July 27, 2004
Robert E Feldman, Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th St, NW
Washington DC 20429
Re: Overdraft Protection Guidance, No. 2004-30
Dear Mr. Feldman:
This comment
letter is submitted on behalf of The State Bank in response to
the notice of proposed guidance (“Proposed Guidance”)
and request for public comments by the Federal Reserve Board (“FRB”),
Office of the Comptroller of the Currency (“OCC”), Federal
Deposit Insurance Corporation (“FDIC”), Office of Thrift
Supervision (“OTS”), and National Credit Union Administration
(“NCUA”), published in the Federal Register on June 7,
2004. The proposed Guidance is intended to assist depository institutions
in the disclosure and administration of overdraft protection Services.
The State Bank appreciates the opportunity to comment on this important
matter.
Safety and Soundness Considerations
The Proposed
Guidance provides that “overdraft balances should
generally be charged off within 30 days from the date first overdrawn.” The
Proposed Guidance also states that even if an institution allows
a consumer to cover an overdraft through an extended payment plan,
the 30-day charge-off provision would apply.
We strongly disagree
with this proposal, and believe that it is not necessary to achieve
safe and sound banking practices
and also
could adversely impact consumers. Many consumers seek to repay overdrafts
as quickly as possible. In addition, institutions actively pursue
the prompt payment of overdrafts through the use of written and oral
notices to consumers. However, numerous circumstances can arise due
to, for example, the frequency or timing of payment by employers
to consumers, unanticipated additional expenses, and unexpected travel,
in which consumers simply are unable to repay overdrafts in full
within 30 days of the overdraft. In an account must be charged off
within 30 days, it can be more difficult to collect payment for such
amounts. Alternatively, if an institution is not required to charge
off an account until day 45, the likelihood of collection in that “additional” 15-day
period can be enhanced because consumers may be far more willing
to pay a sum before it is charged-off. Thus, we believe adoption
of a 45-day charge off period, which also would be consistent with
the time period that applies to federal credit unions, could enhance
the ability of institutions to collect overdrafts and actually enable
better risk management practices.
The Proposed
Guidance also provides that, with respect to reporting requirements,
overdraft balances should be reported
as loans and
overdraft losses should be charged against the allowance for loan
and lease losses. The Proposed Guidance also states that when an
institution routinely communicates the available amount of overdraft
protection to depositors, the amounts should be reposed an “unused
commitments” in regulatory reports. We respectfully disagree
with the approach and believe that it is more appropriate to net
overdraft balances against deposits because no agreement exists with
respect to the overdrafts. Furthermore, negative balances occur daily
at institutions, without regard to overdraft protection programs,
and these balances are not classified as loans nor are they subject
to immediate charge-off policies. We believe that overdraft balances
should be treated the same way. In addition, to the extent these
balances are not treated as loans, available amounts also should
not be reported as “unused commitments” in regulatory
reports.
Legal Risks
Truth in Lending Act
The Proposed
Guidance states: “when overdrafts are paid,
credit is extended.” The guidance then discusses the treatment
of overdraft fees and finance charges under Regulation Z. We strongly
disagree with this statement and urge the Agencies to delete it from
any final Guidance provided, for the reasons discussed below. To
the extent courts and other entities have reviewed this question
they generally have concluded that an overdraft is not credit under
the Truth in Lending Act, unless it is a line of credit established
by written agreement. In addition, this statement introduces an element
of unnecessary risk to institutions that offer overdrafts and could
expose institutions to increased litigation. Furthermore, any determination
or statement that an overdraft is “credit” should only
be made in connection with a full discussion and consideration of
existing legal precedent on this issue. Moreover, there does not
appear to be any reason to include this statement since the guidance
implicitly notes that Regulation Z does not cover overdrafts because
the fees are not considered finance charges. Finally, the FRB’s
recent proposed amendments to Regulation DD, which solely covers
deposit accounts and not credit, makes it clear that overdraft programs
are not credit.
Equal Credit Opportunity Act
The Proposed
Guidance states that the prohibition in the Equal Credit Opportunity
Act (“ECOA”) against discrimination “applies
to overdraft programs.” While we believe that institutions
should not discriminate against persons on the basis or race and
other factors, we do not believe that the ECOA should be deemed to
apply to overdraft programs. In particular, the ECOA applies to credit
extensions and credit is defined as the “right” granted
by a creditor to a person to defer payment of debt. The overdraft
programs described by the Agencies do not involve a “right” granted
by institutions. Moreover, the Agencies have provided no rationale
or reason for the statement that the ECOA covers overdraft programs
and such a statement will likely lead to significant litigation by
individuals, without regard to any evidence of discrimination or
improper treatment by institutions. Furthermore, as discussed above,
because overdraft programs are part of deposit accounts, as the FRB’s
recent amendments to Regulation DD provide, these programs also cannot
be deemed credit. For this reason, we believe it is essential for
the agencies to not include any discussion about the ECOA in any
final guidance. Finally, the statement that overdraft programs that
are not covered by TILA would generally quality as incidental credit
under Regulation B is simply too sweeping a statement, and should
be deleted from any final guidance.
Best Practices
In general,
the establishment of “best practices” can
help institutions identify issues and approaches to disclose the
information and administer financial products and services. However,
while several of the “best practices” set forth in the
Proposed Guidance are helpful and appropriate, a number of the “suggestions,” if
adopted, would require institutions to implement costly and significant
changes to their programs. In fact, several of the suggestions are
simply not technologically feasible. Moreover, we are concerned that
while the provisions are “best practices,” agency examiners,
courts, and other parties will view the provisions as requirements
and expect institutions to comply with these provisions. As a result,
we urge the Agencies to delete the provisions discussed below.
Marketing and Communications with Consumers
Fairly Represent Overdraft Protection Programs and Alternatives
We are concerned
about the breadth of the suggestion that institutions “explain
to consumers the costs and advantages of various alternatives to
the overdraft protection program” and identify the risks and
problems in relying on the program and the consequences of “abuse.” We
believe this suggestion micro-manages the way in which, the customers
to whom, institutions provide information, and is unnecessary. In
addition, providing a detailed cost-benefit analysis of the alternatives
to overdraft programs could require the creation of a lengthy and
complicated document. Institutions make available significant information
about their products and services, and including lines of credit
and other products. This information is made available through numerous
channels, such as websites, via telephone, and in branches. It is
simply unnecessary and inappropriate for the Agencies to dictate
the marketing approaches used by institutions. As a result, we recommend
deletion of this provision.
Train Staff to Explain Program Features and Other Choices
We discuss the
suggestion that staff explain how to “opt-out” of
overdraft services later in this letter.
Explain Check Clearing Policies
We strongly
oppose inclusion of this provision. An institution’s
check clearing policies (i.e., the order of payment of checks) is,
at most, tangentially related to an overdraft program. While institutions
may disclosure their policies, this provision is outside the scope
of the purpose of providing information about overdraft programs
and should be deleted. In addition, such policies can be very detailed
because they relate to checks and other channels through which consumers
can withdraw funds, and the Agencies suggestion of a “clear” disclosure
could require a lengthy and detailed document.
Program Features and Operation
We strongly oppose the suggestion that institutions require consumers to “opt-in” before
providing overdraft services or, alternatively, permit consumers to opt-out
of an overdraft program. Consumers are fully apprised by institutions when
institutions may honor an overdrawn item, instead of returning the item unpaid
and having a merchant or other party assess a fee, in addition to the “NSF” fee
charged by the account-holding institution. Existing law does not support providing
an “opt-in” notice to consumers for overdraft programs, and we
believe that institutions currently do not use such an approach. It would work
great hardship on consumers and would result in consumers paying greater amounts
for checks returned unpaid (due to merchant fees, for example).
Furthermore,
there is no basis for requiring the provision of an “opt-out” notice
to consumers. This would impose significant costs and burdens on
institutions and likely would result in significant litigation, due
to the potential creation of a consumer “right,” by the
provision of such notices. For example, questions could be raised
as to whether the notice is clear, the scope of the right, and numerous
other issues. We urge the Agencies to delete this provision.
Alert Consumers Before a Non-Check Transaction Triggers any Fees
We also strongly
oppose the suggestion that institutions provide a notice to consumers, “when feasible” before completing
a transaction, that a transaction may overdraw an account, for the
reasons discussed below. First, it is unclear what “when feasible” means.
Technologically, an institution could not implement such a requirement,
and any such approach would require the expenditure of extraordinary
sums. Second, because systems that permit access to funds do not
operate in “real time,” it is simply impossible to know
whether, at the time of a withdrawal, a specific transaction will
overdraw an account. For example, withdrawals at ATMs are not completed
in “real-time,” In addition, even if a transaction occurs
in real-time, other transactions, such as withdrawals by check, are
not integrated into the “real-time” evaluation of a consumer’s
funds on deposit, and it is impossible to know, at that time, if
a transaction will overdraw an account, because of the processing
of other deposits and withdrawals.
We also disagree
with the suggestion that institutions post a notice at their ATMs
explaining that withdrawals in excess
of the balance
of funds in a consumer’s account will access the overdraft.
We believe such a notice will confuse or mislead consumers, and should
not be adopted. For example, any consumers that use other institutions’ ATMs
do not have accounts with those institutions, and such a notice could
confuse those consumers. In addition, a number of an institution’s
own customers may not have use of that institution’s overdraft
programs. Such a disclosure at an ATM would confuse and potentially
mislead these consumers. In addition, institutions may process some
overdrafts that occur by “sweeping” funds from other
deposit accounts held by the consumer, or by use of a line of credit.
The disclosure of only one type of program in which an overdraft
may be honored likely will confuse consumers who have other programs
in which withdrawals in excess of the balance may be honored. As
a result, the Agencies should not adopt this provision.
Promptly Notify Consumers of Overdraft Protection Program Usage
Each Time
While, in general,
we agree that institutions should notify consumers when overdraft
services have been triggered, we
recommend that agencies
modify this provision. In particular, we believe the reference to
sending a notice to consumers “the day” the overdraft
program has been accessed is not possibly in many instances. For
example, a consumer may use an ATM or write a check on “day
1” and the overdraft programs may apply to that transaction,
but an institution may not know until day 2 or 3 whether there has
been, in fact, an overdraft, because transactions are not processed
in real-time. In this case, it might be argued that the overdraft
was “accessed” on day 1. Similarly, even when an institution “knows” that
an overdraft program has been “accessed” on day 1, the
institution simply may not be able to send a notice until the following
day or, of the transaction occurs on a weekend or holiday, until
two or three days later. As a result, we recommend this provision
simply suggest that institutions “promptly” notify consumers
of the overdraft using the same type of notice now provided to customers
overdrawing their accounts.
The State Bank appreciates the opportunity to comment on this important
matter. If you have any questions concerning these comments, or if
we may otherwise be of assistance in connection with this matter,
please do not hesitate to contact me, at 810-714-3915.
Sincerely.
Holly Pingatore, SVP
Information Systems
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