The FDIC guidance “reaffirms” a best practices document that was issued in 2005, and it creates specific risk-mitigation techniques that it expects regulated banks to implement.   The FDIC guidance does not apply to credit unions, however, with that said this guidance opens the door for others.
Herein are some specific risk-mitigation techniques:

  • Your board must be involved with its ODP program.  Expected; is regular oversight including an annual board review of an ODP program’s key features.
  • Reviewing ODP advertising to minimize confusion and to promote responsible use.
  • Monitor programs for excessive or chronic customeruse.  What is abuse? When a customer overdraws the account on more than six occasions where a fee is charged in a rolling twelve-month period.  If and when that occurs, the bank must undertake “meaningful and effective” follow-up action, which may include, for example:
    • Contacting the customer to discuss less costly alternatives; and
    • Giving the customer a reasonable opportunity to decide whether to continue fee-based ODP coverage or choose another available alternative.
  • Instituting appropriate daily limits on customer costs by, as an example, limiting the number of transactions that will be subject to a fee or providing a dollar limit on the total fees that will be imposed per day.
  • Considering the elimination of overdraft fees for transactions that overdraw an account by a small amount.
  • Considering the use of cost effective, existing technology, as appropriate (e.g., text message, e-mail, telephone or cell phone) to alert customers when their account balance is at risk of generating a fee for non-sufficient funds.
  • Reviewing check-clearing procedures and any third-party vendor to ensure they operate in a manner that avoids maximizing customer overdrafts and related fees through the clearing order.

The FDIC expects affected institutions to have their new risk-mitigation techniques in place by July 1, 2011.

The guidance will create downward pressure on bank ODP revenue streams.

If your credit union earns income from an ODP program, that income is now at risk.  How much is at risk is yet to be determined, but one may want to consider the following.

  • How much ODP income do you receive from smaller transactions. If the small dollar amount transaction cutoff for fees take effect, ODP fees from those transactions could go away.   What is the impact?
  • How much ODP income do you earn from consumers who are charged more than 6 ODP fees in any 12-month rolling period? If this applied to you, you’d have to reach out to them and show them alternatives. Let’s say only 10% of those consumers opted out of your ODP program. How much money would that be?
  • Do you clear items from largest to smallest in terms of dollar amount?  If you had to clear items based on the order received or by check number, how might that affect your income?
  • Imagine you implemented a daily limit of $25 or $50 for ODP programs.  How would that have affected your income in 2011?

Credit unions are member-centric organizations.  It is recommended those credit unions with an ODP program begin to  develop and deploy several of the risk-mitigation techniques above if they already have not.  That said, it is widely anticipated many executives will be revisiting this area once again.

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