| KANSAS BANKERS
ASSOCIATION
Kansas Bankers Association
610 Corporate View, P.O. Box 4407, Topeka, KS 66604
August 2, 2004
Ms. Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
ATTN: Docket No. OP-1198
Public Information Room, Mailstop 1-5
Office of the Comptroller of the Currency
ATTN: Docket No. 04-14
Mr. Robert E. Feldman, Executive Secretary
Federal Deposit Insurance Corporation
ATTN: Comments
Re: Proposed Guidance on Overdraft Protection Programs
Thank you for the opportunity to offer comments on the proposed
“Overdraft Protection Guidance”. The Kansas Bankers Association is a
nonprofit organization with 357 of the 361 Kansas banks as its members.
As an advocate for the banking industry, the KBA has great interest in
helping our members feel comfortable that the products they are using
are in the best interests of not just each bank’s bottom line, but also
the bank’s customers.
Our comments will be organized in the same manner as the proposal –
we will be offering our comments in three primary areas: Safety and
Soundness Considerations, Legal Risks and Best Practices.
Safety and Soundness Considerations.
In brief summary, the proposal suggests that overdraft protection
programs may expose institutions to more credit risk than traditional
overdraft programs due to the lack of individual account underwriting.
The proposed solution is for institutions providing overdraft protection
programs to adopt written policies and procedures to address the credit,
operational and other risks association with these programs.
Institutions should also monitor these accounts to be able to identify
consumers who excessively rely on the product or who represent undue
risk to the institution. Procedures need to be in place to suspend or
disqualify a consumer from future participation, if necessary. Reports
with information concerning product volume, profitability and credit
performance should be provided to management on a regular basis.
Finally, the proposal suggests that overdraft balances should generally
be charged off within 30 days from the date first overdrawn.
It is our understanding that before an individual can open a demand
deposit account at a financial institution, that individual does undergo
a process by which the institution determines whether this person is a
risk as an account holder of the bank. The process may be different at
various institutions, but all have procedures for determining the
identity of the individual and whether this person has a history of poor
account management with other institutions. In this sense, the
institutions are making a determination of risk before they even allow a
person to open an account. This same analysis is used for every account
– regardless of whether traditional overdraft programs are offered or
whether the newer type of overdraft protection is offered.
The procedures mentioned above are already covered in the
institution’s book of policies and procedures. For example, every bank
must address the provisions of Section 326 of the USA PATRIOT Act
through a Customer Identification Program, and every bank has set forth
procedures for opening new accounts. We understand that while the
institution will want to set forth account eligibility standards (if
they are different from general new account standards) and well-defined
dollar limit criteria, we hope that the agencies recognize the policies
and procedures that are already in place in each institution and will
not require a re-inventing of the wheel.
Experience tells us that a hard and fast rule about charging off
overdraft balances presumes that the customer is a monthly wage earner
or someone on a fixed income who can clear the incidental overdraft in a
30-day period of time. Many bank customers are small business owners
operating on a different time frame. For example, painters only get paid
when their work is completed; harvestors cannot harvest when the wheat
is wet. There needs to be some flexibility in the charge off timeframe.
We agree that if an overdraft remains unpaid for an unreasonably long
period of time, it should be charged off, but we think it would be more
prudent to allow each bank to set the time period they believe is
appropriate. If the bank cannot justify the timeframe to its federal
banking regulator, then let the examination process work to shorten it.
Legal Risks.
In brief, the proposal addresses the following applicable federal laws:
FTC Act/Advertising Rules: Institutions should closely review
the overdraft protection programs to avoid engaging in deceptive,
inaccurate, misrepresentative or unfair practices – especially any
materials that inform consumers about the programs;
TILA: Fees assessed against an account for overdraft
protection services are finance charges only to the extent the fees
exceed the charges imposed for paying or returning overdrafts on a
similar account that does not have overdraft protection;
ECOA: The prohibition against discriminating against an
applicant on a prohibited basis applies to overdraft protection
programs, however such programs are considered “incidental credit” and
so are not subject to the rules concerning notices for adverse action;
TISA: New disclosures may be needed when overdraft protection
services are added to an existing deposit account if the fee for the
service exceeds the fee for accounts that do not have the service, or if
the original disclosure did not disclose that fees would be charged for
both paid checks and returned checks; and
EFTA: If a consumer could overdraw an account by means of an
ATM withdrawal or point-of-sale transaction, both are subject to EFTA
and Regulation E so that periodic statements must be understandable and
accurate regarding debits made, current balances and fees charged.
As stated earlier, our interest is in helping bankers feel
comfortable that the products they offer benefit the bank customer. We
believe the proposed guidance presents a reasonable assessment of the
applicability of these laws and regulations to the overdraft protection
programs.
Best Practices.
The proposal sets forth best practices currently used or recommended by
the banking industry. Generally speaking, we believe the proposed
guidance presents a reasonable approach by incorporating practices that
have already been implemented by institutions concerned about minimizing
potential consumer confusion and complaints, fostering good customer
relations and reducing potential risks to the institution. We would
offer comment on a few of the suggested practices:
Fairly represent overdraft protection programs and alternatives. Bank
customers should be made aware of any bank service or product that would
be available to them. We agree that bank customers should be made aware
of other overdraft protection programs available at the bank. However,
the proposal implies that the bank should try to encourage the customer
to use other alternatives to the overdraft protection program. The
proposal states that the bank should, “explain...the costs and
advantages of various alternatives to the overdraft protection program,
and identify...the risks and problems in relying on the program and the
consequences of abuse”. There will be many instances where the overdraft
protection program is the more advantageous alternative for the
customer. In other words, determining which alternative is best for a
customer depends upon the habits of the customer and whether they
overdraw the account frequently or almost never. We believe the customer
should be made aware of the alternatives and then be allowed to decide
which alternative is best suited to his or her needs.
Clearly explain discretionary nature of the program. Again, we agree
that a bank must make clear in its disclosures, that the payment of an
overdraft item is not automatic. However, we are unclear what is meant
when the proposal indicates that the bank must also, “describe the
circumstances in which the institution would refuse to pay an overdraft
or otherwise suspend the overdraft protection program”. It would be very
difficult to, without exclusion, think of all the circumstances in which
a bank would refuse to pay an overdraft. In addition, a list of all the
circumstances in which a bank would refuse to pay an overdraft implies
that the bank will always pay an overdraft in every other circumstance.
The list then becomes fodder for lawsuits brought by customers whose
overdraft was not paid, but whose circumstance was not on “the list”.
Again, the disclosure should emphasize that the institution has the
discretion in all cases to pay the overdraft and should not oversell the
ability of the institution to pay the overdraft, without trying to list
all circumstances of the institution’s discretion.
Provide election or opt-out of service. There is no doubt that bank
customers clearly have the right to decline the benefits of overdraft
protection programs of any nature. It is our hope that in the final
rule, the opt out process will not be made burdensome for the customer
or for the bank. To this end, we would hope that the process would
remain flexible so that banks of every size and complexity could
determine the method that fits its operation.
Conclusion.
It is our hope that these comments will be useful in formulating a final
regulation that addresses the concerns surrounding the offering and
administration of overdraft protection services, while maintaining the
many benefits of the overdraft protection service to bank customers.
Thank you for your time and attention.
Sincerely,
James S. Maag
President
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