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FDIC Federal Register Citations

GREATER ROME BANK

-----Original Message-----
From: Grey Winstead [mailto:Grey.Winstead@greaterromebank.com]
Sent: Wednesday, August 04, 2004 2:15 PM
To: Comments
Cc: Tom Caldwell; Jason Pruitt; steve@cbaofga.com
Subject: FFIEC proposed guidance on overdraft protection programs

I commend the regulators for attempting to bring a level of standards or best practices to overdraft protection programs. The best practices section of the proposed guidance should prove beneficial to our industry and consumers. I have some serious reservations however, about two of the provisions under the safety and soundness considerations. I have great difficulty with regulations that move to a very detailed level of accounting requirements to be applied equally to all banks, when the degree of risk and the methods of delivering this service may vary greatly from bank to bank.

Specifically, I disagree with the broad application of the following proposals to all banks:

1) the general requirement to charge off overdrawn accounts “within 30 days from the date first overdrawn”; and

2) income and loss recognition requiring the use of a loss reserve, similar to GAAP on loan loss reserves.

I express my opposition primarily based on our experience with the implementation of our automated overdraft protection program in the fourth quarter of 2001. Before the service was implemented we spent several months developing policies and procedures, under the guidance of Strunk and Associates, which addressed operational issues as well as customer disclosures and service promotion. Prior to implementing the program we were already manually processing 1,500 to 2,000 NSF items a month. We currently process approximately 3,000 NSF items a month, with approximately 600 of these handled automatically through the overdraft privilege program; the rest of the items are still handled manually. When we started the automated program, we began with about 1,300 accounts using the service. We now have 1,540 accounts using the automated overdraft privilege service. Our Bank has $145 million in assets. Over the first two years of the program we charged off $6,874 in unpaid overdrafts, excluding NSF fee reversals. This low level of charge offs is less than 0.003% of assets on an annualized basis. Our monthly fee income from processing NSF items, the great majority of which are paid and not returned, has grown from around $22,000 a month in 2001 to approximately $45,000 a month in 2004. Roughly one third of this income is from the automated overdraft privilege service.

When we began our program, we braced for high fee reversals and principal charge-offs and established a loss reserve account, as was recommended by the consultants. The losses never materialized. We ultimately eliminated the loss reserve accounting on overdrafts, because it was not cost effective or even necessary.

We feel our management policies and procedures are more than adequate to manage this program without additional accounting and control mandates from the regulators. We are diligent with our customer disclosures and look to constantly improve customer communications. We monitor all NSF activity, including the privilege service, daily. We remove customers from the service at the first sign that they may have difficulty using it responsibly. If a customer in the program is overdraft for 35 days, our DP system automatically removes them from the program and puts them in a manual handling mode. We charge off and close accounts when collection efforts have been exhausted, but no later than 90 days. Overdrafts under both manual and automated systems are aged and reported at director loan committee meetings.

While some banks may need more supervisory guidance on these safety and soundness issues, our Bank will simply experience added processing cost and regulatory overburden, without any benefit. I imagine that our Bank will not be the only one that will be adversely affected by these two provisions, if they become mandatory requirements. I strongly urge the regulators to give consideration to making these two safety and soundness provisions simply suggestions or guidance for those banks whose management and processing environments may need stronger accounting controls, or at least provide an exception for banks that can demonstrate alternative, prudent risk management practices.

I would be happy to discuss this further if it might help. I can be reached at the number below.

Grey

Grey Winstead
Greater Rome Bank
1600 Martha Berry Blvd.
Rome, GA 30165
706-295-3207, ext: 312
fax: 706-235-7763
grey.winstead@greaterromebank.com
http://www.greaterromebank.com/
 

Last Updated 08/06/2004 regs@fdic.gov

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