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Independent Community Bankers of America
August 6, 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
Becky Baker
Secretary to the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428
Subject: Interagency Guidance on Overdraft Protection Programs
Truth in Savings, Regulation DD
Dear Sir or Madam:
The Independent
Community Bankers (ICBA)1 appreciates the opportunity to offer comments
on
both the proposed Interagency Guidance on Overdraft
Protection Programs and the companion revisions proposed by the Federal
Reserve to address concerns about the use of overdraft protection
programs, often called “bounce protection.” At the outset,
though, while the ICBA believes that the agencies are moving in the
proper direction by offering guidance and while we support the agencies’ efforts
to protect consumers, it is extremely important to recognize that
increased regulatory requirements on the ability of banks to clear
overdrafts for customers could have negative unintended consequences.
A number of community banks provide overdraft protection service
for their customers. Those that offer the service report that it
is one that customers want and appreciate and that automation of
the overdraft process is a time saving feature that allows branch
personnel to concentrate on other responsibilities. Implementing
an overdraft protection service provides consumers with peace of
mind by knowing that if they inadvertently make a mistake in their
checking account balance, it will not result in the embarrassment
and fees associated with a bounced check.
However, the
ICBA is extremely concerned that some of the elements of the agencies’ proposals have the potential to do a great
disservice to consumers, especially low- and moderate-income consumers.
If regulatory barriers and requirements and the costs associated
with disclosures and documentation become too burdensome, community
banks report they might discontinue or not offer these services.
As a result, they would be more likely to reject a check or transaction
that would create a negative balance in an account. If “best
practices” morph into requirements, through examiner interpretation
or otherwise, regulatory burden would produce a consumer disservice.
Background
Last year, in
response to complaints from consumer activists, the Federal Reserve
conducted
a study of automated overdraft protection
programs, including how they operate, how they are promoted and the
fees associated with the services. An overdraft protection service
is distinct from an overdraft line of credit where the bank applies
traditional underwriting to establish a line of credit tied to the
account that the customer can draw on to cover a negative balance.
Generally, overdraft protection programs are automated processes
that allow a check to clear a customer’s account using certain
preset criteria, such as length of time the account has been open
and the amount of the check. When the Federal Reserve started its
initial investigation, the ICBA urged the Federal Reserve not to
consider these programs as credit subject to the disclosures and
restrictions of the Truth-in-Lending Act (TILA) and Regulation Z.
After further analysis and consideration, the Federal Reserve agreed
with the ICBA that it would not be appropriate to subject these programs
to TILA and Regulation Z. However, the agencies are now concerned
that some consumers may be misled about how the programs work and
may incur unnecessary fees. To address these issues, the agencies
have proposed an Interagency Guidance on Overdraft Protection Programs.
In addition, the Federal Reserve has proposed changes to Truth-in-Savings
Act (TISA) and Regulation DD disclosures and expansion of existing
prohibitions against deceptive and misleading advertising.
Overview
The ICBA believes it is appropriate for the banking agencies to
offer guidance on the operation of overdraft protection programs,
and we applaud the Federal Reserve for addressing courtesy overdraft
programs through the Truth-in-Savings rules and not classifying the
programs as loans subject to the normal disclosures under Truth-in-Lending,
Regulation Z.
For well over
one hundred years, banks have occasionally allowed customers to
overdraw accounts.
These overdrafts are permitted at
the bank’s discretion and result in a temporary negative balance
in the customer’s account that must be covered in a short period
of time. While overdrafts do result in indebtedness of the customer
to the bank, it would be a mistake to refer to them as “credit
services.” 2 Therefore, it is extremely important
that the agencies classify overdrafts as negative balances and not
extensions of credit
to avoid unintended and negative consequences.
Recently, to
clear checks more efficiently, and in keeping with statutory requirements
such
as the Uniform Commercial Code (UCC)
and the Expedited Funds Availability Act (as implemented by the Federal
Reserve’s Regulation CC), banks have begun automating the overdraft
clearing process, using either internally developed software or software
programs purchased from third party vendors. The programs are available
for customers that do not have an overdraft credit line but are otherwise
good customers. Customers are allowed to overdraw their accounts
up to a pre-established limit with the understanding that the overdraft
will be covered in a set period of time. Typically, customers can
elect to opt out of the program or the bank can determine that the
customer should not be allowed to have overdrafts.
Consumer
Benefits.
The fee assessed under a courtesy overdraft program may be less
than
would be assessed by the bank for a check returned
for insufficient funds (NSF), saving the customer money. But even
if the fee is the same as a normal NSF fee, a courtesy overdraft
program allows the customer to avoid: (a) the merchant charge for
a returned check; (b) being listed in databases as having bounced
a check; (c) the embarrassment, inconvenience and headaches of having
a check returned; and (d) having to make arrangements for alternate
payment. Establishing an overdraft protection program also takes
the guesswork out of covering overdrafts and ensures consistency
of treatment while providing a safety net for consumers who inadvertently
overdraw their account. And, there are protections against abuse
that protect the bank’s safety-and-soundness since the bank
can deny the privilege to any customer that might be tempted to overuse
overdrafts as a financial management tool.
Overdrafts
Are Not Loans. The ICBA does not believe overdrafts should
be classified as extensions of credit. There is no credit application
and the bank does not undertake an underwriting analysis to determine
the account-holder's creditworthiness. There is no amortization or
collateral. The bank retains the discretion to clear any transaction
that would otherwise create a negative account balance and access
to the service can be cancelled at any time if a customer abuses
the privilege. Any fee for use of the service is not interest or
a finance charge but is designed to offset the cost of handling a
transaction that cannot be processed in the ordinary course. The
fee is a flat fee and not related to the amount of the overdraft
or the time it is outstanding. In its own analysis of whether overdrafts
are loans, the Federal Reserve stressed many of these same features
to distinguish overdraft protection programs and loans.
If overdrafts
are not loans, they should certainly not be subject to the requirements
of the Truth-in-Lending Act and Regulation Z.
As often noted by the Federal Reserve, the purpose of the Truth in
Lending Act "is to promote the informed use of consumer credit
by providing for disclosures about its terms and cost," and
uniform disclosures are "intended to assist consumers in comparison
shopping for credit." Consumers do not “shop” for
overdrafts. Moreover, providing APR disclosures in advance is not
feasible since the amount of the negative balance in the account
is not known until the check is processed and the term is not known
until the customer covers the overdraft. In fact, the only practical
way to provide any APR disclosure would be an after-the-fact notice
mailed to the consumer, since the decision to accept or reject a
check must be made within time limits established by other requirements,
such as the Federal Reserve's Regulation CC and the UCC. And, an
after-the-fact notice does not allow shopping for credit.
Best Practices. Many of the concerns that have been raised about
overdraft protection programs involve advertising and marketing.
The proposed guidance would address those concerns by ensuring
that fees are clearly and conspicuously disclosed. The guidelines
also would ban misleading advertising generally ensure consumers
are provided with appropriate information about overdraft protection
services. However, the proposed guidance goes beyond addressing
the objections that have been raised and includes provisions that
the ICBA recommends be eliminated from the final guidance. Creating
excessive and unnecessary regulatory costs and burdens is likely
to discourage many banks from offering the service to the detriment
of their customers.
Interagency Guidance on Overdraft Protection Programs
Scope. As noted above, banks have traditionally allowed some customers
to overdraw their accounts from time to time, whether or not the
service is automated or formalized. For a number of years, banks
have issued automated reports of accounts that might have a negative
balance if checks are allowed to clear. These reports are furnished
to branch officers to allow them to review the list and make a final
determination on whether to allow the check to clear. However, these
types of automated reports would seem outside the scope of what the
Interagency Guidance intends to cover. Therefore, the final guidance
should clarify what is meant by an automated process and should establish
a carefully outlined scope of what programs are covered. The ICBA
recommends that the guidance be limited to programs where software
is used to decide to clear an overdraft, such that the only human
element would be final review to possibly stop the process before
the check is cleared. The scope of coverage should not include the
more traditional bank determinations whether or not to clear overdrafts
that may be based on automated reports provided to bank personnel.
Policies
and Procedures. The proposed Interagency Guidance addresses
the credit, operational and other risks associated with overdraft
protection programs. First, the proposed Interagency Guidance recommends
that banks adopt policies and procedures that establish eligibility
criteria and provide for regular reports to management, with monitoring
of the program to ensure that customers continue to satisfy established
criteria. Banks should also establish timeframes for consumer repayment
of overdrafts with procedural guidelines for any exceptions.
Community banks
that have instituted an automated overdraft protection program
report
that they have established policies and procedures
that cover the service. Generally, these procedures are designed
to ensure both customers and employees understand how the service
operates and to ensure consistency within the bank. However, the
ICBA is concerned that some of the recommended procedures outlined
in the Interagency Guidelines might be applied as mandatory by examiners.
Therefore, any final guidance should clarify that these are elements
and risks that the bank should take into account when developing
procedures and that examiners should not require a bank that offers
an automated overdraft protection service to incorporate each and
every element in the Interagency Guidance in the bank’s policies
and procedures.
For these programs
to operate successfully, it is important that the bank institute
criteria
defining which customers are eligible.
The ICBA agrees that this is appropriate for the Interagency Guidance.
For example, some of the parameters banks have used to determine
customer eligibility are: time the account has been open, generally
at least 30 days; whether the customer has other accounts with the
bank; a restriction on the number of overdrafts within an established
timeframe; and whether the customer makes regular deposits or has
a direct deposit attached to the account. Community banks also report
limiting the amount of an overdraft that can clear an account. These
pre-set limits vary depending on the type of account, but are generally
limited to $300 to $500, although some banks report setting limits
as high as $700 for certain customers. However, while banks should
implement policies and procedures to govern the operations of an
overdraft protection program, the actual parameters for the program
should be at the discretion of the individual bank and the bank’s
willingness to accept risk.
Charge-Offs.
According to the proposed guidelines, the procedures should provide
that any overdraft amount will be charged off if not
repaid within 30 days.
The ICBA believes this timeframe is unreasonably brief. Thirty days
is insufficient time to notify the customer and then allow any accommodations
or extensions of credit so that the customer can cover the overdraft.
Moreover, banks report that allowing additional time and flexibility
in collecting outstanding overdrafts makes it more likely that the
overdraft will be repaid. Since community banks often allow customers
up to 30 days to cover an overdraft, requiring the bank to charge-off
the amount if it is not covered in 30 days is problematic, since
the bank needs sufficient time to process any payment that arrives
on the last day. The ICBA believes that a longer period of time,
up to 90 days, should be permitted before an overdraft is charged
off. At a minimum, banks should be allowed at least 45 days from
the date of the overdraft before the amount must be charged off.
The 30-day period suggested in the proposed guidance could result
in higher loss levels and runs contrary to protecting the safety-and-soundness
of bank operations.
Call
Reports.
According to the proposed guidance, overdraft balances should be
reported
as loans on the call report, and if not collected,
charged off against the allowance for loan and lease losses (ALLL).
Although the ICBA does not believe that overdrafts should be treated
as credit, we agree that overdrafts that are charged off should be
charged against the ALLL balance. However, if outstanding overdrafts
are reported on the call report, they should not be aggregated with
any of the bank’s outstanding loans.
If the bank informs
customers about the available balance provided by an overdraft
protection
program, the proposed guidance would require
that amount to be reported on the bank’s call report as “unused
commitments.” The ICBA believes that this element of the proposal
is especially burdensome and somewhat misleading. Carrying the overdraft
coverage as unused commitments contradicts the discretionary nature
of the programs. Since the bank always maintains the discretion to
return a check or deny a transaction that would otherwise overdraw
an account, the amount is clearly not analogous to an unused commitment.
It also would be misleading to users of call report information,
since it would reflect obligations of the bank that are not there
in reality: there would be no distinction between true loan commitments,
such as the unused portion of an overdraft line of credit, and the
overdraft protection coverage programs that are not truly obligations.
If the bank retains the discretion to clear an overdraft and can
make that decision at any time and if the bank can cancel the service
or change the amounts available for customers that abuse the privilege
at any time, it is not really a “commitment.” Calling
them “unused commitments” is inappropriate and blurs
the distinction between overdraft protection programs and overdraft
lines of credit, a distinction that the agencies require banks to
make clear elsewhere in the proposed guidance. Therefore, the ICBA
recommends that this provision be eliminated from the final guidelines.
The proposed
guidance would also require that outstanding overdraft balances
be risk-weighted
according to the obligor in accordance
with existing loan procedures established by the agencies. The ICBA
believes this also runs counter to the purpose of these programs.
The great advantage of the automated process is that it sets parameters
around which checks will clear and allows checks to clear more quickly
and efficiently. However, the bank still retains final discretion
whether to clear an overdraft or not. The decision is not based on
the same criteria used for credit decisions, but rather, how a customer
has maintained his or her checking account. To impose the elements
of loan risk-weighting as suggested by the guidance would require
banks to carry out underwriting analysis on every checking account
customer that has access to an overdraft protection service. As one
community banker noted, trying to put these figures together would
be a “nightmare.” Such a burden and expense would clearly
increase the costs associated with account maintenance. At a minimum,
the associated costs would disadvantage low- and moderate-income
customers by making the service cost prohibitive for the customers
most likely to benefit from it. More likely, the associated costs
and burdens would defeat any other cost savings for the bank provided
by the service. Therefore, the ICBA strongly urges the agencies to
eliminate this element from the Interagency Guidance.
Third-Party
Vendors. If a bank enters into a contract with a third-party
vendor to provide an overdraft protection service, the proposed guidance
suggests that the bank should conduct the same type of due diligence
as it would with any other service provider. The ICBA agrees that
this is appropriate.
Legal
Review.
The agencies also recommend that a bank have counsel review its
overdraft protection
program before implementation to
ensure compliance with all applicable laws and regulations. The ICBA
questions whether this step is necessary or appropriate in all instances,
and may in fact cause banks to incur unnecessary costs, especially
if legal review is not part of the bank’s normal due diligence
for third-party vendor contracts. Instead, the guidance should recommend
that banks consider having counsel review the program, but the final
guidance should merely require banks to ensure that appropriate due
diligence is conducted before entering into agreements with third-party
vendors.
Marketing
and Communications. When marketing or otherwise promoting these overdraft
protection
services, banks would be strongly encouraged
by the proposed Interagency Guidance to: (a) avoid promoting poor
account management by encouraging customers to overdraw accounts;
(b) fairly represent overdraft protection programs and alternatives,
such as overdraft lines of credit that the bank also offers, with
an explanation of the costs associated with each option; (c) train
staff to explain program features and other choices, including how
to opt out of the service; (d) clearly explain the discretionary
nature of the program, when the bank may refuse to pay an overdraft,
and do not imply that all overdrafts will be covered; (e) distinguish
overdraft protection services from “free” account features;
(f) clearly disclose fees associated with the account; (g) clarify
that fees count against the overdraft protection limit, if applicable;
(h) demonstrate when multiple fees will be charged, such as when
more than one overdraft charge may be assessed if there is more than
one check that would overdraw the account; (i) explain the bank’s
check clearing policies and the order in which checks will clear
an account; and, (j) illustrate the types of transactions covered,
such as whether the service is limited to checks or whether it may
be accessed through ATM or debit card transactions.
The ICBA agrees
that where a bank decides to promote the service as an account
feature,
customers should be informed about how the
service operates. This is simply a good and sound business practice
and good customer service. As one community banker commented, “we
have always been upfront with our customers [and] we don’t
want to appear that we are hiding something from them.” Informing
customers about how the service works establishes a clear understanding
on the requirements of the program and the fees that are associated
with it.
However, it may not be appropriate for all banks to provide such
disclosures. If a bank has merely automated the discretionary decision-making
that banks have undertaken for years and does not promote the overdraft
protection program as an account feature, and if the customer would
be charged the same fee whether the overdraft clears or not, then
it may neither be appropriate nor necessary for the bank to provide
this information to customers. This is especially so since doing
so might actually lead some consumers to believe that they can overdraw
their account at any time, regardless of the emphasis placed by the
bank on the discretionary nature of the decision to clear an overdraft.
The bank should make the decision, since it is the bank that is in
the best position to know its own customers and how to communicate
with them. If the bank does not promote or advertise the service,
though, the ICBA does not believe it should not be required to make
the disclosures.
The ICBA does agree that it is appropriate for banks that have adopted
these programs to ensure that the appropriate employees are trained
in the operations of the program. This is a hallmark of customer
service, allows employees to explain the service to customers and
helps employees to answer any questions that customers might have.
Community banks
that offer automated overdraft protection programs report that
they
also often offer “free checking” accounts.
Free checking is a service community activists believe is an important
means to bring those without banking accounts into the mainstream
of American finance. However, community banks that offer “free
checking” accounts also report that they make it clear that
there are fees associated with any overdrafts or overdraft protection
service that are outside normal account features.
Finally, some community banks currently provide their customers
with information about the order in which checks are processed. If
it is furnished, the information is most likely given when the account
is opened as part of the account documentation. However, not all
community banks process checks in a particular order: some process
items in the order received; some process larger items first, such
as car payments or house payments, to ensure those items clear without
problems; and some clear smaller items first to minimize the potential
of any overdraft charges against the customer. While there have been
legal challenges to the order in which banks clear checks, the courts
have generally determined that the order in which checks clear an
account is a matter of discretion for the bank. The ICBA firmly believes
that the discretion for check clearing should reside with the bank
and need not be disclosed.
Program
Features. The agencies recommend that banks that offer
an overdraft protection service: (a) allow customers to opt out;
(b) alert consumers before a non-check transaction (such as an ATM
transaction) would trigger any fee so that the consumer may elect
not to complete the transaction; (c) prominently distinguish actual
balances from overdraft protection amounts; (d) promptly notify consumers
of overdraft protection program use each time the service is used,
such as by sending a notice the same day the service is accessed
that outlines the fees and the amount of time before the overdraft
must be repaid; (e) consider implementing limits on the amount or
number of overdrafts a customer may have in one day; (f) monitor
overdraft program usage; and (g) fairly report program usage. The
ICBA believes that these are all appropriate elements for the bank
to incorporate into its overdraft protection program.
Generally, when
community banks offer and promote an automated overdraft protection
service,
they provide notice to customers that
the service is an element of their account. The information is provided
at the time the account is opened in new account disclosure statements.
In addition, banks include information in brochures and lobby posters
and mailings to customers. The notice also stresses that payment
of an overdraft is at the bank’s discretion and not automatic.
Some community banks also include information that abuse of the privilege
can result in the bank terminating the customer’s access to
the automatic overdraft protection service. To some extent, these
disclosures are inherent in the bank’s need to ensure it is
operating in a safe-and-sound manner and the ICBA agrees they are
appropriate.
At the same time that community banks disclose the feature to customers,
they also disclose the fees that are associated with the overdraft
to ensure that customers are aware of the price of the service. The
ICBA agrees that if the bank promotes an overdraft protection service
as an account feature, then it is appropriate to disclose the fees
associated with the service.
If the bank
notifies customers about the existence of the overdraft protection
program,
then the ICBA agrees that customers also should
be given the option to opt out. Giving customers that option is simply
good customer service. While it is often more beneficial to consumers
to have an automated overdraft protection service in effect, the
choice should be the consumer’s. However, the election to opt-out
should be simple and not a burdensome process. A simple phone call
to the bank with a request to be removed should be sufficient, without
the need for detailed documentation to demonstrate that the customer
made the election, especially since use of the service is entirely
at the bank’s discretion. Creating rules that demand documentation
would add costs to the process and be a detriment to consumers.
The ICBA also
agrees that it is appropriate to notify a customer when the overdraft
protection service has been triggered, including
information about the fees to be charged. Currently, community banks
notify a customer whenever an overdraft occurs, generally by mail
to the customer’s address of record. Some community banks also
telephone the customer to let them know that an overdraft has occurred,
while others send the customer a periodic notice about an outstanding
overdraft to ensure that the overdraft is covered.3 Generally, the
notice alerts the customer to the item that caused the overdraft,
the amount of the overdraft and any fees due as a result.
Although
the fees for overdrafts vary, community banks generally charge between
$20 and
$30. Community banks that have automated the
process generally report that the fee for an overdraft covered by
an automated process is the same as their “regular” overdraft
fee. Some community banks also charge a daily fee for each day that
the overdraft is outstanding as “motivation” to customers
to promptly cover the overdraft, but other community banks see the
assessment of a daily fee as excessive and too costly for the customer.
A compromise between a daily assessment and no charge, and to ensure
the consumer does not neglect overdrafts, is an assessment every
10 to 15 days of a nominal fee, such as $10.
When the overdraft
protection service disclosures are provided to customers, community
banks also explain that in the event an overdraft
occurs, it must be covered within a given timeframe, usually no ore
than 30 days. The customer is also informed that failure to cover
the overdraft will result in termination of the privilege. Again,
the ICBA agrees that this is appropriate.
After an overdraft occurs, some community banks may offer customers
a short-term loan to cover the overdraft. However, the ICBA recommends
that this decision be left to the discretion of the bank and not
included in the disclosures, since other agency requirements that
apply to the lending process would cover any loan that the bank may
decide to make at a later date. Including a suggestion in the disclosures
that a short-term credit may be available to cover an outstanding
overdraft is apt to lead some customers to believe that such a loan
is a given, when again, it is at the discretion of the bank based
on the facts and circumstances of each particular situation.
Truth-in-Savings (Federal Reserve Regulation DD)
In addition to the Interagency
Guidance proposed by the banking
agencies, the Federal Reserve has proposed several amendments to
Regulation DD (Truth-in-Savings Act) to ensure consumers receive
appropriate disclosures and are aware of costs associated with overdraft
protection services. The proposed revisions would require additional
fee and other disclosures; require additional disclosures for advertisements;
and expand the prohibition against misleading advertisements to include
current account-holders.
The Federal Reserve is concerned about the adequacy and uniformity
of existing disclosures, including whether consumers receive disclosures
on a timely basis. For example, where periodic statements are provided,
the fees may be dispersed amid other fees and not readily apparent
to consumers. As a result, the Federal Reserve is proposing several
revisions to Regulation DD.
Disclosures. At account opening, the bank would be required to
disclose whether the overdraft protection service is limited to checks
or whether ATM or debit card transactions can trigger the service.
When providing periodic statements, the bank would be required to
provide the total of fees for overdrafts covered by the overdraft
protection program and returned checks, both for the statement period
and for the year-to-date. Importantly, these fee disclosures could
not be aggregated with other fees and fees for overdraft protection
would have to be segregated from fees for returned checks and not
grouped together as fees for insufficient funds.
The ICBA opposes these changes to periodic statements, due to the
burden and cost that would not be offset by any minimal benefits
to consumers. This element is possibly the most burdensome in the
proposal, and possibly the most problematic for community banks.
Many of these disclosures are already furnished to consumers but
disregarded. Customers are already notified about fees when an account
is opened. Customers are also notified about applicable fees when
an overdraft occurs through an independent notice. And, periodic
statements already include a line item that identifies any fees.
Requiring an aggregation of those fees would be overkill, especially
for banks that neither promote nor advertise the service. Adding
a new layer of disclosures only adds to costs without any demonstration
that the information will be put to use by consumers.
Moreover, these disclosures will require extensive software changes
to account processing systems. The ICBA recommends that the Federal
Reserve consult with third party vendors that provide account-processing
systems in order to properly assess the difficulty and costs associated
with this proposed requirement before moving forward. This is especially
important for any requirement to aggregate all fees. However, without
an extensive cost-benefit analysis that clearly demonstrates that
benefits outweigh the costs, these changes should not be adopted.
Other
Transactions.
Community banks generally include ATM transactions and debit transactions
as part of an overdraft protection service.
Since the process has been automated, when a customer makes a withdrawal
using an ATM or debit card, the system treats it like a withdrawal
made by check. As one community banker explained, “for this
product to truly be of service to the customer it must be available
for any form of transaction.” When customers open their accounts,
it is made clear that the service applies to all types of withdrawals,
including checks, ATM transactions and debit card transactions. Customers
need to be aware of the features of the service so they can use it
appropriately. Community bankers believe that it is only proper to
notify customers about this feature.
However, not
all programs include the amount of “overdraft
coverage” in the available balance shown at an ATM. In some
cases, this is a matter of software programming and the ability to
make the disclosure accurately. Community banks that do not include
the amount of overdraft coverage in the account balance exclude it
by providing only the collected balance for a balance inquiry at
the ATM. The ICBA recommends, though, that the Federal Reserve discuss
this issue with software vendors to clearly assess the burdens and
costs to implement such a requirement before making a final determination.
And, again, absent a clear demonstration that the potential costs
are outweighed by the benefits, the ICBA urges the Federal Reserve
not to implement this change.
Advertising. Under the proposed changes to Regulation DD, if a
bank advertises the availability of an overdraft protection service,
the bank would have to disclose: the fee for each overdraft, the
types of transactions covered, the time period an overdraft may be
outstanding, and circumstances when a bank may refuse to cover an
overdraft. The general exceptions for advertising on billboards,
broadcast media and telephone response machines would continue to
apply.
The ICBA believes that these additional elements also would be
unnecessarily burdensome and might actually discourage banks from
advertising the existence of the service. Many of these elements
are covered through other parts of the proposal and through the Interagency
Guidance. Accordingly, the ICBA does not believe that it is necessary
to incorporate a proscriptive set of requirements that advertisements
include all these elements. Community banks report that detailed
disclosure requirements for advertising causes them to restrict their
advertising efforts or the information provided in advertisements.
In other words, instead of providing more information to consumers,
the detailed elements proposed by the Federal Reserve would actually
have the opposite effect. Even if banks adhered to the extensive
disclosures required by the proposal, it is likely that consumers
would pay less attention to the information because there is too
much information. The ICBA believes that the important elements to
include in the advertising are the discretionary nature of the service
and the associated fees.
Finally, misleading
advertising would be prohibited and would be extended to communications
with
customers about their existing accounts.
The revisions would provide examples of misleading advertising: implying
an overdraft protection program is a “line of credit;” representing
that all checks will be honored when the bank retains discretion
to pay or return certain items; representing that an overdraft may
remain outstanding for an indefinite period of time; describing the
service as limited to checks when it may also apply to ATM and debit
card transactions; describing an account as free and promoting the
overdraft service when there are fees associated with the overdraft
service. The ICBA does not object to these provisions, but believes
that they should, as proposed by the Federal Reserve, be part of
the Official Staff Commentary and not part of the actual regulation.
Conclusion
While the ICBA appreciates the need for guidance on the operation
of automated overdraft protection services, we are concerned that
well-intentioned guidance could actually create regulatory burdens
that become a barrier that prevents banks from offering a service
that is welcomed and appreciated by consumers. Since one of the major
complaints from consumers relates to the marketing of these accounts,
it is important to recognize that the agencies already have other
mechanisms in place, notably the ability to address misleading advertising
through enforcement of Federal Trade Commission Act section 5, that
are available to address problems.
Fundamentally,
the ICBA believes it is misleading to characterize overdrafts as
credit,
since they are not a product for which consumers
shop, are not underwritten by banks, and do not bear the general
characteristics of a loan product. The agencies warn the banks against
characterizing the availability of overdraft protection as “ready-credit” and
yet themselves fail in a number of instances to make the same distinction
between overdrafts and credit, as some provisions in the proposed
guidance would treat overdrafts the same as credit. The final guidance
should clearly distinguish overdrafts from credit.
The ICBA cannot help but note an irony: while the agencies are conducting
a review of these same regulations to eliminate unnecessary burdens,
they are simultaneously proposing potentially burdensome and costly
guidelines and regulatory changes without a clear demonstration for
the need for such extensive requirements.
Subject to the preceding comments, the ICBA believes that creating
an Interagency Guidance will be helpful to banks that offer these
services. However, the ICBA also strongly urges the agencies to include
a clear admonition for examiners that these are guidelines and not
mandates.
Thank you for the opportunity to comment. If you have any questions or need
any additional information, please feel free to contact me at 202-695-8111
or by e-mail at robert.rowe@icba.org.
Sincerely,
Robert G. Rowe, III
Regulatory Counsel
________________________________
1
The Independent Community Bankers of America represents the largest
constituency
of community banks of all sizes and charter types in the nation,
and is dedicated exclusively to protecting the interests of the
community banking industry. ICBA aggregates the power of its members
to provide a voice for community banking interests in Washington,
resources to enhance community bank education and marketability,
and profitability options to help community banks compete in an
ever-changing marketplace. For more information, visit ICBA's website
at www.icba.org.
2 Classification of an overdraft
as a “loan” in
a California case involving direct deposits of Social Security
payments could have done serious damage to consumers. Defining
overdrafts as loans would have been very likely to cause banks
to refuse direct deposits of Social Security payments, costing
the government substantial sums and defeating federal government
extensive efforts to encourage direct deposit of Social Security
payments. Another probably outcome of the classification would
have been to cause banks to refuse to allow overdrafts in accounts
that received direct deposits. Either outcome would have been a
serious detriment to consumers. See Lopez v. Washington Mutual
Bank, FA, U. S. Court of Appeals for the Ninth Circuit, 2004. Even
the Social Security Administration argued against classifying overdrafts
as loans.
3 If
the bank sends a periodic reminder to a customer about an outstanding
overdraft, the reminder generally is sent every five to ten days,
depending on the bank’s individual policies and procedures.
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