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Make Sure Your Income-Generating Strategies are Compliant and Consumer Friendly

By: John M. Floyd Chairman/CEO, John M. Floyd & Associates (JMFA)

As credit unions continue to cope with the regulatory challenges placed on generating non-interest income, it is imperative to balance the need for revenue with the ability to avoid programs and practices that could be harmful to members.

In late July, the Consumer Financial Protection Bureau (CFPB) released details regarding the number and type of complaints it has received from consumers during the first half of 2012. And while comments about mortgages and credit cards ranked as the highest concerns, 15 percent of the complaints were focused on bank accounts and other services – including confusion about overdraft protection, program terms and fees.  Add to this the on-going reports of class action lawsuits involving undisclosed programs that implement unfair practices.

Regulators expect clearly defined programs
As regulations on consumer financial products become more stringent, non-disclosed overdraft programs with dynamic limits and/or practices that cause financial hardship for consumers will pose greater compliance risks for credit unions. In fact, over the last few years, nearly all of the criticisms by regulators, legislators and consumer advocates – along with fines and legal action – have focused on undisclosed matrix-based programs and those that implement non-neutral transaction postings.

To avoid such increased scrutiny and threat of legal/monetary consequences, credit unions must maintain a clearly defined overdraft program that guarantees full regulatory compliance and meets consumer protection expectations.

Disclosed programs offer clear benefits for institutions and consumers
Compliant overdraft programs still provide a valuable service. They help consumers to better manage their finances and enable credit unions to strengthen their relationships with members, while improving their performance without the dread of what a compliance exam might uncover.

A fully disclosed overdraft program that clearly defines the rules by which a member may access an overdraft service establishes a straightforward approach of responsible use. Plus, overdraft limits are set with the account holder’s full knowledge. When necessary, the limit can be adjusted, eliminated or re-instated, depending on the situation. As long as an account holder is in good standing, an overdraft will be paid to that limit. As a result, an informed member can avoid the extra expense of merchant fees and penalties for a returned check and rest assured that important purchases will be paid in the event of a financial shortfall.

Meeting regulatory expectations is not a guessing game
In this new regulatory reality, regulators are pushing for more transparency, not less. If you’re not sure that your current overdraft program meets these regulatory expectations, or you are considering a matrix-based program with dynamic limits for your institution, ask yourself these questions:

  • Are the program processes easily understood?
  • Is information about account holder limits clear?
  • Are fees explained in easy-to-understand terms?

If you have concerns about how the new regulations and proposed guidelines on overdraft services could affect your credit union, avoid relying on products that implement undisclosed procedures that can be confusing and cause account holders to incur multiple overdraft fees.  As always, clearly defined program parameters and processes will result in the greatest benefit for your institution and your members.

About JMFA
John M. Floyd & Associates (JMFA), a Preferred Business Partner of the Missouri Credit Union Association, is a leading provider of profitability and performance-improvement consulting. For more than 30 years, JMFA has been recognized as one of the most trusted names in the industry, helping financial institutions enhance their bottom line with programs like JMFA Overdraft Privilege®. JMFA is also recognized for earnings enhancement and expense control programs, training, executive placement, account acquisition programs as well as product, service, pricing and technology-improvement consulting. Simply stated, JMFA’s programs and services are designed to increase income or reduce expenses.  JMFA is proud to be a preferred provider among many industry groups. For more information, contact Paul Dacus, JMFA regional director by e-mail or call 913.827.7140.