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#1904649 - 03/12/14 07:03 PM Ad-hoc "Overdraft" System
JAM Offline
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We have an ad-hoc system (we decide daily at the branch level what to pay/return and charge/waive). I am working to better document our process. My understanding is that the Overdraft Guidance does not apply in its entirety but some areas do apply - namely - Payment order, daily limits, deminimus, safety/soundness and general program oversight. I am working on these areas. Is there something I am missing? I am also working on establishing better consistency between branches to avoid possible Reg B issues. Do we need to worry about the excessive users? I know the 6 in 12 doesn't directly apply but I have just become aware we have a few who have crazy amounts of NSF fees being charged annually. Any other ad-hoc banks sending letters after "x" overdrafts or just assuming they get it monthly on the statement? Any other areas I should focus on?

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#1904724 - 03/12/14 08:47 PM Re: Ad-hoc "Overdraft" System JAM
John Burnett Offline
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In today's regulatory environment, any bank that continues to allow a consumer to run up huge amounts of OD fees is really in an untenable position. Although the Guidance doesn't appear to require it, I suggest you promote a policy of cutting off OD access for consumers who hit some reasonable limit. Remember that ODs are not a right; they are also discretionary. Set that limit based on OD counts or fees paid -- whichever makes more sense to you. I would not publicize that policy to customers, but I would suggest it be strictly controlled and imposed, and if branches won't do it, centralize it.

Paying an overdraft here and there may very well provide a service to the consumer. Allowing the consumer to make overdrawing his account an expensive habit is in no way a service, and is doing the consumer no good.

If you have business accounts that show the same sort of patterns, I'd recommend getting them under control, too.
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#1904725 - 03/12/14 08:49 PM Re: Ad-hoc "Overdraft" System JAM
rlcarey Offline
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If you have business accounts that show the same sort of patterns, I'd recommend getting them under control, too.

Considering they would be uncollectable unless specifically authorized by the business entity, I agree with that statement.
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#1904736 - 03/12/14 09:07 PM Re: Ad-hoc "Overdraft" System JAM
JAM Offline
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Thanks for the input. One of them is a business account. I agree we need to do something but am not sure what. If they overdraw the account we are not going to just stop charging them. We can either pay and charge or return and charge. Just because the abuse the account doesn't seem like a reason to waive the fee. Is the only other option to simply close the account?

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#1904738 - 03/12/14 09:15 PM Re: Ad-hoc "Overdraft" System JAM
Elwood P. Dowd Offline
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Ironically, regulators are more concerned about overdraft fees than return item fees. If you start sending the checks back, the customer may get the idea.

If your bank has allowed this revolving door to go around for awhile, there exists a legal theory that you have established a line of credit, particularly with a business entity. Don't just start bouncing checks and let them figure it out, give them a chance to wean themselves.

Related thread.
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#1904742 - 03/12/14 09:21 PM Re: Ad-hoc "Overdraft" System JAM
rlcarey Offline
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If you charge and return, they will stop.
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#1904749 - 03/12/14 09:29 PM Re: Ad-hoc "Overdraft" System JAM
JAM Offline
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Great advice. Thank you!

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#1904803 - 03/13/14 12:07 PM Re: Ad-hoc "Overdraft" System JAM
John Burnett Offline
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When it's a business that is chronically overdrawn, your bank may have a loan officer or branch manager who is either working with the customer on the loan side (doubtful) or merrily chugging along enabling the behavior by approving the overdrafts on the theory that "they've always made covering deposits, so there's little risk involved." Such businesses are using the unofficial line of credit -- a very expensive one, I might add -- as a form of permanent working capital loan, and they are doing so having neither formally requested the line nor provided documentation of anyone's authorization to borrow on behalf of the business. So more often than not, you've got an unauthorized loan on your books from time to time.

When such a business finally collapses (and they often do under the weight of mismanagement and exorbitant borrowing costs), they bank will be left holding the bag, full of unsecured, unauthorized credit -- a fate brought on by its enabling practices.

Get a handle on who in your organization is approving the overdrafts for such a business and bring them into the light. Then work with them to wean the business off its overdraft addiction.
Last edited by John Burnett; 03/13/14 12:08 PM.
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#1904815 - 03/13/14 12:42 PM Re: Ad-hoc "Overdraft" System Elwood P. Dowd
John Burnett Offline
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Originally Posted By: Ken_Pegasus
Ironically, regulators are more concerned about overdraft fees than return item fees.


And rightfully so. Even though it would seem to make no difference, the fact that the bank is currently paying overdraft items is a form of acceptance of your customer's errant behavior, and ongoing acceptance fosters repetition of that behavior. I won't elevate it to the level of Pavlovian response, but there is a case-effect element there.

Charging the same fee for dishonoring an OD item and sending it back, on the other hand, provides a double reminder: the problem of having the check bounce, and all that goes with it, plus the penalty.

And of course there is the chance your customer might look at the overdraft (paid item) fee as a fee for a service, while looking at the return item fee as a penalty.
Last edited by John Burnett; 03/13/14 12:45 PM.
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#1904980 - 03/13/14 03:43 PM Re: Ad-hoc "Overdraft" System JAM
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This is actually a very helpful thread, as I have been having similar issues.
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#1905008 - 03/13/14 04:02 PM Re: Ad-hoc "Overdraft" System John Burnett
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John,

My observation about the inherent irony in "protecting" consumers from overdraft fees was based on the fact that the consumer usually pays the same fee for an item that is returned, but the consequential damages are much greater. The consumer's lights can be shut off, health insurance cancelled, mortgage be declared in default, etc. At a minimum, a merchant to which a check is returned can add a $35 - 50 fee under state law. At the other end of the spectrum, the drawer can be prosecuted.

Yet, the feds want to protect the consumer from the bank paying too many of those NSF items.

I live in fear that the federal government will someday want to protect me. wink
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#1905088 - 03/13/14 05:27 PM Re: Ad-hoc "Overdraft" System JAM
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Amen Ken, amen.

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#1905100 - 03/13/14 05:36 PM Re: Ad-hoc "Overdraft" System JAM
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All points well taken, Ken. And I would have some significant sympathy for the issuer of those checks if my bank had established a course of conduct in which his overdraft checks were routinely paid before summarily cutting off that "support."

But if the bank started bouncing such checks at the first overdraft incident and repeated that behavior, my well of sympathy would be relatively dry.
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#1905102 - 03/13/14 05:37 PM Re: Ad-hoc "Overdraft" System JAM
rlcarey Offline
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Ken has nothing to worry about. The Fed's have been monitoring him for years and I doubt he is on the "protect" list smile
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#1905107 - 03/13/14 05:39 PM Re: Ad-hoc "Overdraft" System John Burnett
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Originally Posted By: John Burnett
All points well taken, Ken. And I would have some significant sympathy for the issuer of those checks if my bank had established a course of conduct in which his overdraft checks were routinely paid before summarily cutting off that "support."


If we are talking about a business, you might be look at fodder for a lender liability lawsuit if the bank, in suddenly changing their position without warning, causes the business to crater. I believe that is why you previously stated: "Then work with them to wean the business off its overdraft addiction."
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#1905122 - 03/13/14 05:49 PM Re: Ad-hoc "Overdraft" System JAM
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And on a business, if the safety and soundness examiners take notice, well...I have seen banks forbidden from approving further ODs for certain customers. It is a safety and soundness issue.
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#1905280 - 03/13/14 09:29 PM Re: Ad-hoc "Overdraft" System JAM
JAM Offline
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We had a a very useful management discussion as a result of all the great input. I may be prematurely optimistic but I think we are going to start handling things in a more consistent and reasonable manner. Thank you again for the insight.

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#2150010 - 10/16/17 09:34 PM Re: Ad-hoc "Overdraft" System JAM
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A bit of a clarification on this thread - When Reg. E discusses "Opt-in" and "Opt-out" for an "overdraft service," is this tied into the same distinction between an ODP and ad-hoc payments? When a customer opts-in or opts out under 12 CFR 1005.17, is that always in connection with an Overdraft Protection Program, or does it cover any transaction where a bank covers a negative balance and charges a fee for processing a ATM withdrawal or a one-time debit card transaction?

So, if they Opt-out by indication on the Reg. E disclosure, does that prohibit a Bank from assessing a fee when an ad-hoc Overdraft decision is made? Should a Bank, or does a Bank have to, consult with a borrower to help make a decision on how they want to treat such transactions?

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#2150030 - 10/17/17 11:10 AM Re: Ad-hoc "Overdraft" System JAM
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If you don't have an ODP program, there is nothing to opt-in too.
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#2150048 - 10/17/17 01:20 PM Re: Ad-hoc "Overdraft" System JAM
John Burnett Offline
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Justin,

The Reg E opt-in requirement provides that a bank cannot charge a consumer account for an overdraft triggered by an ATM or one-time debit card transaction unless the bank (1) has an automated overdraft program that could permit the consumer to overdraw the account with an ATM or one-time debit card transaction; (2) makes a disclosure concerning its overdraft program as required by section 1005.17; (3) gives the consumer an opportunity to opt-in to coverage of ATM and one-time debit card transactions; (4) receives such an opt-in from the consumer; and (5) confirms the consumer's opt-in and reminds the consumer that the opt-in can be revoked by the consumer at any time.

Because of the nature of ATM and debit card transactions, an ad hoc OD program would not provide overdraft service for ATM and one-time debit card transactions.
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#2150055 - 10/17/17 01:54 PM Re: Ad-hoc "Overdraft" System JAM
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Thank for the responses John and Randy. So, if the borrower opts-out of participating in an ODP and the bank wants to, or actually does, pay the merchant/give the ATM money, then they would be prohibited from charging a fee for doing so? Or, could they be considered to be administering an ad-hoc program in that situation? Can banks that have Automated ODP also not have an ad-hoc decision making process for the accounts that have not signed up for the Automated ODP? Are the programs mutually exclusive at a Bank level, i.e. you have to have either one or the other?

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#2150068 - 10/17/17 02:36 PM Re: Ad-hoc "Overdraft" System JAM
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The prohibition on overdraft fees (absent an opt-in to an overdraft program) applies whether the bank has an ad-hoc or automated OD program. There's no prohibition on having an automated program for some accounts and an ad-hoc program for others. Many banks with automated programs apply them to consumer accounts only, and apply an ad-hoc program to business accounts.

As a practical matter, overdrafts triggered by ATM and one-time debit card transactions are always automated. The bank doesn't have a decision to make because the transactions are approved or disapproved based on balance (and other) criteria at the time the authorization is requested. Once the transaction is completed, the bank can't return it even if it overdraws the account, as might occur if the authorization is for a total ($1) amount and the transaction is finalized for a greater amount (think gasoline pumps) or the authorization and live transaction are separated by several days (hotels, car rentals) and intervening debits have reduced the balance so that the debit card transaction overdraws the account when it finally posts.
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#2150129 - 10/17/17 05:47 PM Re: Ad-hoc "Overdraft" System JAM
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Thanks John, I guess kind of back to the original post in the thread then. Your initial response from 3/12/2014 seems to indicate a bank could assess a fee for ad-hoc overdrafts - "Paying an overdraft here and there may very well provide a service to the consumer. Allowing the consumer to make overdrawing his account an expensive habit is in no way a service, and is doing the consumer no good." Is that for situations that aren't related to the parts covered by Reg. E?

What I am getting at is if they "opt-out" of a ODP, then it seems like you are saying in the most recent post that a Bank would be prohibited from charging a fee for covering a POS or ATM withdrawal. This seems to contradict the initial posts on the thread from a few years ago. Did a change occur, or is it that the Reg. E fees would always be automated, as you stated above?
Last edited by Justin C.; 10/17/17 05:48 PM.
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#2150278 - 10/18/17 04:14 PM Re: Ad-hoc "Overdraft" System JAM
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Yes, to your first question.

"Opting out" of overdraft coverage for ATM and one-time debit card transactions (or failing to opt in to such coverage) has specific Reg E prohibitions on charging overdraft fees (see section 1005.17 for details). Opting in to or out of overdraft coverage for other transactions (checks, ACH, for example) isn't addressed. In today's regulatory environment, if a bank accepts opt-outs from overdraft coverage, the bank should not pay overdrafts on the account and probably should not charge an OD fee if something sneaks in under the fence and gets paid, creating an overdraft. More importantly, the bank should have a transparent explanation of what opting out means.

Reg E §1005.17 was effective 7/1/2010. It prohibits any overdraft fee that's triggered by an ATM or one-time debit card transaction, regardless of whether the bank has an ad-hoc or automated OD service, unless the bank has received an opt-in that complies with the requirements of §1005.17. In order to offer an overdraft service for ATM and one-time debit card transactions, a bank would have to be able to authorize ATM and debit card transactions that would overdraw an account. That decisioning has to be automated, since it's done via whatever interface the bank has to the ATM/POS network(s) without human intervention.
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#2150503 - 10/19/17 04:04 PM Re: Ad-hoc "Overdraft" System JAM
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Thank you for the detailed explanation!

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