IOWA BANKERS ASSOCIATION
August 5, 2004
Office of the Comptroller
of the Currency
250 E Street, SW
Washington, DC 20219
Docket No. 04-14
Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th St. & Constitution Ave., N.W.
Washington, D.C. 20551
Docket No. OP-1198
Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Regulation Comments
Chief Counsel’s Office
Office of Thrift Supervision
1700 G Street, NW
Washington, DC 20552
No. 2004-30
Re: Proposed Interagency Guidance on Overdraft Protection Programs
Dear Madams and Sirs:
Iowa Bankers Association
(“IBA”) is a trade association
representing nearly 95% of 400+ banks and savings and loan associations
in the State of Iowa. We appreciate this opportunity to comment on
the joint proposed Guidance on Overdraft Protection Programs issued
in the Federal Register June 7, 2004. In developing the comments
contained herein, IBA invited its member banks to respond to the
proposed Guidance.
The IBA supports the federal
bank agencies’ efforts to provide
guidance in the area of overdraft protection. Overdrafts have long
been a subject of debate from both a compliance and safety and soundness
perspective. Bank management faces the difficult task of balancing
the scales between providing good customer service, maintaining shareholder
revenues during turbulent interest rate environments, and keeping
the bank safe and sound. And all of this is done while bearing an
increasingly heavier and heavier regulatory burden for consumer protection
compliance.
Comments Related Application of Guidance
Many of the IBA’s members do not yet participate in the formal,
automated “overdraft protection programs” administered
by, or under the auspices of a third party vendor, for which the
guidance appears to be targeted. However, it is safe to say all of
our member banks have provisions in their deposit account agreements
that provide the institution may or may not, at its sole discretion,
pay items against insufficient funds. Institutions incorporated such
language long before vendors developed automated systems for handling
NSF items drawn on customers’ accounts. Likewise, institutions
developed guidelines (sometimes formalized in a written program)
to assist in making the decision to pay or not pay NSF items long
before the development of the “overdraft protection programs” addressed
in the Guidance. Some institutions even “automated” the
process long ago through their own procedures. Rest assured, those
deposit account holders who overdraw their accounts frequently know
exactly how far they will be allowed to overdraw their account. That
amount has been “communicated” over and over again by
virtue of a pattern or practice and may, in some instances, have
been verbally communicated to the accountholder. The application
of the proposed Guidance to traditional ad-hoc methods of overdraft
payment is of great concern to our membership. The underlying tone
of the Guidance is that the “ad-hoc method” of traditional
overdraft payment is easily distinguished from the new wave, automated
overdraft protection programs. We are not convinced the issue is
or will be quite so “black and white” to bank management
and regulators trying to abide by the Guidance if finalized as proposed.
Comments
Related to Marketing, Safety and Soundness & Legal
Risk Considerations
The Guidance points out three main areas of concern related to “overdraft
protection programs” and their application. First of all, it
is important to understand that with a few exceptions, institutions
develop programs, disclosures and marketing materials with the goal
of clearly communicating to consumers all the details of a product – product
features, how it can be used, any fees that may be associated with
its use, etc. Keep in mind there are already regulations (Truth In
Savings Act and Fair and Deceptive Trade Practices) and laws (the
Uniform Commercial Code) which require banks to provide disclosures,
account agreements, and marketing materials which clearly outline
program details, fees, etc. The Guidance addresses concerns regarding
the marketing of some overdraft protection programs; that is, that
the marketing is misleading, suggesting overdrafts will always be
paid when in fact payment is discretionary, that fees are not clearly
outlined, that access to the service is available by more avenues
than merely writing an NSF check. All of these concerns are addressed
under current regulation (Reg. DD and the Fair & Deceptive Trade
Practices Act). The Guidance appears to be duplicative and its application
only to targeted “overdraft protection programs,” which
again can be a murky distinction. Rather than initiate additional
rules/guidance, would not the Agencies’ time be better spent
enforcing the current rules against those few institutions they believe
are violating current statutes? Again, it appears as if new regulatory
burden is being placed against the mass of financial institutions
for the “sins” of a few.
The Agencies concern expressed
over the safety and soundness considerations related to overdraft
protection programs is valid and not a new concern.
Overdraft protection programs have long been an area of concern during
regulatory safety and soundness exams with banks being encouraged
to develop policies and procedures regarding the payment of overdrafts,
monitoring and collection of NSF deficit amounts. The suggested 30-day
timeframe for charge off of uncollected NSF amounts is too short.
Many banks have reported collection timeframes from 30-45 days and
in a few instances, 60 days. Also the guidance does not provide for
discretion on the part of the institution in its collection efforts.
The consumer may be experiencing special circumstances (such as extended
illness, change in jobs, etc.) that have resulted in the NSF, but
will have funds available to cover the amount within a short period
of time outside the 30-day timeframe. It is both costly and time-consuming
from an operational standpoint to charge off an account and then
later re-open the account. Rather the institution should be given
the latitude to develop its own charge-off procedures appropriate
to it customer base, collection process and circumstances involving
the customer. A “one-size-fits-all” approach may not
be the best solution to this issue.
Reporting the amount of
overdraft protection available to consumers as “unused commitments” in regulatory reports and factoring
into risk-based capital treatment outstanding overdrawn balances
and unused commitments would pose another monitoring and reporting
burden on institutions all ready drowning in red tape. Again, the
program provides for discretionary payment of overdrafts, not mandatory
payment of items. The amount of “available overdraft protection” to
accountholders is a dynamic number, changing all the time as new
accounts are opened, privileges are revoked for misuse, etc., thus
determining “available amounts of unused commitments” would
be difficult if not impossible and changes throughout the course
of the day. We do however, agree with the Guidance’s direction
to charge losses against the allowance for loan and lease losses
and uncollected overdraft fees be reversed against overdraft fee
income accounts or associated earned income accounts; this is the
practice currently required of financial institutions for their “ad-hoc” methods
for overdraft payments. The reporting would then more accurately
reflect the effectiveness of the institution’s risk related
to the overdraft program, as well as its collection and charge off
procedures.
Comments Related to Suggested Best Practices
The Guidance provides a number of “best practices” related
to the marketing of overdraft protection, most of which, appear to
be reasonable (those practices related to fee disclosure, check payment
order, the fact that payment is discretionary, etc.) But the Guidance
also suggests the consumer should be informed of “circumstances” in
which the bank would refuse to pay overdraft items or otherwise suspended
the overdraft protection program. There is a danger in describing
in detail circumstances in which the protection may be suspended
or items paid or not paid. The underlying tone in providing such
detailed information is that if all criteria are met, all items would
be paid, which is not the case as the institution maintains its discretion
to pay or not pay NSF items at all times. We recommend this best
practice be removed.
The Guidance also suggests
that the Agencies would prefer overdraft programs be offered and
accepted before they are established in connection
with an account, or at the very least, the consumer be given the
opportunity to “opt out” of over draft protection services.
Adding yet another “opt-out” option to the bank’s
list of “opt-outs” goes beyond regulatory burden. We
do not dispute that consumers should be able to decline overdraft
protection services and that the bank would be well advised to get
the consumer’s written declination affirming their acknowledgement
that NSF items will be returned rather than paid, also describing
the bank’s fee for returned NSF items, but do not believe the
benefits of a full “opt-out” program to the consumer
will outweigh the cost and monitoring burdens to the institution.
Again, these overdraft protection programs are discretionary, they
may not be offered to all accountholders, therefore, a full opt out
program is not warranted.
The Guidance also suggests
additional disclosure regarding fees associated with the program
as well as actual balances vs. available
balances when a consumer is initiating a non-check transaction, which
may trigger protection under the overdraft protection program. Our
members would not be adverse to such disclosure if the technology
were readily available. It is also important for the Agencies to
recognize the number of transactions occurring outside the bank’s
auspices through the interchange system where current technology
does not accommodate such disclosure. Again, we recommend that this
best practice be removed.
Finally, the Guidance
suggests banks should establish daily overdraft fee caps for overdraft
protection programs. If the institution applies
caps to its overdraft protection program (whether the program is
an “ad-hoc” program or automated program), then it seems
appropriate that the cap be disclosed. However, to suggest that such
caps be mandated steps outside normal regulatory perspective. The
Agencies have always be careful not to dictate what fees an institution
may or may not charge, but have mandated clear disclosure of such
fees to the consumer at the time of account opening. Again, we recommend
this best practice be removed.
In closing, it is important
to understand that at the time a financial institution makes the
determination whether or not to open an account
or offer overdraft protection, the decision is not based upon how
much overdraft fee income the institution predicts it can earn from
the account. Overdraft protections have developed as a result of
an evolving financial product market. Financial institutions would
prefer to have all items be presented against sufficient funds, but
the fact of the matter is that today’s consumers demand more
products and services, one of which is protection for NSF items.
If the consumer’s bank does not offer the protection the consumer
is seeking, they will simply move to another institution that will
provide such requested service – an institution often outside
the traditional, regulated banking industry.
Thank you for your consideration of my comments.. If you have any
questions related to my comments, please feel free to contact me
at (800) 532-1423 or at rschlatter@iowabankers.com.
Sincerely,
Ronette Schlatter
Compliance Coordinator
Iowa Bankers Association
8800 NW 62nd Ave.
Johnston, IA 50131
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