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FINANCIAL
SERVICE CENTERS OF AMERICA, INC.
August 9, 2004
Via E-Mail
Robert E. Feldman, Executive Secretary
Attention: Comments/Executive Secretary Section
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Re: Comments on Interagency Guidance on Overdraft Protection Programs
FIL 63-2004, dated June 7, 2004
Dear Mr. Feldman:
On behalf of the Financial
Service Centers of America (“FISCA”)
we are submitting comments on the Interagency Guidance on Overdraft
Protection published on or about June 7, 2004. FiSCA is a national
trade organization representing over 5,000 locations at which a wide
range of financial products are made available to the public. A large
majority of FiSCA’s members provide short term credit for consumers,
all of whom have checking accounts at depository financial institutions.
FiSCA members conduct this line of their business under strictly
enforced state and federal regulation, including through compliance
with the Truth In Lending Act, 15 U.S.C.§1601 et. seq., as implemented
through Regulation Z. 12 C.F.R 226.
In addition, the business practices under which the short term
loans are made, must comply with FiSCA’s Code of Ethical
Standards for those transactions. This ethical code was the first
promulgated for the payday advance industry and it has been updated/expanded
regularly.
Overdraft protection programs (“OPPs”) have been sweeping
the country in the last few years. By early 2004 over 1,000 American
banks were operating and marketing OPP. It is the marketing and
active promotion to consumers of overdraft protection that converts
traditional “courtesy” overdraft transactions to what
is undoubtedly a new financial product line for banks. Last year,
Washington Mutual earned over $1 billion in fee income from its
overdraft protection programs. Those are the real OPPs. They are
actively advertised, promoted and marketed to consumers as a form
of credit. Also, the OPPs are structured and operated to encourage
overdrafts, particularly recurring overdrafts from the same consumer
base.
With the marketing approach described above, these OPPs are nothing
less than thinly disguised short term loans. These transactions
should be regulated as loans.
FiSCA applauds the proposed OPP Guidance as an absolutely necessary
first step in regulating the terms, conditions and marketing by
banks of these advances. The administrative approach that characterizes
the Guidance unfortunately is timid, unrealistic and unfriendly
to consumer interests. OPP transactions are extensions of credit.
The Guidance describes these transactions in terms that are typical
of loans. They are marketed and promoted to consumers as if they
were loans and consumers are encouraged to treat the “available” credit
under an OPP just as if it were a maximum loan limit on a credit
card account. The consumers certainly use them that way. The alleged “discretionary” aspect
of OPP transactions is at best a fantasy. If the federal banking
regulators as a group genuinely accept this myth, it must reflect
a real lack of familiarity with this financial product. FiSCA urges
that the federal regulators investigate, assemble and publish the
data comparing the percentage of denials of overdraft coverage
and the gross numbers involved.
In essence, the guidance represents two steps forward and one backward.
There are positive steps taken by requiring full disclosures of
fees and OPP terms; and adherence to the obligations imposed by
the Truth In Savings Act (“TISA”). 12 U.S.C. 4301 et.
seq. The backward movement is the express exemption of OPP transactions
from compliance with TILA and Regulation Z. It is encouraging to
a degree that the Guidance suggests there may be further scrutiny
in the future of OPPs as more information and experience with them
develops.
TILA compliance should be imposed now. The Guidance forthrightly
acknowledges regulatory concern about consumer awareness of alternative
credit sources and their cost relative to OPP advances. Despite
this concern, the Guidance authoritatively eliminates the single
standard most familiar to consumers who use credit — the
annual percentage rate (“APR”) disclosures. One of
the key purposes of TILA was to create common denominators through
which consumers could comparison shop for credit. That cannot be
done with OPPs today and that situation is very unlikely to change,
even with full implementation of the best practices promulgated
in the Guidance.
By allowing tens of millions of OPP advances to proceed without
APR disclosures, the banking regulators also have denied the consumer
account holders the benefits of robust competition in the credit
market. Not only does TILA compliance assist consumers through
disclosure of the cost of credit, it also beneficially fosters
price competition among the purveyors of credit. Under basic economic
principles this should tend to drive the price of credit down to
marginal cost.
In essence, Congress and the capitalist system as a whole have
embraced the fundamental principle that transparency in credit
transactions through understandable pricing requires the use of
a common standard to enhance the efficacy of competitive forces.
In credit transactions, the accepted criteria are APR disclosures.
By requiring APR disclosures, the federal banking regulators can
encourage price competition among banks offering OPPs. Perhaps
even more importantly, APR disclosures will strengthen the ability
of banks to compete with other sources of short term credit such
as credit card companies, small loan companies, payday lenders
etc. TILA compliance creates a level playing field for all sectors
of the consumer credit market.
In conclusion, FiSCA firmly believes the Guidance should be amended
to require APR disclosures through OPP whose terms will readily
allow the computation of APRs. Alternatively, the federal banking
regulators should commence promptly to investigate actual OPPs
transactions, the extent of “denials” under “discretionary” programs
and the frequency of consumer usage of these products. In addition
information should be amassed to allow a computation of the percentage
that OPP “fees” represent relative to the amount of
funds advanced.
Thank you for your consideration of FiSCA’s views. Should
you require any amplification or clarification of its position,
please feel free to contact us at the above address.
Respectfully submitted,
Gerald Goldman, Esq.
FiSCA General Counsel
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