Pub. 9 2014-2015 Issue 3

www.nebankers.org 24 Extraordinary Service for Extraordinary Members. For more information, contact Darlia Fogarty at Compliance Alliance at (888) 353-3933 or darlia@compliancealliance.com or Jennifer Heaton at the Nebraska Bankers Association at (402) 474-1555 or jennifer.heaton@ nebankers.org. Compliance Alliance (www.compliancealliance.com) is an exciting and innovative tool that represents the unified efforts of state bankers associations across the United States to provide critical compliance services to the banking industry. Compliance Alliance was formed with the belief that by working together each state bankers association can more effectively reach its common goal of improving the competitive position of its member banks by helping ease the compliance and regulatory burden banks face. reminder, Reg Z and Reg DD, of course, only would apply to consumer loans/accounts. That being said, any fee for overdrafting an account must be disclosed per Reg DD. The official commentary to Reg DD pro- vides: (5) Fees for overdrawing an account. Under §1030.4(b)(4) of this part, banks must disclose the conditions under which a fee may be imposed. In satisfying this requirement, banks must specify the categories of transactions for which an overdraft fee may be imposed. An exhaustive list of transactions is not required. It is sufficient for an institution to state that the fee applies to overdrafts “created by check, in-person withdrawal, ATM withdrawal, or other electronic means,” as applicable. Disclosing a fee “for overdraft items” would not be sufficient. Any interest accrued by virtue of adding the amount to the principal of a loan would likely be considered a “fee” for the overdraft that must be disclosed at ac- count opening. Unless the bank disclosed the fact that an overdraft may incur interest charges, you would be in violation of Reg DD. Even if the possibility were disclosed on Reg DD, the program would then be a de facto overdraft line of credit. As such, you would likely need to provide Reg Z disclosures for open-end lines of credit. 1. In addition, a significant UDAAP concern exists with the practice of adding an overdraft balance to the remaining principal of an existing loan converting the overdraft balance to a loan that accrues interest. Under the Dodd-Frank Act, an act or practice is unfair when: √ It causes or is likely to cause substantial injury to con- sumers; √ The injury is not reasonably avoidable by consumers; and √ The injury is not outweighed by countervailing benef- its to consumers or to competition. First, while there is no specific definition of “substantial injury,” it typically means that monetary harm has been sus- tained. In this case, the customer is being charged interest on a loan whereas before they were not. Second, the bank may say that the injury is “avoidable,” but regulators will not likely see it that way. In any case, it may not be “reasonably” avoidable, especially if the customer does not have the means of paying it off. Finally, the third test of the unfair analysis is to prove this is beneficial for the consumer. It would be difficult to think of any situation where a consumer is better off for having to pay interest. Even if it is not “unfair,” a regulator still may find a UDAAP violation, as the practice can be abusive or even deceptive de- pending on how the program is administered. In any case, the bank is opening itself up for increased scrutiny for UDAAP. While there is no conclusive guidance on the practice of capitalizing an overdraft balance into an existing loan, the practice presents many issues that need to be addressed. Dur- ing regulatory panels, regulators have said this is a practice that would cause “great concern,” and we are aware of at least one bank that has had issues with regulators suggesting that this practice violates UDAAP. Even though this practice may have been going on for some time, banks need to re-evaluate the program in light of the tighter regulatory environment Dodd-Frank has created.   Minefield — continued from page 23