Discretionary Overdraft Program Best Practices Regulatory Compliance, Risk Management & Customer Service

Article excerpt

Overdraft privilege ("ODP") services are increasingly important and successful programs among banks nationwide because of the benefits realized by the financial institutions, and more importantly, their customers. Therefore, it is appropriate and imperative that banks and any third party vendors they engage adhere to a very high set of standards for consumer service. The goal of these standards or Best Practices should be to refine and formalize key processes and eliminate consumer confusion.

Let's look at three key areas: regulatory compliance; risk management; and most importantly, customer service as they relate to ODP.

Regulatory Compliance

It goes without saying that all banks routinely conduct compliance reviews to assure their services are in accordance with both state and federal regulations. But what about ODP service programs offered either by the banks themselves or by third party vendors. How should these programs, in particular third party programs, be evaluated?

First, make sure the vendor company can provide evidence that their organization has in place, verifiable operational procedures and engagements with regulatory and legal experts specifically dedicated to regulatory compliance in these areas. In that way, the financial institution will be assured that the vendor has an ongoing and real investment in, and commitment to, compliance and matters involving legal due diligence.

Second, beware of blanket compliance or indemnification guarantees by any third party. The old saying "if it looks too good to be true" should serve as a guideline. Regulations are not static. Any reputable organization knows they can and will change. Therefore, beware of 'foolproof' assurances or guarantees.

Risk Management

A financial institution implementing any new program should assess risk as part of a rigorous due diligence process. Financial risks and risks to customer good will are both important.

To minimize financial risk, carefully study the contract presented by the ODP vendor. Are termination clauses restrictive or detrimental to the bank's financial and strategic risk perspective? The cancellation agreement is critically important.

How is the vendor's fee structured? Do they share the risk of the bank's investment in an ODP program? …