Our operations department is wanting to change our system in order to allow negative balances on savings accounts. The premise for this is to collect all of the fees that a customer owes on small balance accounts.

For example, a customer has $5 in their account and they are due to be charged a $10 fee. Currently , we only take the $5 that is available. Under the proposed idea, we would allow the balance to go to -$5 and then collect that amount from the customer. We would only allow this on fees that we charge on the accounts (and that were properly disclosed), we would not allow an ACH item or in person withdrawal to cause this to happen. (Some holes exist that allow ATM withdrawals to cause an overdraft currently.)

My question is "Is this permissible"? Is there any guidance to this that I can find? Will I need to change disclosures to properly indicate that this is a possibility?

Thanks for any advice.

As far as I know doing this is perfectly fine. At least I hope so since our bank does the same thing. We will also overdraft their savings account for chargebacks, if their other accounts can't cover (or if they have no other accounts).

I can't tell you much about guidance on the subject, but I would think disclosure would be a good move since you are changing the amount you would actually be charging the customer from the $5 available to the full $10.

Just be certain that your system is using "zero" as the balance for interest calculation purposes whenever the balance is negative.

From the Commentary to §230.7 (Regulation D):

Quote:

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Institutions must treat a negative account balance as zero to determine:

i. The daily or average daily balance on which interest will be paid
ii. Whether any minimum balance to earn interest is met

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As a matter of bank policy we do not allow bank service charges to overdraw an account. We believe it would cause negative feelings to casue the overdraft and then charge an overdraft fee becuase the account is negative. Almost like we're self generating income.

Thank you for the input, we're going to do it, but I wanted to make sure it was legal fist.

It is legal. As noted, the accounting takes some verifications and should be added specifically to your sample selection in your next audit.

Make sure your accounting system handles overdrawn savings account totals correctly for your call reporting. Checking systems typically report overdrafts separately, savings systems have a tendency to report a net number, which is a no-no for call reporting.

Old post - but again comes in handy! I love it when I can rely on BankersOnline to have discussed the topic when I don't even know where to start looking in regulations - thank you everyone!