When May a Bank Pay an Overdraft of $5,000? | CRCM Exam Prep

B

The answer to this question is B. When the officer has previously signed an overdraft protection credit agreement in an amount sufficient to cover the overdraft.

An "overdraft" occurs when a bank customer spends more money than they have available in their account, resulting in a negative balance. If the bank pays for these transactions, it is called an "overdraft payment." In this scenario, the overdraft is created by an executive officer of the bank, which raises potential conflicts of interest and requires careful handling.

To address this issue, federal regulations require banks to establish policies and procedures to manage executive officer accounts, including overdrafts. The regulations prohibit banks from paying overdrafts to executive officers unless the payment is made pursuant to a written, pre-approved, and bona fide overdraft protection plan.

In this case, the answer is B because the executive officer can only receive an overdraft payment if they have previously signed an overdraft protection credit agreement in an amount sufficient to cover the overdraft. This agreement must be in place before the overdraft occurs and must be based on the executive officer's creditworthiness, just like any other customer. If the executive officer has not signed such an agreement, the bank cannot pay the overdraft.

Option A is incorrect because an executive officer's level within the bank is not relevant to the decision to pay an overdraft. Option C is incorrect because the executive officer's funds in another account cannot be used to cover the overdraft unless they have previously authorized the bank to transfer funds from that account. Option D is incorrect because the fact that the bank pays overdrafts for other customers does not justify paying an overdraft for an executive officer without a pre-approved overdraft protection plan.