OCC Says Banks Should Consider Lower-Cost Alternatives for Covering Overdrafts

Banks should consider offering lower-cost alternatives for covering overdrafts.

That is one of the suggestions made by the Office of the Comptroller of the Currency (OCC) in a bulletin released Wednesday (April 26).

The bulletin identifies some practices around overdraft protection programs that may result in banks having heightened risk of violating prohibitions against unfair or deceptive acts or practices.

One of these practices is assessing overdraft fees on “authorize positive, settle negative” debit card transactions — those in which the transaction is authorized when the consumer’s available account balance is positive but later post to the account when the available balance is negative.

Another practice that heightens risk is “representment fees” in which the bank assesses a fee each time an item is presented for payment by a third party after it was returned for nonsufficient funds.

Other practices that may heighten risk are having high limits or a lack of daily limits on the number of fees assessed, and charging a fixed, periodic fee for failing to correct a previously overdrawn balance, according to the bulletin.

Conversely, practices that may help banks control risks associated with overdraft protection programs include offering low-cost alternatives for covering overdrafts, such as overdraft lines of credit and linked accounts, and implementing fees that “bear a reasonable relationship” to the risks and costs of offering an overdraft protection program, the bulletin said.

“The OCC recognizes that some banks have announced changes to their overdraft protection programs consistent with appropriate risk management practices,” the regulator said in the guidance. “When supported by appropriate risk management practices, overdraft protection programs may assist some consumers in meeting short-term liquidity and cash-flow needs.”

The Consumer Financial Protection Bureau (CFPB) has also addressed an overdraft fees practice.

In a guidance published in October 2022 as part of its ongoing campaign against “junk fees,” the CFPB said surprise overdraft fees are “likely unfair and unlawful under existing law.”

Surprise overdraft fees include fees levied against consumers who had sufficient funds in their account to cover a debit charge at the time the bank approved it, the CFPB said at the time.