Pub. 4 2014-2015 Issue 3

18 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S FEATURE ARTICLE “Paying off an overdraft by adding principal to an existing loan effectively sidesteps the rule and masks the loss of income.” DARLIA FOGARTY DIRECTOR OF COMPLIANCE COMPLIANCE ALLIANCE How Does a Charged-off Checking Account Become a Minefield of Issues? W e’ve recently been made aware of a pro- cess that quite a few banks have been doing for many years that could very easily cause the bank many issues with the regulatory agencies. Here is the scenario — banks have made it a policy to add the balance of a charged-off deposit account to the principal of a loan the customer has at the bank. This policy presents a minefield of issues that must be addressed, including con- tractual language, UDAAP, safety and soundness and compliance issues (disclosures). This memo highlights some of the issues presented by this policy in light of the continued regulatory focus on overdraft programs. Just a few of the issues presented, by adopting this practice, in light of the continued regulatory focus on overdraft programs are: 1. With respect to overdrafts, banks need to follow GAAP and the Call Report guidelines and should be reporting these charged-off ac- counts as such. This, in a nutshell, means that these losses come out of the bank’s bottom line income. In an issuance from 2005, the FFIEC requires that an overdraft be charged off against current year’s income when the account is overdrawn for 60 days, as stated in the FFIEC guidance on overdrafts. Paying off an overdraft by adding princi- pal to an existing loan effectively sidesteps the rule and masks the loss of income. This pres- ents a safety and soundness issue because the bank may be over reporting income because the loss will no longer be reflected on the books. In essence, you are capitalizing a past due loan and calling it income. Additionally, the existing loan that has had the overdraft