Can anyone give me some pointers on an objective way to audit overdraft services for unfair & deceptive practices? The situation reminds me of the Supreme Court judge who acknowledged he could not define pornography, but went on to observe "I know it when I see it." UDAP accusations based on subjective, personal judgments are unworkable.

It might be possible to just focus on issues where precedents exist; i.e. practices that:
*have been the source of published regulatory criticism,
*have served as the basis for class action law suits, or
*represent a simple failure to adhere to published guidance.

Examples would be manipulation of payment order to maximize fees, daily overdraft fees that do not give the consumer a chance to stop the bleeding, or advertising or disclosures that misrepresent the service.

The progression away from firm precedents (increasingly dangerous as you move further away) would be to incorporate positions staked out by consumer groups in their comment letters to the agencies on proposed regulation and guidance.

I think the idea that an individual auditor could reach an objective conclusion that a particular practice is unfair and deceptive without citing precedent is a little ridiculous. (For an auditor whom management viewed as overly enthusiastic, it could be career threatening as well.)

Yeah, I'm looking for something to audit ODP as well.

Simplified, wouldn't it be sufficient to note that treatment of all users of the overdraft service (for instance) appear to be on par with all other users of same(after an audit of the service and that has been as well as possible, determined). I always look a bit closer at things like exempt or suspended OPS, account history, customer contacts made, if there is excessive usage, etc. When I see a name that varies from the 'usual' names found in this area, it's a flag to maybe look a bit further. This sometimes seems like profiling but it makes sense as a way to determine or at least begin looking to make sure a person isn't being discriminated against. I think it also helps (in a smaller city/town) to not be as familiar with the local 'Names'of the area. That provides much less bias and subjectivity. I scrutinize closely when looking at denials on overdraft protection loans that claim 'out of lending area' .. was this a reasonable, and legitimate cause for denial.. Hope this is somewhat helpful or a starting place

Another FDIC expectation clarification please:
Ensure that boards of directors provide appropriate oversight of programs, consistent with their ultimate responsibility for overall compliance, and that on an ongoing and regular
basis management provides oversight of program features and operation. Appropriate steps include an annual review of an overdraft program’s key features.

Would this be an annual review by BOD or is an internal audit of service features surfice ? Ken? Thanks in advance.

They are looking for direct involvement by the board of directors because they intend to lay any problems at their feet.

Compliance, not audit, should develop a description of the bank's overdraft services and overdfraft protection plans listing their key features. They should talk to the board about the key choices that were made in their design. While the FDIC's perspective on this event is "compliance," I suggest the report should also depict the position these services occupy in your overall fee income. Decisions to cap fees or establish de minimus overdraft amounts should not be made in a vaccum.

On the other hand, decisions to continue an order of payment that maximizes fee income should be disclosed to the board in the context of enforcement actions and civil suits brought to date. They need to be given the details and if they decide no changes are necessary there will be a record of the decision. That way, the FDIC will know exactly how many crosses to bring to the exit conference.

Audit's role is to audit for Regulation E and DD compliance as well as UDAP concerns and tender that report to the board. It is only the UDAP audit that I regard as problematic. The parameters for the regulatory audit can be listed from the relevant examination procedures and adjusted to fit the bank's overdraft services.

Thanks for your insight , Ken.
How heavy do you expect examiners to come down on the f.i. if they do not choose to limit total maximum fees assessed per day?

Ken
I know this thread is old, but here are some suggestions based on my exam experience. I dont think that the daily cap is necessarily the answer. We had that cap and it didnt protect us from severe scrutiny.

Start by reviewing a list of your top 100 users and the fees they pay. If they give you sticker shock and you would not want it disclosed in the paper that people are paying those fees, you might have a UDAAP concern.

Next ask yourself how often those customers are contacted to be sure they understand how the program works, and the alternatives available to them.

Be sure to remind yourself that it does not matter one bit what the average or majority of the users do, so dont get hung up in those statistics.

Next compare the fees to the customers income and or source of income. If you cant do that, compare it to the average income in your customer base. Ask the question does it seem reasonalbe for these people to spend this much money on fees. Whats reasonable for Donald Trump is not the same reasonable as a little old lady on social security.

If you customers paying $1,000 or more and you are not in regular contact with them to ensure they know how the program works and what the alternatives are, you should be concerned.

Justin thank you for your update. This is an area that does concern me greatly. Waiting for my exam this fall and wondering how hard they are going to come down on us. The $1,000 figure was that something the examiners gave you or just your number? We have done a good job of counseling and having forms signed by customers, but we have not seen a large change in their behavior and wondering what additional steps should/could be taken. I feel we have a good program and monitoring but wonder when the customer needs to take responsibility for their money?

The $1,000 is just my number to get you started asking the questions. The reality is customers don’t change their behavior because they want the product. You really have to beat the customers off with a stick from this product. If you have a good trail / process of counseling the customers you are in great shape!

The only other thing I would recommend you consider is a point when would you consider taking the customer out of the program. The examiners seem to feel that the customer can take responsibility only up to a point, and that there is a point where the bank should take over to force the customer out to prevent the customer from harming themselves. Think of the bartender analogy...at some point the bartender needs to cut people off for their own good. Clearly the cutoff point is different for each user, so my recommendation is to set a rather high review point and then take them on a case by case basis. Bill Gates can afford it, and probably truly sees it as a value added service...but the proverbial little old lady on social security is a different story.

People want this product, and banks should give it to them, but there need to be enough safeguards in place to keep people from getting stuck in a rut of fees for-ever.