other regulatory bodies have made similar announcements. In addition to closely examining decision-making practices in pricing, advertising and other areas, the Bureau examiners will look at other processes — as defined in your program disclosures — and the impact of fees.
So, even without a formal overdraft or courtesy pay service, your credit union may still face examiner scrutiny. Regulating bodies want financial institutions to address the issue proactively. This means a wait-and-see approach is not recommended.
Addressing current (and future) guidance
Many credit unions are lacking resources, be it time, staffing and/or expertise. Your compliance team has the extraordinary responsibility of managing the entire range of your credit union’s products and services. The weight of this workload can leave little to no time for keeping up with the ever-changing best practices that examiners look for.
Having the appropriate resources in place to proactively address examiner expectations continues to be a common challenge in the industry.
If a shortage of time, staffing or expertise is leaving a risky gap in your compliance efforts, an overdraft expert can help. After performing a deep dive into your credit union’s overdraft practices — or lack thereof — you’ll get actionable recommendations and the assistance you need to bring your services in line with current regulatory expectations and best practices.
Having 100% compliance naturally strengthens your financial institution by providing transparent, useful, consumer-friendly services. And in today’s competitive environment, that’s both essential and priceless — for your credit union and your members.
For answers to all your questions about maintaining a compliant, consumer-first overdraft program, contact the experts at JMFA at 800-809-2307