Your overdraft protection product may need some re-engineering.

• Author: Motley, L. Biff
• Position: Customer Satisfaction

On Feb. 18, federal banking and credit union regulatory agencies announced their long awaited "final joint guidance" to assist insured depository institutions in the disclosure and administration of overdraft protection programs. The guidance, as expected, covers both safety and soundness implications as well as the legal risks of these popular programs. But the guidance goes beyond these two issues and lays out a set of "best practices" for banks to follow in the administration of their programs. While it is unclear how closely examiners will hold banks to these practices, it would be wise for marketers to fully understand what it will take for their institutions to implement these changes.

Many of the best practices are in common use today.

Others may require some product re-engineering.

Before we get to these best practices, it should be noted that in the safety and soundness guidance, it is now required that overdraft protection program amounts, if communicated to clients, be treated as loans or lines of credit for accounting purposes. That is, if you tell a client he has a $100 overdraft (OD) protection, this has to be treated the same way you would a line of credit for loan accounting purposes. It is not necessary to subject this product to Reg. Z disclosures since it is considered "incidental credit," but you now must keep track of lines in use, charge-offs, and related credit measures; plus, these all have to be supported by explicitly written policies and procedures. (For further information, visit www.federalreserve.gov/boarddocs/press/bcreg/20050218.)

Now, back to best practices. There are eleven of these enumerated and discussed in the joint agency release, but only a few might require banks to...