Pub. 4 2014-2015 Issue 3

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 November • December 2014 19 tacked onto the principal balance could well be considered as impaired since now the borrower has demonstrated that they do not have the ability to remain current on their debt obligations. 2. Whether this practice is even permissible would be governed by the agreement between the borrower and the lender. Since each loan is unique, the bank will have to consult their counsel to determine their rights and remedies with respect to the specific loan. Often, banks assume that there is a provision in the loan agreement permitting this. Rather than assuming, the bank should carefully read the loan agreement to determine if this is accurate. Keep in mind, this action would not be considered in the same category as force placement of insurance. 3. There is also a question of whether disclosures are necessary under Reg Z prior to converting the balance of the overdraft to a loan that accrues interest. As a reminder, Reg Z and Reg DD, of course, would only apply to consumer loans/accounts. With that being said, any fee for overdrafting an account must be disclosed per Reg DD. The official commentary to Reg DD provides: (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 account 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. 4. There is also a significant UDAAP concern 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 Dodd-Frank, 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 benefits to consumers or to competition First, while there is no specific definition of “substantial inju - ry,” it typically means that monetary harm has been sustained. 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 situationwhere a consumer is better off for having to pay interest. Even if it is not “unfair,” a regulator may still 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. During 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. n Reach your target audience a ordably. advertise get results DANI GORDEN Advertising Sales 801.676.9722 or 855.747.4003 dani@thenewslinkgroup.com