Are return item fees allowed for Auto Loan Payments that overdraw a checking account and have to be returned? Not coming up with guidance on this in my search.

I should have said Automatic transfers from a checking account to a Loan that over drafted the checking account.

There is no prohibition on charging a return item fee unless you hold both the deposit account and the loan and the loan is subject to the CFPB's Payday Loan rule. Some exclusions from coverage by that rule depend upon an agreement not impose an overdraft or return item fee or close the deposit account if a negative balance occurs resulting from a transfer of funds to a covered loan.

You should also clearly disclose as part of the TISA disclosures that an overdraft or return item fee when an automatic loan payment is made or attempted to be made from the account.

Thank you for the information.

I believe these are generally HELOC payments.

It most likely would come down to whether State law addresses such fees. In Texas, you can charge a fee for a returned loan payment, but it cannot exceed $30 for example. You would also have to reserve the right to charge the loan this fee in the loan agreement.

I would agree to having to disclose in the loan agreement if you are charging the fee to the loan, but this would be an NSF fee to the checking account, not a fee added to the loan for a returned check. My concern was charging an NSF fee and later a late fee to the loan if the borrower does not make the payment on time.

If that borrower made the payment from a check from another bank, they would charge the NSF fee and we would charge a late fee if the loan payment was not satisfied by the end of the grace period, so I am trying to figure out how that would be different just because the loan and the deposit account are held in the same institution.

I have never seen a State law that would address this and that is where it would have to reside. You and the customer have separate contractual relationships and agreements for the checking account and the loan. I am just not sure how this would be a problem. I do know that some systems are sophisticated enough to recognize when a linked asset account of the customer does not have enough money in it to make the automatic payment, and it then just does not complete the transaction. Other systems will just cancel any future automatic payments when this happens. However, if the customer writes a check for the loan payment, I just have a hard time seeing this as an issue.

You are going down the same path I am, but was told we could not, so trying to find the source for that information. Thank you so much.

You guys are the best and can't thank you enough.

Well, when someone tells me no - I usually ask them for the source rather than going on a wild goose chase If they are able to speak with such authority, they must have the reason for it.

Just my opinion - but while there may not be any technical issues with charging the fee for an automatic draft, could there be potential UDAAP issues? You (or your system, rather) know the deposit account is insufficient, but you attempt the draft anyway and charge a return item fee. Then later you charge a late fee to the loan. I don't think it's too far of a stretch to say you're double dipping in fee income.

I agree about writing a check, though. That is a different animal. Our system does just what Randy said. If the funds are not sufficient the loan isn't paid. This is stated in our automatic payment agreement.

The system must not be able to tell so may need to look into that now.

The payment hits the account, the person making the decision to pay/return (we do not have overdraft protection if you breathe product) but we do have an overdraft line of credit (and in my research did see that the payment for that is one of the payments, which my present some of the problem), so the operations staff review, see that it is for an AFT and mark it as Return. (My understanding is that you should not pay the item as you are then trading secured debt for unsecured debt) Is that correct thinking?

The double dip was part of my concern, but there is a lot of time spent on these where there is no "reward" if before the 10 day grace is up they make a sufficient payment.

Trading secured debt for unsecured debt is never a wise move.

The "no reward" part can be summed up as simply a cost of doing business. If you're looking for something else, the reward can be the cost of NOT having to go back X years and refund X fees, plus a penalty - tack onto that the extra time and manpower needed to review all those files and loans.