Written by Stephanie Lyon, Regulatory Compliance Counsel
On Wednesday, November 10th, the Consumer Financial Protection Bureau (CFPB), the National Credit Union Administration (NCUA) and other financial services regulators joined to present a webinar on overdraft practices and issues identified through consumer complaints, examinations, and enforcement actions. You can listen to the audio of the webinar here and download the presentation slides here.
Unfair, Deceptive or Abusive Acts and Practices (UDAAP)
The key issues identified by the regulators centered on unfair and deceptive practices such as failing to obtain proper opt-ins, having overdraft practices that differed to those disclosed on the opt-in forms, and misrepresentations from staff regarding the service. The NCUA representative did state that the Agency continues to be impressed with credit unions’ tendency to promote financial literacy such as educating members on the benefits and the fees associated with the use of overdraft services. However, there are a few examples of unfair and deceptive acts and practices that are worth reviewing.
Some of the practices regulators found problematic are:
- Promoting constant use of overdraft service
- Not explaining overdraft alternatives that may be cheaper
- Improperly trained staff that is unable to explain program and alternatives
- Suggesting the overdraft service is free when there is a fee associated with the use
- Transaction re-ordering to increase consumer costs
It is no secret that CFPB and other regulators have their eye set up overdraft services. Credit unions can review CFPB’s supervisory highlights to get an idea of the overdraft practices that are raising potential UDAAP concerns in the industry.
The regulators gave a few options for monitoring overdraft services to mitigate the risk of facing an enforcement action. Among these suggestions a couple can be beneficial for credit unions:
- Comparing the credit union’s disclosures to its actual policy and procedures to ensure that they accurately describe the credit union’s practices.
For example, if the credit union uses the member’s available balance to decide if there is an overdraft, the disclosures should clearly and conspicuously explain the practice so members are not caught by surprise if they incur an overdraft when there would be no overdraft if the member’s ledger balance was taken into account. Another important instance is when a software change makes the system operate differently than the disclosures anticipate.
- Monitoring member complaints to identity systemic failures that should be reported to senior management.
A credit union that actively monitors member complaints is better positioned to find trends of potential member confusion or staff misrepresentations regarding overdraft services. For instance, if one teller consistently tells members that the service is free to encourage them to opt-in and the credit union receives 3 complaints from members who were charged an overdraft fee, this can serve as an early warning signal.
- Monitor and control risks presented by third party vendors.
This risk management strategy is best understood by reviewing a recent CFPB enforcement action against Santander’s Bank. The Bank’s third party service provider was enrolling customers without affirmative opt-in and providing deceptive information to get consumers to opt-in. According to the enforcement action, Santander did not exercise appropriate oversight of its third party overdraft service provider and was ordered to pay a whopping $10 million civil money penalty. You can read more about this enforcement action here.
In light of the interest overdraft services are receiving from regulators and potential plaintiffs alike, credit unions may want to ensure their program follows Regulation E’s disclosure and opt-in/opt-out requirements as well as review consumer complaints to identify potential unfair, deceptive or abusive practices.
This weekend, my family celebrated thanksgiving early because we will not be able to be together on the actual date. It is the third year I celebrate thanksgiving with my wonderful husband Devon, and as usual, we made enough food to feed a family of 12. I have to admit, I was thrilled to have an excuse to use the wedding china we received for our wedding.