04/30/2010

Financial Institutions Alert: OTS Cracks Down on Overdraft Practices, Proposes New Guidance

On April 23, 2010, the Office of Thrift Supervision (OTS) reached agreement with Woodforest Bank, a thrift institution located in Refugio, Texas, concerning its overdraft protection program. The OTS also issued proposed Supplemental Guidance on abusive overdraft practices.

In consenting to two Orders from the OTS, Woodforest Bank agreed to cease certain unsafe or unsound practices identified by the OTS, including the origination of loans with a low probability of repayment, unfair, misleading or deceptive marketing or advertising practices and disclosures in connection with the bank's overdraft protection program. Under the terms of the agreement, the bank will set aside more than $12 million to pay restitution to existing and past bank customers harmed by the bank's overdraft protection practices, as well as pay $400,000 as a civil money penalty.

On April 29, 2010, the OTS also published proposed Supplemental Guidance on Overdraft Protection Programs in the Federal Register, which, if finalized, would update the Guidance on Overdraft Protection Programs previously issued by the OTS in 2005. In its proposed Supplemental Guidance, the OTS emphasized that thrift institutions must accurately represent the features of overdraft protection programs and clarify that overdraft protection is not a "free" account feature, while disclosing applicable program fees to the customer. The OTS also highlights a thrift institution's responsibility to explain to customers that payment of overdrafts by the thrift institution is discretionary and to disclose circumstances under which the institution will not pay an overdraft. Additionally, the proposed Supplemental Guidance advises thrift institutions to provide customers with information regarding alternatives to overdraft protection and place reasonable aggregate limits on overdraft fees. Comments to the proposed Supplemental Guidance are due on or before June 28, 2010. Follow this discussion on our blog at: www.bankinbits.com