UNITED COMMUNITY BANKS
August 2, 2004
Via Facsimile, Electronic Mail and U.S. Mail
Federal Deposit Insurance Corporation
Robert E. Feldman, Executive
Secretary
550 17th Street, NW
Washington, D.C. 20429
Attention: Comments
Re: Comment: Overdraft Protection Guidance
69 Fed. Reg. 31858 (June
7, 2004)
Dear Sir or Madam:
Powell, Goldstein, Frazer & Murphy LLP is submitting this comment
with respect to the proposed Interagency Guidance on Overdraft
Protection Programs (the "Proposed Guidance") on behalf of United
Community Banks ("UCB"). UCB is the third largest traditional bank
holding company in Georgia, with assets of $4.5 billion. UCB is
headquartered in Blairsville, Georgia and operates 78 banking offices
throughout Georgia, North Carolina and Tennessee. UCB specializes in
providing personalized community banking services to individuals and
small to mid-sized businesses in its markets.
UCB appreciates the opportunity to comment on the Proposed Guidance
issued by the member agencies of the Federal Financial Institutions
Examination Council (the "Agencies"). UCB's comments are limited to a
single issue. In particular, we believe that there are very important
distinctions between discretionary overdraft programs, as described
below, and the other types of overdraft programs contemplated in the
Proposed Guidance, and that it is crucial to the banking industry that
this distinction be maintained so that banks, savings associations and
credit unions (collectively referred to herein as "banking institutions"
or "institutions") can continue to offer discretionary overdraft
programs.
For purposes of the following discussion, this comment uses the term
"overdraft item" to refer to a check or other debit presented against a
deposit account when the account is either overdrawn or where payment of
the item would cause the account to be overdrawn. Overdraft items may be
paid or returned unpaid by the banking institution. For discretionary
overdraft programs, payment or not of the overdraft item is in the
institution's discretion. For other programs, whether the institution
pays the item may depend on whether the institution has a
contractual obligation to the owner of the account on which the item is
drawn, and on the terms of any such contractual obligation.
I. Overview of the Issue Addressed in this Comment
In the past ten years or so, banking institutions have begun to offer
more formal discretionary overdraft protection programs (referred to in
this comment as "Formal Discretionary Programs"). UCB and other
institutions have taken great care in structuring, promoting, and
disclosing these programs to ensure that they would not involve credit,
extensions of credit or other credit facilities for purposes of the
federal Truth in Lending Act ("TILA") disclosure requirements or State
lending or interest and usury laws. In doing so, the industry was guided
by TILA and Regulation Z, Official Staff Commentary to Regulation Z,
State law definitions of credit and interest, and an important body of
case law.
While the Proposed Guidance seems initially to recognize the distinction
between Formal Discretionary Programs and other types of overdraft
protection program, this distinction is not maintained throughout the
Proposed Guidance. In particular, the Proposed Guidance seems to
contemplate that all overdraft programs, formal or otherwise, involve
extensions of credit or are "short term credit facilities." While this
credit characterization might be appropriate for non-discretionary
overdraft programs (which we do not address in this comment), we believe
that it is not appropriate or useful to characterize Formal
Discretionary Programs as involving extensions of credit. We also
believe such a characterization to be inconsistent with TILA and case
law.
The Formal Discretionary Programs that this comment considers have
the following characteristics in common:
A banking institution will, from time to time and in its sole
discretion, pay an overdraft item presented against a customer's
account. The bank charges a nonsufficient ("NSF") item fee whether or
not the bank pays the overdraft item, and this NSF fee is the same in
amount whether the institution pays or "bounces" the item. The bank
imposes no other charges for paying the overdraft item. In particular,
the institution does not charge any fee that varies as to amount based
on the amount of the overdraft item or the length of time that the
customer takes to reimburse the institution for the paid overdraft item.
The institution may or may not promote the program. In any case, the
institution's deposit account agreement with the customer clearly
discloses that the bank may, in its sole discretion, pay an overdraft
item but that the institution has no obligation to pay any particular
item even if the bank has done so in the past. To the extent the
institution markets the program, marketing materials also fully disclose
the discretionary nature of the program.
Some institutions may disclose a "discretionary overdraft amount," which
reflects the maximum amount of overdraft items that the bank would allow
to be outstanding and unreimbursed by the customer at any time. If the institution does
disclose this discretionary overdraft amount, the institution clearly
reiterates the disclosure that the bank will pay overdraft items only in
its discretion.
II. The Four Basic Types of Overdraft Protection
The Agencies seem to recognize in the Proposed Guidance that there are
essentially four different types of overdraft protection offered by
banking institutions. (These programs are described in general terms in
the first two paragraphs of the "Introduction" portion of the Proposed
Guidance, and are discussed below in the same order as presented in the
Proposed Guidance. 69 Fed.Reg. at 31860.)
However, we believe that the Agencies may be blurring some very
important distinctions among the options. The following adopts the
Agencies' general descriptions of the four options, but attempts to
clarify the differences among the options. In Parts III and IV of this
comment we discuss why these differences are important and why we are
asking the Agencies to adopt these distinctions in any final Guidance.
1. Written Overdraft Lines of Credit. Banking institutions have long
offered overdraft lines of credit to customers. When offered to a
natural person for personal, family or household purposes, the line of
credit would be subject to Truth in Lending disclosure requirements. In
any case, any interest charged on the account would be subject to State
interest rate limitations and, in some cases, any nonsufficient funds
("NSF") fee could be subject to State limitations.
2. Informal Discretionary Programs. Perhaps the most traditional and
historical version was the practice of many institutions of paying an
overdraft item for a known customer on an occasional basis, purely in
the institution's discretion. This was not so much of a "program" as a
practice. This practice, which could be as old as banking itself, was
not formerly promoted by the institution and might even by thought of as
simple civility (referred to herein as "Informal Discretionary
Programs").
3. Formal Discretionary Programs. In recent years, the Informal
Discretionary Programs have become automated at many institutions. Among
other things, the automation allowed the institution to establish more
uniform standards and to minimize the need for (and expenses of) human
intervention. However, under these programs the institution still pays
overdraft items only in its discretion, has no obligation to a customer
to pay any particular overdraft item, and the institution clearly
discloses the discretionary nature of the program. The common
characteristics of Formal Discretionary Programs are described more
fully at the end of Part I, above.
As discussed below, the only meaningful differences between these
Formal Discretionary Programs and the Informal Discretionary Programs
described in paragraph 2, above, is that the
institution has automated the process and might promote the program in
some manner. These Formal Discretionary Programs are the focus of this
comment.
4. Informal Lines of Credit. After the Agencies discussed the above
three options, the Agencies then discuss programs that are "marketed to
consumers essentially as short-term credit facilities...." This
"program" appears really to be only a Formal Discretionary Program where
the institution became obligated to pay overdraft items, perhaps up to a
specified "limit," either because the institution's deposit agreements
or marketing materials effectively promise that the institution will pay
overdrafts, but where the promise is not evidenced by a formal, written
overdraft line of credit.
This comment refers to the options described in sections 2 and 3 above
as "Discretionary Programs," distinguishing such programs from those
described in sections 1 and 4 where the institution has a legal
obligation to pay overdraft items under certain circumstances.
III. The Proposed Guidance Blurs the Important Distinctions between
Discretionary Programs and Non-Discretionary Programs
It appears that one aim of the Proposed Guidance is to address the
compliance issues and best practices of Formal Discretionary Programs.
See 69 Fed. Reg. at 31,860 (noting that a major concern of the Agencies
are overdraft protection programs which are "promoted in a manner that
leads consumers to believe that overdrafts will always be paid when, in
reality, the institution reserves the right not to pay some
overdrafts"). In discussing their concern over the increasing use of
Discretionary Programs, the Agencies note:
some institutions have promoted this credit service in a manner that
leads consumers to believe that it is a line of credit by informing
consumers that their account includes an overdraft protection limit of a
specified dollar amount without clearly disclosing the terms and
conditions of the service including how fees impact overdraft protection
dollar limits, and how the service differs from a line of credit.
69 Fed. Reg. at 31,860.
UCB can appreciate the concerns noted by the Agencies in the Proposed
Guidance, and we appreciate the opportunity for formal regulatory
guidance. We also support, in general, more precise disclosure of the
terms of Discretionary Programs, particularly Formal Discretionary
Programs.
Our concern is that, after the Agencies seem to acknowledge that
institutions offer both Discretionary Programs and Non-Discretionary
Programs, the Agencies seem to lose sight of this
distinction and repeatedly imply that all of the four program types
involve extensions of credit. As discussed below, we believe that, with
respect to Formal Discretionary Programs (1) it is inconsistent with
TILA and case law to treat these programs as credit facilities; and (2)
this characterization exposes institutions to significant risk of law
suits under State lending and interest laws by implying that the
Agencies fully consider the Formal Discretionary Programs (or the
Informal Discretionary Programs, for that matter) as involving
extensions of credit.
IV. Discretionary Programs Do Not Involve Extensions of Credit
A. Discretionary Programs Do Not Meet the Regulatory Definition
of "Credit" Under the Federal Truth in Lending Act and Therefore Should
Not Be Characterized as Credit in the Proposed Guidance
Contrary to the implications in the Proposed Guidance, Discretionary
Programs do not involve extensions of credit for TILA or State law
purposes and are not "short-term credit facilities" or a "credit
services," as explained below.1
Regulation Z defines "credit" as "the right to defer payment of a debt
or to incur a debt and defer its payment." 12 C.F.R. §§ 226.1(c)
(discussing the coverage of Regulation Z) and 226.2(a)(14) (defining
"credit"). Most deposit agreements used by depository institutions that
offer Discretionary Programs state that the depositor is required to
reimburse the depository institution immediately for any overdrafts paid
by the depository institution. In those cases where the deposit
agreements do include such terms, it follows that a depositor does not
have the right to defer payment of a debt or to incur debt and defer its
payment in connection with Discretionary Programs. That is, the
Discretionary Program does not provide for an extension of credit under TILA.
Even if the Discretionary Programs are a type of "credit" for TILA
purposes, in order for TILA to apply, four additional conditions must be
met (i) the credit is offered or extended to consumers; (ii) the
offering or extension of credit is done regularly; (iii) the credit is
subject to a finance charge or is payable by written agreement in more
than four installments; and (iv) the credit is primarily for personal,
family, or household purposes. 12 C.F.R. § 226.1(c). Assuming for this
purpose that conditions (i), (ii) and (iv) are satisfied, Discretionary
Programs still would not be subject to TILA because they involve neither
finance charges nor written agreements for repayment in more than four
installments, as discussed below.
TILA defines a finance charge as `the cost of consumer credit as a
dollar amount" which includes "any charge payable directly or indirectly
by the consumer and imposed directly or indirectly by the creditor as an
incident to or a condition of the extension of credit." 12 C.F.R. §
226.4(a). Notably, the TILA definition of a finance charge excludes "[c]harges
imposed by a financial institution for paying items that overdraw an
account, unless the payment of such items and the imposition of the
charge were previously agreed upon in writing." 12 C.F.R. § 226.4(c)(3)
(emphasis added). The very nature of a Discretionary Program is that the
depository institution may, but is not required to, pay overdraft items,
and this is clearly disclosed in the Formal Discretionary Programs that
are the subject of this comment. Because there is no agreement to pay
each or any overdrawn instrument, the Discretionary Programs satisfy the
exclusion noted above.
Section 226.4(b)(2) of Regulation Z and its associated Staff Commentary
indicate that overdraft fees are finance charges when imposed "in
connection with a credit feature," but then only to the extent the
charges exceeds the charge for a similar account without a credit
feature. See 12 C.F.R. § 226.4(b)(2) and Reg. Z Official Staff Comment
at 4(b)(2)-1. Because Discretionary Overdraft programs do not involve
"credit," as discussed above, NSF charges should not be considered to be
finance charges. Moreover, as discussed in Part I, institutions offering
Formal Discretionary Programs typically charge the same fee whether the
institution pays or bounces the item. In those cases where the NSF fee
is the same whether the overdraft item is paid or not, the NSF fee
should not be considered to be a finance charge for TILA purposes.
In addition, under Discretionary Programs, most depository
institutions charge an overdraft fee regardless of whether the
depository institution honors the overdrawn instrument. In the case
where a depository institution does not honor an overdrawn instrument
yet charges an overdraft fee, there is no "extension of credit" and the
overdraft fee cannot be viewed as a finance charge. If the institution
does pay the item, it would charge the same NSF as it would have charged
if it had not paid the item and, therefore, the NSF fee should not be
considered to be a finance charge. Therefore, an overdraft fee obtained
under a Discretionary Program is not a finance charge for TILA purposes,
and since most Discretionary Program agreements do not contain any
clauses that the overdrawn instrument can be repaid in four or more
installments, TILA does not apply to Discretionary Programs.
B. Discretionary Programs Are Not "Credit" Under the Case Law
Interpreting the Federal Truth In Lending Act and the National Bank Act
and Thus Should Not Be Characterized as Credit In the Proposed Guidance
There is ample case law in a variety of jurisdictions concluding that a
depository institution does not extend credit for TILA purposes when it
pays overdrafts from time to time on a discretionary basis in the
absence of a formal, written overdraft line of credit. Numerous federal
and state courts have held that overdraft fees charged by depository
institutions are not finance charges.
Federal courts in Mississippi have concluded that overdraft charges
are not finance charges for TILA purposes. See, e.g., Nicolas v. Deposit
Guaranty National Bank, 182 F.R.D. 226 (S.D. Miss. 1998) (where deposit
agreement provided that bank could, in its discretion, pay or return
checks presented against insufficient funds, and bank charged consumer a
$20 fee per item regardless of whether the bank paid or returned the
check); Terrell v. Hancock Bank, 7 F. Supp. 2d 812 (S.D. Miss. 1998).
In addition, both the Southern and Northern District Courts in
Mississippi held, in separate cases, that a daily overdraft fee was not
a finance charge for TILA purposes where the parties did not agree in
writing that the bank would pay the overdrawn items. Taylor v. Union
Planters Bank of Southern Mississippi, 964 F. Supp. 1120 (S.D. Miss.
1997); Sims v. Union Planters Bank of Northeast Mississippi, NA, 1997 WestLaw 170309 (N.D. Miss. 1997).
Similarly, numerous courts have held that overdraft and nonsufficient
funds fees are not interest. In First Bank v. Tony's Tortilla Factory,
Inc., 877 S.W.2d 285 (Tex. 1994), the bank had, from time to time,
honored certain of the depositor's overdraft instruments. A nonsufficient funds fee was always charged to the depositor's account,
whether or not the bank honored the overdrawn instrument. The depositor
sued the bank alleging that the bank's nonsufficient funds fees were
usurious. The Texas Supreme Court stated that fees which are "an
additional charge supported by a distinctly separate and additional
consideration, other than the simple lending of money, are not interest
and thus do not violate the usury laws." 877 S.W.2d at 287. Because the
court concluded that each nonsufficient funds fee was a separate and
additional consideration for processing each bad check, the court
concluded that the nonsufficient funds fees were not interest. Id. at
287-288. The Texas Supreme Court found that the consideration for the
funds advanced to cover the bad checks was not the nonsufficient funds
fee, but was the customer's promise to repay that advance. Id. at 288.
The court also noted that "the mere profitability of the NSF fee to
First Bank does not make the fee usurious interest." Id.
In Video Trax. Inc. v. NationsBank, N.A., 33 F. Supp. 2d 1041 (S.D.
Fla. 1998), the United States District Court for the Southern District
of Florida held that nonsufficient funds fees were not interest under
either the National Bank Act or Florida law. In this case, the
depository institution not only charged a flat overdraft fee for each
overdraft instrument presented, but the depository institution also
charged interest on those overdraft instruments. The plaintiffs did not
challenge the interest charges on the overdrawn balance, but challenged
only the overdraft fee on the grounds that the fee was also "interest."
In this case, the bank had discretion as to whether to honor or dishonor
any particular overdraft instrument; the bank was not obligated by any
specific overdraft line of credit or other agreement to honor any
overdrafts.
The plaintiff depositor argued that the definition of interest in the
National Bank Act preempted the Florida law definition of interest
Although the court did not concede that the National Bank Act definition
was controlling, the court went on to conclude that overdraft fees were
not interest under the National Bank Act. J at 1049-1050. The court
reached this conclusion "because the OD fees were not imposed in connection with a credit
transaction" but instead arose from the terms of the deposit agreement.
Id. The court looked to "the ordinary meaning" of interest in reaching
its conclusion under the National Bank Act, stating that interest
"includes any compensation allowed by law or fixed by the parties for
the use or forbearance of money." Id. at 1049. The court also recognized
that the bank's overdraft fee reflected allocations of administrative
costs consequent to the processing of checks -- i.e., that the overdraft
fee was a processing fee, not interest. Id. at 1051.
In considering whether the overdraft fee was interest under Florida law,
the court noted that Florida law specifically provided that "the
calculation of unlawful rates of interest 'shall apply only to loans and
advances of credit.'" Id. at 1052 (citing Fla. Stat. 687.03(2)(b)). The
court concluded, however, that honoring checks on overdrawn accounts is
not an extension of credit. Id.
A Federal court in Mississippi, considering Mississippi law and the
National Bank Act, also concluded that overdraft fees were not interest
In Terrell, supra, the court held that nonsufficient funds fees were not
interest under the National Bank Act because they are not imposed in
connection with credit transactions, but instead arise under the deposit
agreement. Id. at 816. With respect to Mississippi law, the court
considered the Mississippi law definition of finance charge:
[T]he amount or rate payable, directly or indirectly, by a debtor
for receiving a loan or incident to or as a condition of the extension
of credit, including, but not limited to, interest, ... service charges,
transaction charges, ... or any other cost or expense to the debtor for
the services rendered to the debtor in making, arranging or negotiating
a loan of money or extension of credit....
Id. at 817 (quoting Miss. Code 75-17-25 (1991)). Based on this
definition, the court concluded that the NSF fees were not interest
because these fees were not charged in connection with credit. Id. The
court also cited the Tony's Tortilla case as persuasive authority.
Id.
As in the other cases discussed in this section, the defendant bank in
the Terrell decision honored overdrafts only in its discretion and was
not obligated by written agreement to do so.
The regulations implementing TILA, case law and general industry
practice for decades have illustrated that nonsufficient funds and
overdraft fees are not ordinary interest charges or finance charges.
Thus, for TILA purposes, the Discretionary Programs which are the
subject of the Proposed Guidance are not and should not be referred to
as "short-term credit facilities" or "credit services."
C. Formal Discretionary Programs are Indistinguishable from Informal
Discretionary Programs for Legal Purposes
The cases discussed above arose prior to the wide spread use of
Formal Discretionary Programs. However, Formal Overdraft Programs differ
from the Informal Overdraft Programs that were the subject of these
cases in only two ways: (1) Formal Overdraft Programs tend to be
automated and (2) some institutions offering Formal Overdraft Programs
establish overdraft thresholds either on an individual customer basis or
with respect to all customers. We believe that these differences do not
alter the fundamental conclusion that the discretionary overdraft
programs do not involve extensions of credit for TILA or State law
purposes.
The automation of Discretionary Programs simply reflects the times
and the overall automation of banking So long as the institution retains
discretion as to whether to honor or return an overdraft item, the
program should not be considered to be a credit program simply because
it is automated. When a bank elects for any reason not to pay an
overdraft item for a particular customer, the bank simply changes a
"switch" in the system so that the items would not be honored
automatically.
Likewise, the possibility that some institutions might establish
overdraft thresholds for Formal Discretionary Programs should not in
itself convert the program into a credit product. The threshold is
simply a risk control established by the institution -- an outside limit
for the overdraft items that would clear the system automatically until
such time as the institution flips the "switch" to stop payment of
future items. This does not change the fundamental discretionary nature
of the program and does not change the fact that customers have no
rights to incur debt.
For these reasons, we respectfully submit that Formal Discretionary
Programs should not be considered as involving extensions of credit for
TILA or State law purposes, and that it would be inaccurate and
inappropriate for the Agencies to publish final Overdraft Guidance that
refers to such programs as "short-term credit facilities" or "credit
services."
V. Conclusion
Depository institutions and consumers alike have suffered due to the
lack of regulatory guidance for Discretionary Programs. UCB supports the
Agencies' recommendation that regulatory guidance be enacted for
Discretionary Programs. We believe that such guidance will assist
financial institutions and can better protect consumers from confusing
disclosures or inappropriate practices.
However, we strongly urge the Agencies not to characterize Formal
Discretionary Programs as "short-term credit facilities" or "credit
services" for the reasons discussed above. As discussed above, we
believe that Formal Discretionary Programs do not qualify as, and should
not be considered to be, credit services or short-term credit
facilities. If any final Guidance issued by the Agencies characterizes
Discretionary Programs as credit or credit facilities, that could mark
the end of Discretionary Programs, at least in the sense of the modern,
automated programs that many depository institutions and vendors now
offer.
UCB appreciates the opportunity to provide these comments and is
available to provide additional information or assistance as you may
require.
Sincerely,
John ReVeal
Powell Goldstein Frazer & Murphy LLP
Washington, DC
1 We recognize that the Agencies may not have the authority to determine
whether Discretionary Overdraft Programs are credit products for State
law purposes, and we recognize that some States may choose to enact
legislation that causes such products to be treated as credit. Our aim
in part is to dissuade the Agencies from treating Discretionary Programs
extensions of credit for TILA purposes, or from otherwise characterizing
or referring to Discretionary Overdraft Programs as credit products, so
as to avoid any implication that such characterization or reference
applies under State law.
cc: Jennifer J. Johnson, Secretary
Board of Governors of the
Federal Reserve System
20th Street and
Constitution Avenue, N.W.
Washington, D.C. 20551
Attn: Docket No. OP-1198
Office of the Comptroller of the Currency
250 E. Street, S.W.
Public Information Room
Mailstop 1-5
Washington, D.C. 20219
Attn: OCC Docket No. 04-14
Regulation Comments
Chief Counsel's Office
Office of the Thrift Supervision
1700 G Street, N.W.
Washington, D.C. 20552
Attn: No. 2004-30
Becky Baker, Secretary of the Board
National Credit Union
Administration
1775 Duke Street
Alexandria, VA, 22314-3428
