| INDEPENDENT BANKERS ASSOCIATION OF TEXAS
July 21, 2004
Via email
OCC – regs.comments@occ.treas.gov.
Board of Governors of the Federal Reserve System – regs.comments@federalreserve.gov.
FDIC – comments@FDIC.gov.
Office of Thrift
Supervision – regs.comments@ots.treas.gov.
RE: Inter-Agency Guidance on Overdraft Protection Programs
Gentlemen:
The Independent
Bankers Association of Texas (“IBAT”)
is a trade association representing over 600 independent community
banks domiciled in Texas and Oklahoma. Virtually all of our members
offer some overdraft protection to customers. A large number of our
members have recently automated such services to greater facilitate
the efficiency of the service and to provide products and services
that customers desire.
IBAT is particularly concerned that this overdraft protection for
the occasional or inadvertent overdraft continue as a cost effective
service for customers without being subjected to the open end credit
requirements of Regulation Z. In polling our members, we have concluded
that if, in fact, the disclosure and other requirements of Regulation
Z are imposed on this very popular service, the cost will render
the product ineffective for banks to offer, thereby depriving many
customers of important protection. Perhaps most significantly, most
of the programs of which we are aware offer the inadvertent overdraft
privilege to all customers without requiring the customers to go
through an underwriting process. This decreases the cost of providing
the service. In addition, it makes the protection available to persons
who might otherwise not qualify for open-end consumer credit.
The introductory remarks in the inter-agency guidelines indicate
that overdraft balances should generally be charged off within 30
days from the first date overdrawn. IBAT believes that this flies
flatly in the face of existing accounting statements and current
requirements. The overdraft, rather, should be written off only after
a minimum of 90-120 days to be in conformity to other existing guidelines
with regard to problem debt. Again, most programs have a system for
collection that begins a series of collection letters at 15 or 30
days in order to assure that the customer remains on a sound footing.
However, requiring an absolute charge-off at 30 days is unnecessary
and contrary to current normal practices.
IBAT members understand that overdrafts are, in fact, a type of extension
of credit. This has long been a position of Regulation O and is supported
by Texas case law. However, we would strenuously oppose any requirements
that the available amount of overdraft protection to the entire customer
base be reported as unused commitments in regulatory reports. Although
overdraft privilege may be available to every customer in an institution,
only a small percentage of customers actually avail themselves of that
protection. Therefore, calculating the potential that each and every
customer overdrew in the maximum amount would lead to an absolutely
absurd result and would distort regulatory reports rather than be useful.
IBAT concurs that overdraft protection programs are, in fact, credit
for purposes of the Equal Credit Opportunity Act. In fact, these
programs are offered without underwriting to all customers. Discrimination
is the very last motivation for bankers offering these types of programs.
However, we also concur that these programs fall in the category
of incidental credit and should not trigger adverse action notices
under Regulation B. So, for example, when a customer abuses its overdraft
privilege and has such privilege revoked, IBAT would suggest that
since this is merely incidental credit, no adverse action notice
would need to be sent to the customer under Regulation B. Clearly,
a notice is sent to the customer as a matter of contract practices
to make sure that the customer is aware of his or her new standing
with the institution.
The overdraft privilege is probably most commonly used at ATMs next
to checks. It is also used at Point of Sale terminals. The section
in the guide dealing with applicability of the Electric Funds Transfer
Act is absurdly unworkable. The terminal receipt at the grocery store
or the mall simply will not be able to provide additional Reg E disclosures.
BEST PRACTICES
IBAT appreciates the efforts to identify appropriate best practices
for this growing area. Many of these practices are already in place.
However, we have concern with several of the recommendations.
ALTERNATIVES
One of the best
practices would give customers the opportunity to opt-out of overdraft
privilege and instead select
another alternative.
As noted before, the cost of compliance with Regulation Z is such
that there is no other alternative other than returning the check,
imposing the exact same fee that would be imposed under the overdraft
privilege plan and then subjecting the customer to the additional
cost of the ‘hot check fee’ imposed by the merchant,
the potential for criminal action by prosecutors, and the cost of
obtaining a money order to replace the item. If, in fact, the regulators
believe that this alternative should be offered and clearly explained,
then banks will do so. However, that is the only viable alternative
in Texas. Our open-end credit laws are extremely restrictive and
render this type of product unprofitable particularly when combined
with the Reg Z data processing and other requirements.
DISTINGUISHED
OVERDRAFT PROTECTION FROM “FREE” ACCOUNT
FEATURES
It is clear under
the Truth-In-Savings Act that a fee for overdrawing an account
is a fee over which the customer
has control and is not
a maintenance fee subject to the limitations on “free” accounts.
Many banks offer free accounts and overdraft protection services
in a package. We understand that this “best practice” would
simply require the institution to assure that the customer understands
that although the account is free in the sense that there is no maintenance
or service charges, in the event the customer does overdraw the account,
there will be an NSF charge.
CLARIFY
THAT FEES COUNT AGAINST OVERDRAFT PROTECTION PROGRAM LIMITS
In fact, at least
some marketing programs in Texas are already clarifying the effect
of the overdraft program limit
using clearer explanations
and examples to assure that customers realize the full impact of
the fee—or multiple transactions with multiple fees—on
their balance.
CHECK CLEARING POLICIES
Many Texas banks
are already disclosing to consumers the order in which the institution
pays checks or processes other
transactions.
However, it is quite clear under Article 4 of the Uniform Commercial
Code that banks may pay checks in any order. Numerous court cases
have validated that right and clarified the meaning of that section
of Uniform Commercial Code. This best practice would appear to fly
in the face of uniform law throughout the United States. None-the-less,
many institutions are already disclosing payment order. For those
that are not, there will be significant additional paperwork in advising
existing customers of the bank’s practice and revisions to
standard depository contacts.
ELECTION OR OPT-OUT OF SERVICE
Obtaining an affirmative consent of consumers to receive overdraft
protection will increase the paperwork burden of financial institutions,
particularly with regard to an existing customer base. If this is
to be a best practice, it should be prospective only.
ALERT
CUSTOMERS BEFORE A NON-CHECK TRANSACTION TRIGGERS ANY FEES
This particular
best practice is simply not possible to satisfy. In reviewing the
recommendations with data processors,
ATM companies
and community banks generally, we have learned that when customers
use off-premises ATMs or use debit cards in a POS transaction the
community bank, which is off-line, has absolutely no ability to provide
the consumer notices suggested by this section. It would be possible
for institutions to explain in the initial disclosure that ATM balances
may reflect available balance and not just collected and/or ledger
balances. Currently, there is no way to revise the data processing
for off-line community banks to assure disclosures of ledger or collected
balance. Even if there were, there is no guarantee that that will
be an absolutely accurate balance for off-line transactions. For
example, a payee may come to the customer’s institution and
cash a check thereby changing the actual balance before the off-line
ATM or POS transaction is posted.
At our request, several bankers experimented with eliminating overdraft
privilege at ATM and POS since they could not control the data
processing issues in this best practice. The result was a 30% drop
in volume and significant customer dissatisfaction.
DAILY LIMITS
This proposal is too complicated for community banks to implement.
The customer has control over how many items he or she issues or
uses in any given day that could overdraw the account. Banks are
happy to provide additional education to customers about the impact
of multiple transactions in a day. However, setting daily limits
at the institution is simply too costly for community banks to implement.
MONITOR OVERDRAFT PROTECTION PROGRAM USAGE
Currently, this is not available through data processing programming
that is widely used by community banks. Also, this is a rather open-ended
recommendation. What is excessive to one customer may be minor to
another. Again, the customer has the ultimate of choice in the types
of systems that are now available.
NEGATIVE REPORT PROGRAM USAGE
IBAT agrees that institutions should not report negative information
to consumer reporting agencies so long as the overdrafts are paid
under the terms of the overdraft protection program.
In conclusion, IBAT believes that the current overdraft privilege
systems that are working well in Texas allow banks to offer more
services for each of their customers and, in fact, have expanded
services to the unbanked prospect who feared overdrafts. Reasonable
revisions to Regulations DD and Appropriate Best Practices can
help everyone continue to offer this program in a cost-effective
way that allows maximum flexibility to the consumer.
Thank you for this opportunity to comment.
Sincerely,
Karen M. Neeley
General Counsel
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