Like many banks, we have many customers set up on automatic loan payments from their deposit account. When the deposit account and loan are both held by our bank the payment is really an intra-bank transfer, not an ACH. So when the deposit account does not have sufficient funds the loan payments are usually returned (without an NSF fee). On some occasions though, the payment will be force-posted and is assessed an overdraft fee. I feel like this is a poor practice.

Some in management want to know why. We can charge an overdraft fee if an ACH from our deposit account is sent to another bank. Or if the loan payment is coming from another bank to pay our loan, that customer will be subject to that bank's OD rules. So why can't we charge our fee in this situation? Besides UDAAP risk (this is basically the issue - why is it UDAAP) is there any guidance anyone can offer. There seems to be a fair amount of subjectivity here, and I know there aren't any Regs which specifically speak to this practice - so where do I go?

Any help?????

Why are some payments force-posted while others are not? Do you have examples?

And is your bank masking past due loans by allowing the customer to go overdrawn?

Our loan system defaults to not allow ODs when the deposit account is insufficient. So when the transfer attempts to happen, it simply stops dead - no return item fee (think along the lines of a POS transaction declined at the terminal). In some situations, that system default is changed to allow transfers even if the funds aren't available. This can be for multiple reasons, but the biggest being at the direction of upper management. When this happens, the loan transfer is completed and the deposit account is charged an OD fee.

Good luck with that from a safety and soundness perspective and a fair lending perspective if when to allow this is left to the discretion of "management".

So to sum this up, I too would be concerned with 1) masking your past due loans (which is the safety and soundness issue Randy is referencing) and 2) fair lending as there seems to be a lot of discretion when this is done. To me, UDAAP isn't as problematic as these two issues, but could be an issue if you are doing something different than what you disclose.

Unfortunately, there isn't a clear citation that says you can't do this, but there have been plenty of enforcement actions over the years for these types of problems. The bottom line is that this isn't a good practice.