By Richard Miller, Executive Vice President at John M. Floyd and Associates
Legal scrutiny against financial institutions relating to overdraft practices and disclosures is on the rise, according to industry sources. In some cases, attorneys have used websites and social media platforms to target consumers who have been charged overdraft fees in an effort to initiate class action lawsuits.
And while the issues associated with recent litigation vary from case to case, most actions against banks and credit unions involve allegations of improper fee assessment, unclear or misleading terminology used on account agreements, and violations of opt-in requirements.
The following checklist provides advice on how your bank or credit union can lessen the risk of potential legal scrutiny by implementing a proactive approach to overdraft program management which includes compliant overdraft procedures, transparent disclosures and next generation tools for better program tracking and maintenance.
Even though regulators aren't currently pursuing new actions regulating financial products and services, it's important not to be lulled into complacency. In the last couple of years, law firms have targeted financial institutions for such issues as:
The best way to avoid such potential legal headaches is to make sure your processes and procedures are compliant and user friendly, and your fees are fair.
When consumers can make informed financial decisions, there is no need to be concerned about the feedback they provide about your service. You can make this easier for your account holders with compliant communications policies and easy-to-understand disclosures. This includes information regarding how you obtain affirmative opt-in consent before charging overdraft fees on ATM and electronic transactions, and the specific details about how your overdraft program works.
To maintain full compliance and avoid possible legal consequences, make sure all account agreements, marketing materials and on-going communications provide clear, consistent messaging regarding fees, processing and procedures, and account holder responsibilities when using your overdraft program.
With advances in technology and data analytics, many established overdraft programs have become outdated...even obsolete. Next generation overdraft program software offers improved automation for greater flexibility and improved program monitoring of issues that impact service quality, including:
Implementing cloud technology also provides greater efficiency, improved IT security and the use of consistent software throughout the institution. Access to more comprehensive program data provides the ability to cultivate the most current account information and maintain a more complete picture of how a best-in-class overdraft program is performing.
To avoid increased workload for employees and possible damage to account holder relationships — when potential problems arise — review the processes, procedures and disclosures you are using to address issues related to overdraft opt-ins, fees and refunds on a regular basis. When a question or complaint comes up, be sure the issue is covered thoroughly in your disclosures and communications materials.
For example, are your account holders aware of how your institution determines when to assess an overdraft fee? Are they familiar with how specific transactions — such as POS debit card pre-authorization holds — can impact their balance? Make sure your disclosures are consistent, informative and unambiguous to prevent any confusion around unexpected overdrafts and fees.
In the event a fee is charged in error by your institution, make sure procedures are in place to correct it quickly. Taking a proactive approach to error resolution will help you to maintain compliance and lessen the possibility of an account holder complaint that could become a viral headache or lengthy legal concern.
The best way to mitigate compliance and legal risk is to make sure your overdraft program is a socially responsible option that provides a financial safety net for your account holders. A professional overdraft service provider will review your existing program to make sure your procedures are userfriendly and compliant, and your communications materials are comprehensive and easy to understand. They will monitor your program results on an on-going basis and recommend upgrades to help you concisely address any performance or service issues. And they will provide on-going staff education opportunities to ensure everyone is up-to-speed on program details and confident in their ability to present the program accurately.
Or, they can help you implement an updated, next generation overdraft program that will provide better service for your account holders and measurably better overall results for your bank or credit union through improved, in-depth analytics, reliable tools for continuous program monitoring and reporting, on-going consulting advice and a 100 percent compliance guarantee.
Richard Miller joined JMFA after a 23-year career in banking, providing JMFA and their clients a broad base of management experience in community banking, from chief lending officer to president of small and medium-sized financial institutions. For more information on how JMFA can help your institution maximize overdraft income, contact Craig Simmers at 410-990-0172 or email firstname.lastname@example.org.