It has come to my attention that some of my branches, are allowing customers, with or without OPD, to cash checks over the amount of their balances, a few days before their pay check get directly deposited. We are charging a $35 NSF fee, something about this feels wrong, but is it contrary to any regulations.

You mean it is not already contrary to Bank policy? You typically cash checks when there are no funds in the account???

It is not addressed in policy. These customers get there paychecks directly deposited say on the 27th, on the 23rd they are coming to the counter and cashing a check, say for $500, which puts there account in a negative balance, we charge them $35,and four days later the deposit is made and they are positive, however this cycle continues with a hand full of customers in several branches.

I would think someone could eventually sue your bank for doing this (Fair Lending - Do you do this for everyone?, UDAAP - I didn't know I was OD, Why did you return my rent check? You let me have cash the same day.)

Besides the fact that it isn't a sound practice. It's one thing for a customer to write a check and give it to a merchant and it bounce when it attempts to clear the account. It's an entirely different matter to do short term extensions of credit on a repetitive basis with no disclosures. You can see their account balance, and you let them withdraw what isn't there.

How about this wrinkle? What if they have opted out of ODP? (and reg E). If you "pay" the overdraft you can't really charge a NSF fee...since you gave them the funds, but they opted out of ODP so can't really charge them the overdraft fee either right?

Let's not get ahead of ourselves here. The question is about cashing checks that overdraw the accounts, so Regulation E and its opt-in provision aren't implicated. The fee is legit, given the circumstances.

I do agree it's a poor practice and it has pointed out a gap in policy or procedure (or both). Most bankers would say that having a specific policy or procedure shouldn't be needed to address this practice. But where you find an undesirable practice that isn't proscribed, you create rules against it.

Then you alert the staff concerned of the new rules, and monitor for adherence to the rule, prepared to impose sanctions for infractions.

On the other hand, if you allowed the customers to opt out of your overdraft service altogether (to address AngelMae's comment from a different direction), then you should not impose your OD fee at all when an employee allows the customer to tap his next paycheck through an overdraft.

I have put a stop to it, it gave me the feeling of a payday lender, and I don't want to be in that situation! Thanks everyone for your input. I will also address in Policy/Procedure.

I’ve heard that the FDIC in the Midwest has warned banks where under some overdraft programs in which the customer opts-in to ATM and one-time debit card programs at account-opening, it could be a UDAAP issue if the bank waits for a period of time before it permits the overdraft program to be effective (for instance, waiting 30 days until the bank assure its customer is in good standing). Has anyone heard of this?

Yes, and it is probably warranted.

I think that the proper way to handle such a situation is to clearly and conspicuously disclose the 30-day waiting period; remind the consumer of that waiting period in your confirmation of receipt of the opt-in, and send a follow-up notice when the service is actually activated to alert the consumer that it's now available.

And, of course, my usual caveat here: If you aren't actually providing an overdraft service covering ATM and one-time debit card transactions (which means authorizing ATM withdrawals that would OD the account and approving POS purchases that would create an overdraft, usually by "padding" the balance used for such authorizations), don't even bother soliciting those opt-ins for coverage of card-related transactions, because the opt-ins won't be valid, and you'll be opening the bank up for criticism and potential UDA(A)P allegations -- followed by an order to rebate any fees you collected.

John, I was thinking the same thing, in that the safest method would be to solicit the opt-ins after the 30 days have passed. On the other hand, perhaps another way would be to provide a nominal overdraft amount at the beginning and obtain an opt-in at account-opening, and then increase the overdraft amount after the 30-day trail-period ends (with a notice).