TO: ALL TENNESSEE STATE CHARTERED BANKS AND SAVINGS BANKS
SUBJECT: Bounce Protection
DATE: February 5, 2004
With an observed increase throughout the banking industry in the use of nontraditional overdraft programs often referred to as "bounce protection" as a means to generate fee revenue, this Department is issuing this to provide insight into the possible regulatory implications of such programs. These programs establish an understanding that drafts up to a certain dollar amount, usually based upon the account type and customer history, will be honored by a financial institution even if there are insufficient funds to pay the drafts. It is a fundamental responsibility of banks to take reasonable measures to provide clear and accurate account information to their customers. While such programs can provide a service to banking customers allowing them to avoid the inconvenience and subsequent fees associated with returned checks, steps must be taken to ensure that these programs are utilized within applicable laws and rules concerning interest rates, finance charges, and information disclosure. Often these programs are being provided by third party vendors. Clearly such a situation requires due diligence on the part of banks in selecting and supervising these vendors as well as a thorough review of their programs before implementation.
This Department strongly encourages consistency in the disclosure of balances in written monthly statements, ATM displays, transaction receipts, telephone and internet banking services and any other medium for providing account information. The balances provided should be well defined, and the definitions disclosed to customers in a clear, understandable format upon the opening of an account or upon any changes in balance definitions. This includes disclosing the fact that a balance reflects the net amount of funds remaining in an account following processed deposits and withdrawals as well as any overdraft limit incorporated in an overdraft program. Failure to provide this information in an understandable format with the apparent motive of increasing overdrafts and subsequent fees may be viewed as a misleading business practice.
Fulfilling this responsibility will allow banks to avoid the encouragement of customers to overdraw accounts, be it through the marketing of overdraft programs or the manner and extent to which account information is provided. If the payment of returned checks is at the bank's discretion, such direct or indirect encouragement might be considered as promoting the writing of worthless checks because a customer has no assurance that checks written on accounts with insufficient funds will be paid by the bank. However, regardless of whether the payment of overdrafts is solely the bank's decision or a contractual obligation, such encouragement is a general promotion of poor fiscal responsibility.
If an overdraft program dictates that the payment of insufficient fund transactions is at the bank's discretion, the decision making process concerning whether or not to pay should be objective and consistent. However, if an overdraft program includes a written obligation on the bank's part to pay checks written on an account with insufficient funds, such payments might be considered open end credit, and consequently may be subject to applicable statutes that dictate lawful interest rates, finance charges, and disclosure of information.
Non-traditional overdraft programs may serve both the interests of a bank and it's customers. However, these programs should be implemented with an emphasis on the promotion of fiscal responsibility as well as a policy of reasonable, comprehensive disclosure to the customer of a program's intended purpose, the contractual obligations of the customer as well as the bank, and any interest or other charges related to the program. This Department encourages such disclosure at the point of account opening as well as reasonable notice of program changes. It is also recommended that nontraditional overdraft programs be reviewed by an institution's legal counsel or compliance officer before implementation.
This Bulletin is not an endorsement or promotion of any particular overdraft program or overdraft programs in general by the Tennessee Department of Financial Institutions. This is merely intended to provide guidance to Tennessee state banks regarding their use of such programs.
If you have any questions regarding this Bulletin, please contact Financial Analyst Justin McClinton at (615) 532-1021.
Kevin P. Lavender