Community Bankers Association of Illinois
August
6, 2004
Robert E. Feldman, Executive Secretary
ATTENTION: Comments
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
via e-mail to: Comments@FDIC.gov
Re: Overdraft Protection Guidance
Dear Mr. Feldman:
On behalf of
the Community Bankers Association of Illinois (hereinafter, “CBAI”),
I am submitting this comment letter in response to the proposed “Interagency
Guidance on Overdraft Protection Programs” (hereinafter, “Proposed
Interagency Guidance”). The Proposed Interagency Guidance was
published by the federal regulatory agencies, including the Federal
Deposit Insurance Corporation, in the Federal Register on June 7,
2004 (Volume 69, Number 109).
With more than
500 member financial institutions and more than 140 associate members,
CBAI
is the largest state-organized trade association
in Illinois representing the interests of financial institutions
and is the third largest such association in the United States. CBAI
is the leading advocate for community banks in Illinois, the state
with more active bank charters than any other state in the nation.
Our members include state-chartered and federally-chartered banks,
savings banks and savings and loan associations that can be found
in every one of Illinois’ 102 counties.
Among our roles on behalf of community banks in Illinois are the
review of products and services in the marketplace that may be of
interest to our members as well as the review of legislative and
regulatory proposals that might affect the ability of our members
to offer those products and services or the efficiency with which
they can be offered. Given those roles, we appreciate this opportunity
to comment on the Proposed Interagency Guidance.
General
comments on the regulators’ assessment of overdraft
protection services
CBAI supports reasonable and accurate disclosures that are designed
to educate a customer so that the customer can make an informed decision
regarding whether he or she will elect to purchase or enroll in a
particular product or service. To the extent that the Proposed Interagency
Guidance recommends clear, accurate and useful disclosures, CBAI
concurs with those recommendations. Unfortunately, the Proposed Interagency
Guidance goes beyond that threshold by suggesting actions or obligations
pertaining to overdraft protection programs that may not be warranted.
In setting the
stage for the recommendations, the Proposed Interagency Guidance
acknowledges
an increase in “customer acceptance” of
overdraft protection programs but states that certain aspects of
such programs “have raised concerns....” Later, the Proposed
Interagency Guidance refers to “existing and potential concerns
surrounding the offering and administration of such overdraft protection
services.” CBAI would prefer that federal regulations or guidelines
addressing a currently available banking product or service should
be rooted in evidence or data rather than concerns, whether those
concerns are existing or potential. The Proposed Interagency Guidance
does not include persuasive evidence that overdraft protection programs
are generally anti-consumer in concept or in application. By comparison,
in recent years there were numerous instances of predatory lending
practices by mortgage brokers and other non-bank mortgage lenders.
Regulators at both the state and federal levels responded to real
and demonstrable abuses that cost unsophisticated mortgagors substantial
financial losses and often resulted in foreclosure actions. If there
have been abuses on a similar scale with respect to overdraft protection
services, or if there is data indicating such an abusive trend, such
evidence or data is lacking in the Proposed Interagency Guidance.
CBAI does not
assume that overdraft protection services are somehow quasi-abusive
and therefore
should be reigned in by regulations or
guidelines. Rather, CBAI takes the position that legitimate, reputable
overdraft protection services are a modern extension of a service
that has long been offered by banks. It was not necessarily safer
for a bank to permit overdrafts on an ad hoc basis without the disclosures
and policies that usually accompany today’s programs. The fact
that today’s programs are more systematic and usually more
automated may raise certain operational issues that are rightly addressed
in the Proposed Interagency Guidance, but CBAI urges the federal
regulatory agencies to be deliberate and not to act prematurely or
unnecessarily unless there is data showing that the service is increasingly
being utilized in an abusive or predatory manner.
Safety and soundness considerations
CBAI agrees that prudent policies and procedures should be in place
to address operational risks associated with overdraft protection
services. We disagree, however, with specific recommendations contained
in the Proposed Interagency Guidance. For example, the suggestion
that “overdraft balances should generally be charged off
within 30 days from the date first overdrawn” is arbitrary,
unrealistic and inconsistent (as conceded in the Proposed Interagency
Guidance) with existing regulations affecting credit unions. The
ability of the customer to pay down or fully repay an overdraft
is in large part a function of his or her payroll periods and his
or her historical account relationship with the bank. There is
no magic to a 30-day rule and a bank should have ample discretion
to assess repayment probabilities and schedules without imposing
a one-size-fits-all rule. To tie the bank’s hands by suggesting
that 30 days is the maximum allowable time frame in which the customer
must resolve the overdraft status could result in negative credit
information being reported to credit bureaus when, had the bank
been left to its own reasoned judgment, full repayment of the overdraft
might have occurred on Day 35, or Day 45, or some other day that
would be within a reasonable time frame. Furthermore, as identified
in the Proposed Interagency Guidance, federal regulations permit
a credit union to carry an overdraft for 45 calendar days before
the customer must repay the negative balance or come to some approved
credit terms to cover the overdraft. There is no reason why a 30-day
maximum should be urged upon some financial institutions while
another set of their competitors (i.e., credit unions) is operating
with a 45-day window. CBAI believes that a one-size-fits-all time
frame is not advisable and that banks should be given discretion
to establish their own standards, but that under no circumstances
should the recommended time frame be less than the 45-day time
frame under which credit unions may operate.
CBAI also disagrees
that the dollar amounts of overdraft protection services that are
available
to customers should be reported for regulatory
purposes as “unused commitments.” There are at least
two problems with this provision. First, the vast majority of customers
who automatically qualify for a bank’s overdraft service will
never use the service because they manage their finances in such
a way as to not create overdraft balances. These customers will nominally
show an unused overdraft protection balance but will be unlikely
to utilize it, and therefore categorizing these balances as “unused
commitments” will vastly and unfairly misstate the true risk
exposure of the bank. Secondly, unlike approved lines of credit,
the Proposed Interagency Guidance stresses the discretionary element
of overdraft protection services (i.e., the fact that the bank reserves
the right to not pay any or all overdrafts pursuant to the bank’s
policies). It occurs to CBAI that an unused overdraft protection
service cannot simultaneously be (1) a discretionary privilege unilaterally
under the control of the bank; and (2) a “commitment” to
extend the unused balance to the customer such that it should be
reported as an “unused commitment” for regulatory purposes.
Best practices
CBAI agrees with the following general principle stated in the Proposed
Interagency Guidance: “Clear disclosures and explanations
to consumers of the operation, costs, and limitations of an overdraft
protection program and appropriate management oversight of the
program are fundamental to enabling responsible use of overdraft
protection.” The Proposed Interagency Guidance goes on to
list numerous “best practices” that financial institutions
are encouraged to consider. Many of the proposed best practices
are reasonable (e.g., banks should not encourage routine and intentional
overdrafts; banks should clearly disclose applicable fees; etc.).
Some, however, raise issues or potential unintended consequences
that may be worthy of further consideration.
One proposal suggests that bank personnel, when informing a consumer
about overdraft protection, should perform a comparative analysis
by describing and comparing the costs, advantages and disadvantages
of other products or services that might be an alternative to overdraft
protection. While CBAI believes that the bank should provide accurate
and not misleading information about overdraft protection, we have
concerns about a bank employee assuming a role that a customer could
perceive as advisory in nature. However well-intended this proposed
best practice may be, a bank employee should not be channeled into
a conversation in which he or she is telling a customer that one
product or service may be more beneficial than an alternative. Those
types of conversations, even for a well-trained employee, can easily
become a subject of dispute and potential liability exposure in extreme
cases where the customer subsequently claims that he or she suffered
some economic or reputational damage because he or she relied on
the advice or analysis provided by the bank employee when, in retrospect,
another alternative would have allowed the customer to escape a loss
or damage that the customer has now sustained.
Another proposed
best practice states that the bank should “(c)learly
disclose to consumers the order in which the institution pays checks
or processes other transactions (e.g., transactions at the ATM or
point-of-sale terminal).” Clarification may be necessary with
respect to suggested disclosure of “the order in which the
institution pays checks....” Section 4-303 of the Uniform Commercial
Code states that a bank may accept, pay, certify or charge against
the account of its customer “items” in “any order.”
The Proposed
Interagency Guidance suggests that when consumers attempt to execute
non-check
withdrawals (such as an ATM transaction), the
consumer should first receive a message that completion of the transaction
will trigger overdraft protection fees and the consumer should have
the option to cancel the transaction after receiving that message.
The Proposed Interagency Guidance, perhaps in recognition of the
fact that such messages and technology would not be uniformly available
at every ATM terminal accessible by the bank’s customer, also
states that if the fee message and the right to cancel are not uniformly
available, then the bank should post notices on its “proprietary
ATMs explaining that withdrawals in excess of the actual balance
will access the overdraft protection program and trigger fees for
consumers who have overdraft protection services.” For some
customers, this proposed best practice might be confusing and might
lead to a misunderstanding. The customer, seeing that notice posted
at the proprietary ATM but seeing no such notice posted at a competitor’s
ATM on the other side of town, might draw an inaccurate conclusion
that use of the ATM with no notice posted (i.e., the competitor’s
ATM) will not have the same consequences as the use of his or her
bank’s proprietary ATM where he or she saw the notice posted.
Conclusion
CBAI’s membership includes many banks that offer overdraft
protection services contemplated by the Proposed Interagency Guidance
and many banks that have chosen not to offer such services. CBAI
has never condoned abusive or predatory practices, and we have no
objection to the imposition of reasonable and necessary restrictions,
terms or conditions that are uniformly applied to all financial institutions
and that do not impair the banks’ ability to efficiently deliver
legal and common bank products and services to their customers. With
respect to overdraft protection services, disclosures that are clear,
accurate and not misleading are reasonable expectations. Prudent
policies and internal risk management controls are also reasonable
components of such a program. Many of the aspects of the Proposed
Interagency Guidance are sensible and CBAI believes that banks and
third party providers of overdraft protection programs or consultative
services should implement them. However, CBAI is not persuaded that
the federal regulatory agencies have stated a strong case for comprehensive
regulation or guidance in this area. Absent data showing that customers
are suffering significantly more harm than good from these programs,
CBAI would encourage the agencies to avoid premature judgments about
overdraft protection.
Specific areas
of disagreement or concern, as expressed above, are based on CBAI’s
assessment that the various proposals are arbitrary, that they
are not reflective
of the true nature or risk exposure
associated with the overdraft protection service, or that they invite
unintended consequences that could adversely affect the customer,
the bank or both.
The community
banks that are members of CBAI have outstanding records of customer
service.
We understand that many regulations and guidelines
are designed to target the “bad apples” within our profession
rather than to unnecessarily burden the vast majority of financial
institutions that would not be inclined to engage in deceptive or
unethical practices. CBAI urges the federal regulatory agencies to
adopt only those guidelines that are reasonably necessary and that
will allow financial institutions, and particularly community banks,
to operate as efficiently as possible in the delivery of legal products
and services to their customers.
Thank you for your consideration of these comments.
Sincerely,
Jerry D. Cavanaugh
General Counsel
Community Bankers Association of Illinois
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