State Bank of Southern Utah
From: Kirk Jones [mailto:KPJones@sbsu.com]
Sent: Monday, July 12, 2004 4:48 PM
To: Comments
Subject: Overdraft Protection Guidance
July 12, 2004
Federal Deposit Insurance Corp
550 17th Street NW
Washington, DC 20429
RE: Overdraft Protection Guidance
Dear FDIC:
Thank you for this opportunity to comment on the proposed Overdraft
Protection Guidance.
Foremost in my mind is the question about why regulate a program
that
is well received by the consumer? If there are consumer complaints
I
have not heard of any. Indeed, it appears that such programs are
disliked only by organizations that claim to represent consumers.
The
person who actually writes a check against insufficient funds is
only
too happy that a bank would pay it instead of returning it. In fact,
in
the two years since our bank has implemented our "Overdraft
Permit"
I have not heard of one customer complaint about the program. I have,
however, seen "Thank You" letters written in appreciation
that we
did not return critical checks. More importantly, complaints from
customers have decreased regarding our treatment of overdrafts.
Our "Overdraft Permit" (developed
internally) has allowed our pay
or no-pay decisions to be more rational, as we now provide every
bank
customer with a certain overdraft limit ($300 - $500). Before our
program was implemented our decisions were very inconsistent and
somewhat arbitrary. Indeed, we generated complaints because of our
lack
of consistent treatment. One day an overdraft check would be paid
for a
certain customer, another day it would not. It all depended upon
the
mood and experience of the officer making the overdraft decisions.
As I said, our bank customers seem quite happy with our program.
Negative comments about overdraft programs appear to be coming from
consumer organizations and not from the actual consumer. This
distinction is important, as certain political organizations are
always
looking for a reason to exist. While the regulatory bodies need to
be
very careful in becoming too closely aligned with bankers, there
is
another danger as well * that of becoming an apparatus of lobbying
groups. I believe this regulatory proposal may be a case in point
for
the argument that consumer lobbying groups have gained too much
influence with regulatory agencies.
Consumers are not stupid. They use a logical sequence in tapping
sources of money starting with the least costly (a paycheck). After
the
cheap money is exhausted consumers move up to more costly sources,
such
as a credit card. Other costly options are also tapped if necessary,
such as an overdraft. As the last resort a consumer may turn to
extremely high-cost funds, such as a "Pay Day Loan". The
point here
is that an overdraft is one of several sources of funds. Restricting
or
regulating the way a bank pays an overdraft item will have the ultimate
effect of forcing more consumers into higher cost options at a faster
rate, resulting in greater hardship and greater cost for consumers.
For example, one local "Pay-Day" outfit charges $8.50 per
hundred
per week for post-dated checks. That works out to a cost of $51 for
a
$300 loan for two weeks (442% APR). The same consumer could get the
same $300 for less than $21 in fees and interest at our bank by writing
one overdraft check and waiting the same two weeks before repayment
(about 182% APR) It does not take genius to figure out which option
is
best for the consumer.
One other issue related to the proposed regulation needs to be
addressed. We use our products as a competitive tool to differentiate
us from our many competitors. We have designed our "Overdraft
Permit" to fit in with the overall philosophy of the bank.
However, with each regulation we become less unique and more like
the
mega-bank next door.
As for printing total overdraft fees on a separate line-item in
the
monthly bank statement, I believe that this proposal it is completely
unnecessary and will be wholly ineffective at reducing the number
of
overdrafts. First, the information is already conspicuously identifie
d
on the statement. Any customer with 30 seconds and the inclination
could easily calculate the overdraft fees for the month. Second,
and
perhaps more importantly, the proposal will be ineffective because
I
have a strong suspicious that many overdraft customers never bother
to
look at their statements. I have been flabbergasted by the number
of
customers who claim that they were unaware of their account balance
until they received notice of a returned check. A consumer's lack
of
interest in his own bank statement is a serious issue that cannot
be
overlooked in formulating proposed regulations.
By the way, the act of writing an overdraft check is a criminal
offense. If a customer ignores the criminal aspect of writing an
overdraft check, what makes you believe he will pay attention to
financial aspects?
As for the proposal to require the closure of an overdrawn account
after 30 consecutive days in the overdraft, I strongly disagree with
your reasoning. If there is an element in the proposal that needs
major
modification or complete withdrawal, this is it.
First, the closure of an account usually serves as the trigger for
other important events, such as ChexSystems reporting, collection
action, or reporting to a credit bureau. A strict 30-day charge-off
would allow very little margin for people to work out the overdraft.
There are many people who are paid on a monthly basis and cannot
or will
not bring their account current in one payroll cycle. Many require
two
or more pay periods to become whole again.
Second, accelerating the charge off to 30 days would cause hardship
for
customers on an extended vacation. As an example, ironically, on
the
date that I received the FDIC letter requesting comments, I received
a
call from a customer who had been overdrawn 58 days. She had been
traveling and was not aware that her account was overdrawn until
she
returned home and began reading the mail. She thanked us for paying
her
checks and then she proposed a plan to bring her account current.
Had
the 30-day rule been in place we would have closed the account, causing
our customer unnecessary hardship. Some of the checks that we paid
would have instead been returned "Account Closed", subjecting
our
vacationing customer to possible legal action and additional expense.
Third, we have a significant percentage of overdraft customers who
bring their accounts current 30 to 60 days after the first overdraft.
Of the 70 or so customers overdrawn between 30 and 60 days during
any
given week, I estimate that about 85% (about 60) clear up the problem
before the 60-day mark. Of the remaining 10, about half of those
progress to an actual charge-off. This is significant. We have noted
that 60 days is usually sufficient for customers who intend to pay
us
back to do so (or make arrangements to do so). We may delay charge
off
for several more weeks for those who stick to their repayment
commitments. I suspect many other banks have witnessed this same
trend
and would suggest that you not tinker with our procedures. Our normal
policy in most situations is to charge-off accounts that are overdrawn
60 consecutive days, which allows us to make four attempts to contact
the customer to work out a payment plan (one attempt at contact every
two weeks).
Fourth and finally, I believe that accelerating the charge-off to
30
days would actually reduce our chances of collection and increase
realized losses on all overdraft programs. Once the word "charge
off" enters the discussion, many people view it as an indication
that
they have been relieved of their obligation to repay. Although this
is
far from the truth, many customers simply stop listening and actually
resist further effort to repay. For this reason we should be avoid
charging off an account until as late in the process as possible.
Regulation is not without its cost. I believe that an unintended
effect of this proposal, if enacted, would be to limit overdrafts
as a
source of funds. Consumers, as a co
nsequence would be forced into
higher-cost options, such as "Pay-Day Loans" and end up
in a worse
condition. The need for the funds and the urgency of the situation
would not disappear, but one significant source of money would become
less reliable or more difficult to obtain under the proposal.
While I believe that your assessment that the marketing of some
overdraft programs may lead to irresponsible and costly behavior
on the
part of bank customers, there is nothing fundamentally wrong with
the
way the overdraft programs work. I share your opinion that marketing
should be discrete, informative, in good taste, and not geared to
promote abuse by people who cannot control their spending. But
controlling marketing does not appear to be the main thrust of the
proposal. Indeed, the proposal goes far beyond marketing and delves
deeply into the operation of such programs.
For the reasons above I recommend that you postpone or completely
withdraw your proposed regulations. One other possible option is
to
significantly alter the proposal to address marketing issues only.
If
the regulations as proposed are imposed, the regulatory agencies
will
end up causing far greater hardship and far greater expense for the
very
consumers you seek to protect. However, you will end up pleasing
one
industry for the consequential boon in business * the one that charges
442% APR for a "Pay Day Loan"!
Sincerely,
Kirk Jones
SVP Operations
State Bank of Southern Utah
Cedar City, UT
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