Is Your Third-Party Overdraft Provider Putting Your Credit Union at Risk?

By John M. Floyd, chairman and CEO of John M. Floyd and Associates

On April 13, 2012, the Bureau of Consumer Financial Protection (CFPB) released Bulletin 2012-03 outlining its supervisory and enforcement authority over service providers associated with the institutions it supervises. Under Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) the Bureau is granted the authority to oversee these “supervised service providers.”

The Bulletin states that the CFPB intends to fully exercise its authority, including the ability to examine the supervised service provider’s operations on site as well as its compliance with Title X’s prohibition on unfair, deceptive or abusive acts or practices.

Much like the FDIC’s 2008 Guidance for Managing Third-Party Risk, the CFPB Bulletin outlines expectations for financial institutions to have an effective process for managing risks of service provider relationships. This includes ensuring that the business relationships do not present “unwarranted risks to consumers.”

To avoid potential pitfalls, financial institutions should:

  • conduct thorough due diligence to ensure that their service provider understands and is capable of complying with Federal consumer financial laws;
  • review the service provider’s policies, procedures, internal controls and training materials to ensure appropriate oversight and training of employees and agents is in place;
  • set clear expectations and enforceable consequences in the service provider contract for violations of any compliance related responsibilities;
  • establish internal controls and monitoring to ensure the service provider is complying with Federal consumer financial laws; and
  • take prompt action to address any violations identified through monitoring, including terminating the relationship, if appropriate.

Clearly, regulatory efforts to protect consumers from harmful financial products are continuing to intensify. To avoid the risks of increased regulatory scrutiny and enforcement, make sure you are maintaining your overdraft strategy with a provider that is recognized as an expert and offers:

  • a completely transparent program;
  • comprehensive employee training to help staff explain your overdraft policies, fees and alternatives to account holders;
  •  easy-to-understand informational materials to promote responsible program use;
  • reasonable, communicated fees and clearly established overdraft limits;
  • transaction clearing policies that avoid maximizing overdrafts and related fees created by the clearing order;
  • the ability to easily monitor excessive usage;
  • communications materials that outline alternative financial products that more appropriately fit the needs of excessive overdraft users; and
  • a 100-percent compliance guarantee.

It’s clear that attention to consumer financial protection efforts is here to stay. But maintaining compliance is as simple as contracting with an overdraft program provider that will give you a guarantee that your program is in line with all regulations and best practices.


Strategic Link is the NWCUA’s wholly-owned service corporation, providing the Association’s member credit unions with exclusive high-quality, competitively-priced products and discounted services. Questions? Contact Sales & Marketing Associate Craig Reed: 206.340.4789,

Posted in Compliance News.