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In February 2012, the Consumer Financial Protection Bureau took an interest in how industry practices, in regards to checking account overdraft programs, affect consumers. The findings have not yet been published, but below you will find information on the most common types of arrangements community banks use to cover account overdrafts:

A true line of credit: This requires credit approval and an agreement that the banker may transfer an overdraft to the credit line.

A sweep-account arrangement: In this case, the bank and accountholder agree to “sweep” funds from another account to cover the overdraft. No loan is needed as the funds are already on deposit at the bank.

A “bounce protection” program: This type of coverage gives protection based on specific guidelines, such as the account’s balance or the number or amount of deposits made. Essentially, each overdraft creates a “loan” from the bank to the account holder.

An automated overdraft payment program: This program runs on predetermined criteria, eliminating employee involvement. It is usually partially or fully computerized and does not rely on employee decision-making.

In order to keep customers happy, make sure you provide clear and significant disclosures and give them the opportunity to choose the overdraft program that best meets their needs. For more information on how to incorporate successful overdraft payment and line-of-credit practices, please visit the Independent Banker.