Dear Board of Directors:
Recently, some credit unions have begun offering nontraditional overdraft programs. These programs are often referred to as "bounce protection".
Unlike traditional lines of credit, bounce protection does not require individual underwriting or written agreements. Instead, credit unions choose to honor drafts, up to an aggregate dollar amount, even if there are insufficient funds in a member's account to pay the drafts. Members are charged a per item fee for this service, and outstanding amounts must be quickly repaid.
NCUA recognizes bounce protection can benefit both credit unions and credit union members, if members access the program infrequently. Credit unions receive another source of fee revenue. Members avoid the inconvenience and subsequent fees associated with returned checks. To promote fiscal responsibility and to help members make informed choices, credit unions offering bounce protection must educate members about costs, program details, and less expensive options.
To establish clear guidelines for the operation of bounce protection programs and communication with members, NCUA is joining with other federal banking regulators to issue the enclosed "best practices" guidance.
Credit unions should be aware these "best practices" are minimum expectations for the operation of bounce protection programs. To successfully mitigate reputation risk, credit unions must also establish consistent practices for handling members that find it difficult to manage accounts, as shown through regular access to bounce protection.
When members repeatedly access bounce protection, credit unions should advise members about less costly products and consider suspending access to bounce protection. For example, a board of directors may choose to limit the number of bounce protection transactions to be covered for a member. Or, a board may choose to contact members and describe other options. Members may qualify for other types of loan products based on successful repayment under bounce protection.
If third party vendors are used to offer bounce protection, due diligence is required. Credit unions must thoroughly review decision software used by the vendor, verify appropriate referrals are provided to less expensive options, and supervise ongoing vendor activity. In addition, credit unions must monitor vendors to be certain fee income is not increased by manipulating payment order or taking other action that is not disclosed to members.
Credit unions are encouraged to carefully review and, as appropriate, to implement the best practices described in the enclosed guidance. The best practices section begins on page 16 of this Letter to Credit Unions.
Should you have questions, please contact your district examiner, regional office, or state supervisory authority.