The Federal Reserve and the other federal banking and credit union regulatory agencies have released the attached guidance concerning a service offered by some insured depository institutions that is commonly referred to as "bounced-check protection" or "overdraft protection." This credit service may be offered on both consumer and small business transaction accounts in lieu of traditional ways of covering overdrafts. The guidance is intended to assist banking organizations with managing the risks presented by overdraft protection programs.

The guidance is divided into five primary sections:

1. The evolution of banking organizations' practices for paying overdrafts and common characteristics of overdraft protection programs;
2. concerns surrounding the marketing, disclosure, and implementation of overdraft protection services;
3. safety and soundness considerations including the establishment of written policies and prudent risk management practices to address the credit, operational, and other risks associated with overdraft protection programs and appropriate regulatory reporting and risk-based capital treatment of overdraft exposures;
4. a discussion of the legal risks of overdraft protection programs and the impact on these programs of other laws, such as Federal Trade Commission Act/Advertising Rules, Truth in Lending Act, Equal Credit Opportunity Act, Truth in Savings Act, and Electronic Fund Transfer Act; and
5. best practices observed in the industry.

Reserve Banks are asked to distribute this guidance to banking organizations supervised by the Federal Reserve in their districts. If you have any questions regarding this letter, please contact Suzanne Killian, Assistant Director, Consumer Compliance Supervision, Division of Consumer and Community Affairs, at (202) 452-2090, or William Tiernay, Supervisory Financial Analyst, Division of Banking Supervision and Regulation, at (202) 872-7579.

Attachment:

Joint Guidance on Overdraft Protection Programs (752 KB PDF)