Discretionary overdraft protection, when done right, provides one of the best member services credit unions can offer as an alternative to the thousands of check cashing outlets on street corners throughout so many underserved neighborhoods. These check cashers have taken the business of millions of our members and built a multi-billion dollar business out of what they call “helping out someone until payday by holding a check that the guys who issued you the checks don’t trust you enough to honor.” We all know this is how the payday lending cycle begins and how difficult it is for someone to break free from it once they leave the traditional financial sector and become dependent on these alternative providers. That is why so many mainstream financial service providers like credit unions have chosen to offer discretionary overdraft protection program to their members. Likewise, that is why so many credit union members have responded so positively to programs that are called everything from overdraft privilege to courtesy pay to bounce protection.but, most importantly, they are good for member service with one huge caveat. Overdraft protection programs are good for members when they are “done right.” Making sure overdraft protection is “done right” therefore remains, as it should be, a priority for federal and state regulatory bodies concerned about consumer protection. On February 18, the FFIEC agencies (including NCUA) published their long awaited final guidelines on the subject of overdraft protection entitled Joint Guidance on Overdraft Protection Programs. After almost two years in the formulation and a lengthy comment period that examined these programs in depth, the Joint Guidance is a healthy and balanced approach which will enable these programs to continue to benefit credit union members nationwide while ensuring that concerns raised by consumer advocates, financial institutions, regulators and the public about the marketing, disclosure and implementation of discretionary overdraft protection programs are appropriately addressed. A quick overview of the Joint Guidance is in order. First, let’s remember that the Joint Guidance was based on quite valid concerns about the potential for consumer abuse in ill-conceived and ill-managed discretionary overdraft programs or “ODP.” It has always been our firm belief, and it should be the position of any firm desiring to be an industry pacesetter in this field, that common sense guidelines for ODP should indeed be in place at all appropriate regulatory agencies and should govern responsible ODP practices. It has also been our position that, long before any such guidance is officially issued, any reputable advisor, consultant or “expert” in ODP services should already be implementing a system that employs best practices that protect the consumer and adhere to both local and federal regulations and guidelines. As we’ve said many times, if the financial industry does not adopt self-imposed standards and conduct governing ODP products, it invites regulatory over action, reaction and well-intended but burdensome and unnecessary regulation. The Joint Guidance can only be a benefit to responsible financial institutions and their reputable ODP advisors and consultants. Although it is impossible to cover all aspects of the Joint Guidance here, we’ll try and address its highlights. They are broken down into three sections: Safety & Soundness, Legal Risks, and Best Practices. The Safety & Soundness section largely deals with policies and procedures that address credit, operations and other risks, including the elusive but critical “reputation risk” associated with ODP services with the emphasis on risk management. This section encourages financial institutions to conduct thorough due diligence reviews on third party advisors and consultants offering ODP services. It’s our position that, in well-managed ODP programs, these reviews should be welcomed and the results should serve to strengthen the programs even further. In fact, we submit that the suggested processes will be quite beneficial in making better and more informed decisions regarding the payment or return of items that would create an overdraft. At Strunk & Associates we have long recommended routine reviews of operational policies and procedures by financial institutions to ensure responsible implementation of overdraft protection programs. The Legal Risks section alerts financial institutions of the need to comply with all applicable federal and state laws and lists those requirements. We could not agree more that credit unions must have adequate policies and procedures in place to address all legal and regulatory compliance issues, including NCUA’s requirements for a properly drafted overdraft policy. No credit union should offer ODP without having its legal counsel review and monitor the program for compliance in all areas. The Best Practices provisions constitute the most significant part of the Joint Guidance. This section provides a set of detailed and specific “best practices” that should serve as positive examples that accompany the offering of overdraft protection services, as well as additional, voluntary disclosure and operation of program features. NCUA was actually ahead of the curve with its ODP regulations which have been in effect for several years and recognize the member service oriented nature of credit unions with an aggregate cap requirement and a 45 day time limit (as opposed to the 60 days in the Joint Guidance) to either charge off or book a loan on any delinquency. Best practices should always be a blueprint to ensure the responsible use of overdraft protection, address potential management oversights, foster good member relations and secure the public trust. Credit union members are the first and best asset for any credit union. Every effort should be made to routinely and voluntarily disclose, inform and educate members that particular overdraft services are discretionary, non-contractual and should not be used irresponsibly. Advertising and collateral marketing materials should refrain from statements that oversell the benefits of overdraft protection or confuse consumers about the extent of coverage of an overdraft protection program. It is certainly in a credit union’s best interest to provide members with ample educational information that fully and voluntarily discloses program fees and eligible forms of transactions. In closing, overdraft privilege is a well received member service and these new guidelines, when implemented by credit unions in a best practices approach, will help ensure that overdraft privilege is more than well received.it is also “done right.” To view the Joint Guidance in its entirety, you may go to the NCUA website at www.ncua.gov .

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