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Disparate Impact Studies Especially Tough on Dynamic Matrix Systems
Friday, August 19, 2016 6:30 AM

By Richard Miller, Executive Vice President, JMFA

As regulations on financial products and services continue to rank among the top concerns for credit unions, many institutions are re-evaluating the viability of the products they offer to their members.

Overdraft matrix systems are complicated algorithms that have come under increased scrutiny insofar as their effect on protected classes.  These programs are not transparent and are based on an abstract set of parameters or a complex matrix of eligibility requirements that are suspected of having a disparate impact on certain member segments.

When program eligibility favors one group of potential users over others or restricts a member from accessing the service based upon abstract or subjective factors, compliance violations and damaged account holder relationships may occur.

Avoid risk of disparate impact with consistent overdraft program eligibility criteria
When it comes to ongoing regulatory review of overdraft solutions, credit unions can rest easy if their program is fully disclosed and provides specific eligibility requirements for all members. For example, the use of unbiased criteria that pertain to everyone reduces the likelihood of criticism or negative consumer impact.

Also, programs based on ad hoc decisions were common in the days when a credit union officer or branch manager would review account overdrafts early every morning and decide whose check to pay and whose to deny, often based on subjective criteria. Today that practice could be equated to having a disparate impact on account holders who were denied the service.

With the availability of fully transparent overdraft solutions, credit unions can avoid inconsistent decisions when it comes to overdraft program eligibility requirements. The key is to select a program provider that uses criteria that are objective and based on conditions that are common to all account holders. This will help to alleviate any compliance concerns regarding discrimination or disparate impact against any member segment.

For best results, look for a compliance-tested, regulator-approved program
Financial institutions and outside vendors that have created their own eligibility criteria based on an abstract set of parameters or a complex matrix of eligibility requirements run the risk of negative examiner reaction and the possibility of adverse action by a class of consumers.

Did your credit union turn off your overdraft program as a result of increased regulatory scrutiny? Or, could your current eligibility requirements put the institution at risk of being cited for discrimination and disparate impact by examiners?

In either case, it’s time to find an overdraft program that can provide you with regulatory peace of mind and an easy-to-manage, reliable source of non-interest income. Likewise, more of your members will have the opportunity to access a compliant service that helps them maintain a healthy bottom line, as well.

About John M. Floyd & Associates (JMFA)
John M. Floyd and Associates (JFMA) is an endorsed business partner of Credit Union Resources, a wholly owned subsidiary of Cornerstone Credit Union league. For the past 36 years JMFA has been considered one of the most trusted names in the industry helping credit unions improve their performance and profitability. Whether it’s recovering lost revenue, uncovering savings opportunities, serving your members better, finding the perfect personnel fit or delivering a 100% compliant courtesy pay program, JMFA has the right solutions to help you not only meet, but exceed, your goals. We are proud to be a preferred provider among many industry groups, including CUNA Strategic Services. To learn more please visit or call 800-809-2307.

About Richard Miller
Richard joined JMFA after a 23-year career in banking, providing the company and its clients with a broad base of management experience in community banking – from chief lending officer to president of small and medium-sized financial institutions. He supervises JMFA’s sales activities across the nation, establishing valued relationships and helping financial institutions achieve their goals. He graduated from the University of Tulsa and the Southeastern Graduate School of Banking at Southern Methodist University in Dallas, Texas.