(As published in BankingExchange.com)
On December 3, 2024, the Office of the Comptroller of the Currency published an updated UDAAP section
On December 3, 2024, the Office of the Comptroller of the Currency (OCC) published an updated UDAAP section of its Comptroller’s Handbook (version 1.1). While OCC oversight is technically limited to national banks, all financial institutions will want to read the updates carefully since, among other impacts, the updates may require changes to overdraft programs and procedures as well as consumer-facing disclosures. The UDAAP updates regarding overdrafts are the subject of this article.
What’s new?
While not all the content is new, the OCC has added bullet points to the section on Deposit Account Management to emphasize the expectations it has for overdraft program disclosures. First, the OCC addressed the importance of disclosing the terms and features of the bank’s overdraft program clearly, accurately, and in a timely manner. The OCC also noted, however, that even if terms and features are clearly disclosed, the products or services may include features that could risk being viewed as unfair or even abusive. The OCC addresses elsewhere a couple specific examples of unfair practices (discussed below), but leaves the assessment open here.
Second, the OCC notes that a national bank should disclose any key changes to its overdraft program made since disclosures were previously issued. Notably the OCC does not appear to distinguish between changes that are negative to the consumer versus those that are positive. Nor does the OCC explain what is meant by “key” changes.
Not new, but notable
Throughout the booklet, the OCC continues to emphasize the importance of making sure that deposit account disclosures accurately describe the bank’s actual practice. The OCC recommends that the bank, prior to deploying new or updated disclosures, compare what its disclosures say against how the program actually operates, to ensure that the disclosures are accurate. This is the classic “Say what you do; and do what you say.”
In addition to being accurate, the OCC reminds banks that their disclosures must be clear. For example, the consumer should be able to understand when overdraft fees will be incurred. This may require the bank to explain their balance calculation method, or to clarify whether daily fees are charged each “business” day or each “calendar” day.
Action steps
Banks subject to OCC oversight should take a few steps to implement the guidance in the UDAAP booklet. First, banks should review their overdraft programs to determine if there are practices that need to be discontinued or modified. For example, some practices may still be considered unfair, even if they are disclosed. Specifically, the OCC calls out two scenarios as leading to UDAAP risk, and recommends banks avoid these scenarios. These are: 1) assessing overdraft fees on Authorized Positive Settled Negative (or “APSN”) transactions, and 2) assessing fees each time a third party resubmits the same transaction for payment after the bank has returned the transaction for non-sufficient funds (“Multiple-Representment NSF Fees” scenario).
This meshes with the OCC’s reference, added in this version, to OCC Bulletin 2023-12, “Overdraft Protection Programs: Risk Management Practices.” In addition to discouraging APSN and Multiple-Representment NSF Fee practices as likely unfair, the bulletin also describes certain fee assessment practices (e.g., high limits or no daily limits, sustained overdraft fees) that could lead to an unfair finding, depending on whether the customer is able to bring their account balance positive in a reasonable period of time. Banks will want to consider the guidance found in the Bulletin when evaluating their overdraft programs for UDAAP risks.
Second, banks should make sure overdraft-related disclosures are accurate and complete. The OCC indicated that it expects account disclosure to make clear when a consumer can expect an overdraft fee will be incurred. Further, the disclosures should accurately reflect the bank’s actual transaction posting practices, as well as any other relevant practices. Banks should review their account disclosures to determine whether their account disclosures accurately reflect their practices, and whether those disclosures can be understood by the average consumer.
Third, banks should evaluate the need to send change notices or to redisclose the terms of their overdraft programs. Importantly, the OCC’s requirement to disclose “key changes” to an overdraft program does not appear to be strictly covered by Regulation E or the other consumer deposit regulation change notice requirements; instead, the OCC requirement appears to be expanding the change notice or disclosure requirements. Nor does the OCC’s requirement to disclose changes limit itself to changes that affect consumers in a negative way. The OCC might be expecting, for example, that a “key” reduction in overdraft fees or reduced daily overdraft fee limits should be communicated to customers.
Meeting this regulator expectation, however, provides banks with the opportunity to use a change notice to highlight even positive changes of an overdraft program. Banks should also take the opportunity to review their overdraft disclosures and ensure they meet regulator expectations. If they find they need to revise the disclosures, the revised disclosures can also be sent to their customers at the same time as any key program changes are communicated. Sending the revised disclosures can also help to limit the potential pool for class action lawsuits or regulator findings by ensuring that all account holders have been provided with the most current information.
Conclusion
The OCC recently updated the UDAAP section of its Comptroller’s Handbook, focusing primarily on proper oversight of a national bank’s overdraft program. Banks should use the opportunity to review their overdraft programs, determine if there are practices that need to be modified or discontinued, and communicate any changes to impacted customers.
