Since Village Bank opened its first branch in 2000, branch managers had been entrusted with making pay/return decisions for NSF items, including whether to charge overdraft fees. The process resulted in preferential treatment for some customers, putting the bank’s reputation and compliance at risk.
Has this ever happened to you? An account holder, let's call him Dave Smith, has opened a checking/share draft account at your financial institution. After 30 days of consistent deposit activity, minimum balance requirement and no overdrafts, he qualifies for your institution's discretionary overdraft program.
You give Mr. Smith an overdraft limit of $500—the same limit you assign to every other customer who opens this type of account and qualifies for the service. Mr. Smith can now access your institution's overdraft service (at your discretion) up to the fixed limit of $500.
Fast forward several months only to see Mr. Smith's name on a monthly charge-off report; and you wonder...where did Mr. Smith go wrong?
Or was it us?
Formal discretionary overdraft programs—despite their past stigma—are a topic for consideration again for financial institutions. I draw this conclusion based on the hundreds of conversations I have had over the past several months with financial executives while attending and exhibiting at various industry trade shows and conferences.
It seems many institutions that had previously adopted a 'wait and see' stance about implementing a discretionary overdraft program are now moving forward. Some executives said the encouraging news coming from the CFPB is their impetus to modernize. Other institutions simply realize their programs are outdated, inefficient and need to be updated in order to provide exemplary service and generate new income.
The Office of the Comptroller of the Currency is encouraging banks to offer short-term, small dollar loans to subprime borrowers, according to the recent American Banker article, OCC Gives Banks Green Light to Compete with Payday Lenders.
The article states that OCC Comptroller Joseph Otting wants banks to originate loans of $300 to $5,000 to borrowers with FICO scores of 680 or below, with few other parameters beyond "sound underwriting." In doing so, the new OCC guidelines could open a $90 billion market to financial institutions.
"This product is a vehicle to help people get back into mainstream banking and get them off of high-cost financial services products of check-cashing and payday lending, with a view toward getting them into the mainstream of financial activities where they can qualify for a credit card," Otting said on a conference call with reporters.
There has been a plethora of news stories lately about the intentions of the Consumer Financial Protection Agency (CFPB) to roll back banking regulations, but this one from American Banker is a must-read: "From overdraft to HMDA, rulemaking has new look at Mulvaney’s CFPB. The article explains that acting CFPB director Mick Mulvaney has "overhauled the agency’s spring agenda, dropping several long-time goals of his predecessor, including a rule on overdraft programs."
The growth of digital lending—and community banks' failure to keep up with the pace—is illustrated clearly (and pretty harshly) in the charts below.
According to FDIC and Fintech industry data, community FIs have lost nearly half their market share of small business loans under $100k to large banks and Fintech companies in the last seven years. This is unfortunate considering that small business loans have been a distinguishing strength of community banks in the past and serve as a key pipeline for future loans.
A year ago, President Trump signed an executive order that directed agencies to identify two regulations to cut for every new one they intended to issue. We're 37 days into 2018 and it appears the president is keeping his word: “In our drive to make Washington accountable, we have eliminated more regulations in our first year than any administration in history of our country,” Trump said during his State of the Union speech last week.
Even the most cynical nay-sayer should feel positive about this changing regulatory climate.
We are especially encouraged with regard to the future of automated overdraft programs for several reasons:
- A diminishing role for the Consumer Financial Protection Bureau (CFPB) after Trump appointed new leadership to the agency and the Supreme Court upheld the decision
- A former banker, Joseph Otting, was sworn in as U.S. comptroller of the currency to serve as the leading regulator of national banks
- Approved changes to Dodd-Frank reforms
- Five federal financial regulatory agencies revealed likely changes to overdraft programs that seem rather minor, including revised disclosures, standard posting order and balance calculation methods