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Is Your Overdraft Program Providing Optimal Results for Your Members and Your Credit Union?
Thursday, January 9, 2014 6:45 AM

Changes in regulatory requirements over the past few years regarding financial services and products have had a significant impact on overdraft programs for all financial institutions. Now, most overdraft programs are outdated and obsolete. As regulators and consumer groups continue to focus on the expectations of transparency and full disclosure when it comes to consumer products, John M. Floyd, chairman & CEO of John M. Floyd & Associates (JMFA), says offering an overdraft program that is not up-to-date can have a strong impact on a credit union’s compliance, and ultimately, revenue.

“Now is the time to re-evaluate the overall effectiveness of your overdraft program – from a compliance standpoint – as well as how it affects member service and performance,” suggests Floyd.

Floyd believes that full disclosure supports responsible use.

“Whether a member only uses overdraft services occasionally or on a more regular basis to meet his or her near-term liquidity needs, providing all account holders with easy-to-understand information about how your overdraft program works, the costs associated with its use and the importance of returning an account to a positive balance is essential,” he explains.

A fully-disclosed overdraft program, Floyd notes, clearly defines the rules by which an account holder may access an overdraft service and establishes a straightforward approach of responsible use. As a result, account holders have a reliable tool for maintaining control of their money.

“Moreover, a consumer-focused, disclosed program offers overdraft limits that are set with the account holder’s full knowledge,” Floyd continues. “When necessary, the limit can be adjusted, eliminated or re-instated, depending on the situation. As long as an account holder is in good standing, an overdraft will be paid to that established limit.”

To further demonstrate your efforts to promote responsible program use, Floyd says it’s important to have the policies, procedures and communications materials in place to educate your members about the importance of returning their account to a positive balance within a specified timeframe. In addition to these formal policies, have a plan for counseling regular overdraft program users about how to avoid overdrafts, and provide advice on how to balance their account and establish a budget. When necessary, offer information on alternative strategies that might be better suited for their needs.

In the past several years, nearly all of the criticisms on overdraft programs – as well as reported fines and legal action – have focused on institutions that offer programs with dynamic overdraft limits or those that manipulate transaction processing order to increase overdraft fee income.

“Because dynamic overdraft limits are set using a complicated, ever-changing criteria-based matrix, it is impossible for a member to know his or her limit from day to day. Or, for that matter whether or not an overdraft will be paid,” Floyd says. “Posting checks, ATM and debit card transactions in non-neutral order can cause financial hardship for members who may already be facing a difficult economic situation.” 

From a regulatory standpoint, Floyd notes that these undisclosed procedures are discriminatory and will most likely result in increased scrutiny during a compliance exam or, in a worst-case scenario, result in fines and legal action.

Compliance doesn’t happen by accident. In today’s reality, transparent financial products and services are expected. To eliminate the risks of being out of compliance, Floyd says credit unions should make sure their overdraft program adheres to all consumer-focused regulations and industry standards for best practices, and provides the following:

  • complete transparency regarding fees and program procedures;
  • reasonable, communicated overdraft fees;
  • clearly established overdraft limits;
  • transaction clearing policies that  avoid maximizing overdrafts and related fees created by the clearing order;
  • the ability to easily monitor excessive usage; and
  • communications materials that outline alternative financial products that more appropriately fit the needs of excessive overdraft users.

If you’re not sure that your current overdraft program is getting the best results for your credit union and its members, it may be time to undergo a review of your program to identify any adjustments that need to be made to get it back on track.