Regulation O and Waiving Overdraft Fees

Issue/Inquiry

A director of the Bank incurred an overdraft. It was paid the day after from one of the director’s other deposit accounts with the Bank pursuant to a written agreement for covering overdrafts in this manner. The Bank, however, waived the overdraft fee that its policy required, on the basis of the size of the director’s deposit relationship with the Bank. The Bank indicated that such a waiver is allowed under its policy.

Response Summary

The payment of an overdraft pursuant to a written agreement to transfer funds from another account is permitted by Regulation O. Since an overdraft is an extension of credit under the regulation, a waiver of an overdraft fee can only be made if such is also made for similarly situated customers of the Bank who are not Insiders. The Bank must be able to document the basis for such a waiver.

Response Detail

The payment by the Bank of small, short-duration, inadvertent overdrafts of its directors and executive officers would not be prohibited under Regulation O if made pursuant to “a written, preauthorized, interest-bearing extension of credit plan that specifies a method of repayment” or “a written, preauthorized transfer of funds from another account of the accountholder at the bank.” 12 CFR 215.4(e)(1).

In this case, there is a written agreement for the preauthorized transfer of funds from another of the director’s accounts with the Bank. However, the Bank waived the overdraft fee required by its rules, which the Bank indicates can be done for accountholders, depending on the size of the account relationship with the Bank.An overdraft is an extension of credit under Regulation O. 12 CFR 215.3. Generally, a financial institution may not extend credit to any Insider unless the extension of credit “is made on substantially the same terms (including interest rates and collateral) as, and following credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions by the bank with other persons that are not covered by this part and who are not employed by the bank.” 12 CFR 215.4(a)(1).

In such a case, the burden will be on the Bank to demonstrate that it did not give preferential treatment to the director. To do so, it must be able to demonstrate the following:

• Policies or procedures allowing the waiver of the overdraft fee under certain conditions
• The waiver of fees for similarly situated customers as the director

The Bank should either document such, or exercise best practices by creating a memorandum for the file when such waivers are granted, which describes the basis for the waiver.

This entry was posted on Monday, October 7th, 2019 at 9:00 am.