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Pinnacle Financial Strategies
August
6, 2004
Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, DC 20429
Via e-mail: Comments@FDIC.gov
Subject: Proposed Guidance with Request for Comment Interagency
Guidance on
Overdraft Protection Programs
We are pleased to respond to the Federal Financial Institutions Examination
Council’s
five member agencies’ request for comment concerning the proposed “Interagency
Guidance on Overdraft Protection (ODP) Programs” (the Guidance).
We note that this
proposed Guidance appears to attempt to address two pressing needs:
the need as stated
by many consumer groups to provide more clear information to customers
about the costs
and functions of ODP programs, and the regulatory and industry need
for consistent
treatment by the regulatory agencies during their review of these programs
in light of
existing safety and soundness and risk management concerns, as well
as consumer
protection laws, regulations, and policies.
Pinnacle Financial Strategies (PFS) is a third party provider that
offers such a program,
marketed under the following service marks, “Bounce ProtectionSM”, “No
Bounce
AdvantageSM”, “No Return BenefitSM”, and “Member
Privilege®.” PFS currently has in
excess of 500 financial institutions successfully using our ODP program.
These
institutions include commercial banks, thrifts, and credit unions.
Our institutions continue to report that consumer demand and acceptance
of this service
is very high with strong customer appreciation of the service. While
the media and some
consumer groups are prompt to provide isolated examples of consumers
who have been
harmed by similar programs, examples that may have been justified in
some cases to
expose to criticism poorly run ODP programs, our institutions note
few complaints and
numerous accounts of customers’ favorable comments concerning
the personal benefits
received from the program. We believe the success of these programs
is because they
clearly fill a valid consumer need that is not always met by the more
traditional forms of
overdraft protection programs. As such, courtesy ODP programs are intended
to
complement the traditional programs, not replace them.
We are pleased that the agencies also recognize the widespread consumer
acceptance of,
and desire for, well run consumer oriented ODP programs. We strongly
support the need
for consistent examination treatment and the need for full disclosures
and clear
communications by financial institutions with their customers. For
the most part, we are
very supportive of the agencies’ efforts to protect consumers
and provide consistent
examination treatment as presented in the draft Guidance. We are also
pleased to provide
constructive commentary on several issues that we believe warrant further
consideration
by the agencies before final Guidance is issued.
Traditional interagency guidance has typically been used to provide
expanded
requirements that institutions must follow as an augmentation to existing
rules and
regulations or other established procedures based on safety and soundness
standards. This
Guidance is broken down into three primary sections that financial
institutions must pay
close attention to: Safety and Soundness Considerations, Legal Risks,
and Best Practices.
The first and second sections, “Safety and Soundness Considerations” and “Legal
Risks”
we view as the regulators’ more traditional form of guidance.
These first two sections
clearly identify safety and soundness risk assessment areas and existing
financial
reporting requirements, as well as existing compliance regulations
and legal issues that an
institution must address when adopting an ODP program. Financial institutions
and
examiners will be expected to closely comply with these sections as
they clearly provide
specific guidance that represents safety and soundness examination
standards and
existing regulations that may be cited as apparent violations of law
if not followed.
The third section is presented as “Best Practices” that
are used in, or are recommended
by, the industry. This section appears to be less formal and suggests
that the industry
self-regulate ODP programs by considering the adoption of as many best
practices as
possible. The introduction paragraph that precedes the listing of the
best practices states
that; “Institutions that establish overdraft protection programs should take into
consideration the following practices that have been implemented by
institutions and
that may otherwise be required by applicable law.” Such language
indicates that a failure
to comply with any individual suggested best practice should not by
itself be considered
subject to examination criticism provided management had documented
its serious
“
consideration” of the practice and has documented, demonstrated
good reasons for not
implementing it.
During the recent June 24, 2004, meeting of the Federal Reserve Board
Consumer
Advisory Council, several banker members noted that they believed this
language would
be problematic because examiners may use the individual Best Practices
as a checklist to
determine required compliance with the Guidance, rather than as a general
guideline for
best practices worthy of management consideration. Recent examination
experiences
communicated to us by our client institutions indicate that this is
clearly a legitimate
concern. We have already heard of criticisms being made by examiners
on specific
practices without regard to bank management's reason for not adopting
certain practices
(for example, not adopting certain best practices because of technical
data processing
limitations).
For this reason, we suggest the agencies make clear to their examiners
that suggested best
practices are practices management should consider, but are not practices
they are
required to adopt in every instance. We also believe this and related
concerns warrant
additional commentary on certain of the suggested best practices.
Our commentary and recommendations are provided under the specific
section as
presented in the proposed Guidance sections and listed items.
Safety & Soundness Considerations
•
The Guidance establishes a clear safety and soundness standard that
overdrafts
must be charged-off within 30 days.
PFS Comment: The Guidance appears to indicate that a 30 day charge-off
policy is
justified because of the lack of underwriting standards used in courtesy
ODP programs as
opposed to those generally applied to traditional overdraft lines of
credit. PFS performs a
credit risk assessment of the various classes of deposit accounts and
recommends
overdraft limits using a validated risk approach that has historically
resulted in minimal
and manageable overdraft losses. Based on our institutions’ collective
experience, we
believe this 30 day charge-off requirement is unnecessary, very consumer-unfriendly,
and
in contravention of existing regulatory guidance concerning the classification
of
unsecured consumer debt. The uniform classification of unsecured consumer
credit does
not suggest a “loss” classification until delinquency
reaches 120 days. The OCC
Comptroller handbook on “check credit” similarly lists
the same 120 day charge-off
requirement for unsecured lines of credit initiated by overdrafts.
PFS suggests a more consumer-friendly approach than is proposed in
the Guidance that is
based on safety and soundness standards requiring prompt notifications
to the customer
of the overdraft and an encouragement coupled with appropriate collection
and work out
procedures to bring the account to a positive balance as soon as possible.
For example,
under PFS' program the overdraft privilege is suspended at the 30 day
mark with
continued customer letters (and in some institutions additional telephone
calls) used to
further collection efforts. By suspending the privilege at the 30 day
mark, consumers are
provided with a “cooling off” period where they are not
able to continue creating
additional overdrafts and are allowed to return their account to a
positive balance with
normal activity. PFS’ best practices and model procedures do
provide for the charge off
of the overdrawn balance at 70 days, at which time additional collection
efforts are made.
At this point our institutions are encouraged to work with those customers
who arrange to
repay their overdraft balances that are maintained as off balance sheet
receivables.
Customers in this category are generally allowed to participate in
our “Fresh Start”
program where they are counseled and are able to retain their open
checking account as
long as it is maintained with a positive balance. They are not provided
with overdraft
privilege and they are not reported to the credit bureaus as long as
they continue to
maintain their account balance and continue to repay their former overdraft.
No
additional fees are charged for this convenience and only the charged
off overdraft
amount is collected.
Recovery rates are reported as much higher then historical recoveries
before this program
was initiated at many of our institutions with increased customer loyalty
resulting. In
addition, PFS' approach has the positive public benefit of keeping
the customer in the
banking system by avoiding premature charge-offs, the closing of accounts,
and the
consequent creation of an adverse credit history which might prevent
the consumer from
opening an account at another institution.
Furthermore, based on the experience of many of our institutions, shortening
the chargeoff
period from an accounting viewpoint will only increase the number of
charge-offs and
recoveries detailed in the Allowance for Loans and Leases Loss (ALLL)
account. Net
losses in a given quarter would be expected to remain the same. Operationally,
however,
many institutions that do not participate in the PFS program would
be inclined to close
the customer account and remove it from the demand deposit trial balance
when it is
charged off. In such intuitions this regulatory accounting requirement
may actually
result in an increase in net losses to the institution.
We would also like to provide our observations concerning the existing
45 day charge-off
rule imposed on Federally insured credit unions for the benefit of
the NCUA. Credit
union members are not currently accorded the same amount of time to
resolve their
financial difficulties when working with their credit union as are
customers of their
commercial bank competitors. This presents special difficulties for
those credit unions
where the primary membership consists of members of the armed forces
who are
currently serving overseas. Should the interagency Guidance follow
these existing
practices of the longer charge-off periods, the NCUA may also want
to consider
forbearance in their review of their institutions charge-off practices.
For the aforementioned reason, PFS supports a longer charge-off policy
than the 30
days proposed and recommends that 60 or 90 days would allow for the
reasonable
collection of a depositor account while maintaining transparency in
the regulatory and
financial reporting of the institution. This longer charge-off policy,
as noted above, is
also more favorable to the consumer since no credit damage would be
done to
depositors by the premature reporting of charged off accounts to the
credit bureaus.
•
Institutions should adopt rigorous loss estimation processes to ensure
that any
allowances related to earned fees reflect all estimated losses and
that earned but
uncollected fees are accounted for accurately.
PFS Comment: PFS institutions are already encouraged to monitor their
overdraft
losses, to make appropriate provisions to the ALLL as necessary, and
adjust account
limits if needed. Net losses are also reported to PFS monthly. PFS
monitors net losses
for abnormalities as an added service to its institutions and provides
peer comparison
data to its member institutions. NSF fees earned and uncollected rarely
remain in an
overdraft balance for longer than 30 days before collection and in
most case are charged
off or reversed at the 70 day mark.
• When an institution routinely communicates the available amount of
overdraft
protection to depositors, these available amounts should be reported
as "unused
commitments" in regulatory reports. The Agencies also expect
proper risk-based
capital treatment of outstanding overdrawn balances and unused commitments.
PFS Comment: This particular instruction appears to be in contradiction
with other
sections of the Guidance and with Federal Call Report Instructions.
Courtesy ODP
programs by nature, when properly structured, are non-contractual courtesy
payment
programs that contain clear language that the institution reserves
discretion over the
payment of all items and the right to discontinue the program at any
time. Call Report
instructions indicate the need for reporting of contractually binding
obligations such as
traditional overdraft lines of credit or other formalized credit facilities
as evidenced by a
formal documented loan commitment or overdraft agreement (which are
for that reason
subject to Regulation Z.) Internal matrix driven overdraft programs
expose institutions
to a similar level of potential payments; however, since these amounts
are not
communicated to the customer they are not required to be reported under
the proposed
Guidance. In both situations, additional “draws” on the
non-contractual limits should
not reasonably be expected to increase loan volumes beyond the normal
average
overdraft GL balances already reported on the balance sheet. It is
also unclear what the
term “routinely communicates” the available amount of
ODP to depositors means. This
language appears to create an unnecessary reporting requirement for
only those
instructions with a disclosed OD limit that is more typical of the
smaller less complex
community financial institution. It is recommended that this language
be dropped or
changed to match the existing instructions that cover contractual agreements.
Should
the agencies desire to change these reporting requirements, it is recommended
that the
change be further documented in the appropriate instructional booklet
for financial
reporting to assure consistency of reporting among the agencies.
Legal Risks
PFS Comment: The proposed Guidance appears to have appropriately addressed
the
various legal risks institutions should assess in adopting and implementing
ODP
programs.
Best Practices
• Institutions that establish overdraft protection programs should take
into
consideration the following practices that have been implemented by
institutions
and that may otherwise be required by applicable law.
PFS Comment: PFS applauds the agencies for adopting a best practices
approach to
allow the industry to self-manage new products that are evolving. We
support the idea
that examiners should review each institution in light of the presented
best practices.
We further suggest as previously noted that they should exercise discretion
in the
criticism of institutions that may be more limited in their technology
options when they
are able to serve their customers in other ways. We believe the Guidance
put out by the
OCC and separately by the FDIC and FRB jointly on unfair and deceptive
practices is
good guidance for the review of ODP programs. This Guidance suggests
that no one
component of a program be reviewed in isolation and that all aspects
of the program
should be reviewed “as a program” to determine the fairness
and reasonableness of a
program. Such an approach would preclude the fears that examiners will
look at each
practice as a check list subject to isolated criticism.
Marketing and Communications with Consumers
•
Avoid promoting poor account management. Do not market the program
in a
manner that encourages routine or intentional overdrafts; rather present
the
program as a customer service that may cover inadvertent consumer overdrafts.
PFS Comment: PFS supports this best practice.
•
Fairly represent overdraft protection programs and alternatives. When
informing consumers about an overdraft protection program, inform consumers
generally of other available overdraft services or credit products,
explain to
consumers the costs and advantages of various alternatives to the overdraft
protection program, and identify for consumers the risks and problems
in relying
on the program and the consequences of abuse.
PFS Comment: PFS supports this best practice. However, PFS suggests
that
institutions that do not offer such additional products should not
be subject to criticism
if their ODP program adequately meets the needs of their customers.
•
Train staff to explain program features and other choices. Train customer
service or consumer complaint processing staff to explain their overdraft
protection program's features, costs, and terms, including how to opt
out of the
service. Staff also should be able to explain other available overdraft
products
offered by the institution and how consumers may qualify for them.
PFS Comment: PFS supports this best practice.
•
Clearly explain discretionary nature of program. If the overdraft payment
is
discretionary, describe the circumstances in which the institution
would refuse
to pay an overdraft or otherwise suspend the overdraft protection program.
Furthermore, if payment of overdrafts is discretionary, information
provided to
consumers should not contain any representations that would lead a
consumer to
expect that the payment of overdrafts is guaranteed or assured.
PFS Comment: PFS supports this best practice. However, PFS suggests
that the
requirement to provide information on “when an NSF item might
not be paid” be
limited to a general description so as to maintain, and be consistent
with the
discretionary nature of the institution. This practice appears to be
part of the
amendment to Regulation DD and as such the Regulation DD language should
take
precedence over the Guidance language, with the proposed Staff Commentary
to
Regulation DD providing a reasonable example of the level of disclosure
required.
•
Distinguish overdraft protection services from "free" account
features.
Avoid promoting "free" accounts and overdraft protection
services in the same
advertisement in a manner that suggests the overdraft protection service
is free
of charges.
PFS
Comment: PFS supports this best practice; however, this practice
also appears to
be part of the amendment to Regulation DD and as such the Regulation
DD language
should take precedence over the Guidance language, again with the
Staff Commentary
to the Regulation providing a reasonable explanation of the requirement.
• Clearly disclose program fee amounts. Marketing materials and information
provided to consumers that mention overdraft protection programs should
clearly disclose the dollar amount of the overdraft protection fees
for each
overdraft and any interest rate or other fees that may apply. For
example, rather
than merely stating that the institution's standard NSF fee will
apply, institutions
should restate the dollar amount of any applicable fees in the
overdraft
protection program literature or other communication that discloses
the
program's availability.
PFS Comment: PFS supports this best practice; however, this practice
also appears to
be part of the amendment to Regulation DD and as such the Regulation
DD language
should take precedence over the Guidance language.
• Clarify that fees count against overdraft protection program
limit. Consumers should be alerted that the fees charged for covering
overdrafts, as well as the amount of the overdraft item, will be
subtracted from any overdraft protection limit disclosed, if applicable.
PFS Comment: PFS supports this best practice.
• Demonstrate when multiple fees will be charged. Clearly disclose, where
applicable, that more than one overdraft protection program fee may
be charged
against the account per day, depending on the number of checks
presented on
and other withdrawals made from the consumer's account.
PFS Comment: PFS supports this best practice.
• Explain check clearing policies. Clearly disclose to consumers the
order in
which the institution pays checks or processes other transactions
(e.g.,
transactions at the ATM or point-of-sale terminal).
PFS Comment: PFS has no objection to this requirement and notes
that some states
already require a similar disclosure. However, it should be noted
that often the payment
order is complicated and many consumers will not easily understand
the payment
process. This is another example where an institution would need
to exercise caution in
its disclosure so as not to appear to be bound by a specific payment
order that it may
need to alter for valid business reasons, such as the return of
certain items when a check
kite is suspected or other operational reasons. A general disclosure
should be allowed
under this Guidance if this practice is adopted.
• Illustrate the type of transactions covered. Clearly disclose that
overdraft
protection fees may be imposed in connection with transactions
such as ATM
withdrawals, debit card transactions, preauthorized automatic debits,
telephoneinitiated
transfers or other electronic transfers, if applicable. If institutions'
overdraft protection programs cover transactions other than check
transactions,
institutions should avoid language in marketing and other materials
provided to
consumers implying that check transactions are the only transactions
covered.
PFS Comment: PFS supports this best practice.
Program Features and Operation
• Provide election or opt-out of service. Obtain affirmative consent
of
consumers to receive overdraft protection. Alternatively, where
overdraft
protection is automatically provided, permit consumers to "opt
out" of the
overdraft program and provide a clear consumer disclosure of this
option.
PFS Comment: PFS supports the “opt out” option as a best
practice and was one of the
first third party vendors to adopt this practice. On the other
hand, obtaining an
affirmative "opt-in" consent by consumers goes against
the discretionary nature of the
privilege and could be construed as establishing a contract with
the customer which is
clearly how these programs are not structured. We recommend the
affirmative consent
language be dropped from the best practice. We also suggest that
language be added to
the Guidance that requires the “opt out” offer contain
all of the information needed to
opt out without the need to look to other documentation for additional
instructions.
• Alert consumers before a non-check transaction triggers any fees. When
consumers attempt to use means other than checks to withdraw or transfer
funds
made available through an overdraft protection program, provide
a specific
consumer notice, where feasible, that completing the withdrawal
will trigger the
overdraft protection fees. This notice should be presented in a
manner that
permits consumers to cancel the attempted withdrawal or transfer
after receiving
the notice. If this is not possible, then post notices on proprietary
ATMs
explaining that withdrawals in excess of the actual balance will
access the
overdraft protection program and trigger fees for consumers who
have overdraft
protection services. Institutions may make access to the overdraft
protection
program unavailable through means other than check transactions.
PFS Comment: PFS supports all efforts to provide more information
to consumers to
allow them the ability to make well informed choices. This is another
area where PFS
was one of the first to adopt similar best practices. In this regard
one of our core
platform business partners currently has adapted its ATM system
to provide a stop
panel to inform customers that they are about to overdraw their
account and incur a fee,
and it gives them the option to cancel. This is an area, however,
where many
institutions are more severely limited by their technology providers,
and we assume the
agencies recognize this reality by the inclusion of the term "where
feasible" in the
suggested best practice. PFS is continuing to work with other technology
providers to
urge them to develop similar programs on a cost effective basis
to enable the notices
suggested in this best practice.
We also note that this section is intended to address “non-check” transactions
which
would include point of sale (POS) terminals and the use of debit
cards. Most POS
terminals are located in retail stores throughout the country.
This Guidance should
recognize that current technology does not provide for the notification
at POS terminals
of a potential overdraft situation. PFS client’s customers
are clearly told that their ODP
limit will be available when applicable and that the NSF fee will
be charged. In most
cases, the ATM and POS systems are driven by the same balance files.
Clearly,
customers want access to their ODP limits at these locations, so
regulatory forbearance is
needed until technology catches up with new banking products. Alternative
means of
communication and disclosures should be considered as acceptable
best practices in lieu
of the technology solutions suggested that are currently limited
or unavailable.
• Prominently
distinguish actual balances from overdraft protection funds
availability. When disclosing an account balance by any means, the
disclosure
should represent the consumer's own funds available without the
overdraft
protection funds included. If more than one balance is provided,
separately (and
prominently) identify the balance without the inclusion of overdraft
protection.
PFS Comment: PFS supports this practice as a best practice; however,
we believe this
practice is worded in such a way as to discriminate against the
less complex smaller
community institutions that, because of cost and technological
limitations, cannot
provide multiple balances to their ATM systems. In some systems,
a positive balance
file that contains only one customer balance is provided to the
POS and ATM networks.
These systems use this balance for authorizations as well as balance
inquiries. Should
the institution make the ODP limit available at the ATM, the balance
displayed must
also reflect the limit amount in the available balance. In such
cases PFS intuitions are
encouraged to provide clear disclosures to their customers that
their balance will
include their ODP amount. The series of notices has worked well
and customers who
use the service in these intuitions understand it and appear pleased
with the service.
Local proprietary ATMs include reminders that customers’ balances
may include their
ODP limit amounts. In these instances, we believe that institutions
that make good faith
efforts to notify customers by providing notices on their bank
owned ATMs, using preprinted
receipts for balance inquiries advising of their limit inclusion,
and by providing
clear prior disclosures, should be allowed to continue providing
ODP at their ATM
without undue criticism. We encourage additional guidance for institutions
that are
unable to provide multiple balances and request that the agencies
exercise forbearance
until the technology catches up with the needs of the industry.
• Promptly notify consumers of overdraft protection program usage each
time used. Promptly notify consumers when overdraft protection has
been
accessed, for example, by sending a notice to consumers the day
the overdraft
protection program has been accessed. The notification should identify
the
transaction, and disclose the overdraft amount, any fees associated
with the
overdraft, the amount of time consumers have to return their accounts
to a
positive balance, and the consequences of not returning the account
to a positive
balance within the given timeframe. Institutions should also consider
reiterating
the terms of the overdraft protection service when the consumer
accesses the
service for the first time. Where feasible, notify consumers in
advance if the
institution plans to terminate or suspend the consumer's access
to the service.
PFS Comment: PFS supports this best practice in substance. Typically
PFS clients send
a series of letters to customers after a set number of days overdrawn.
These letters
clearly explain the program and its consequences. The original “NSF
or OD notice” is
sent the day of the initial overdraft, but it is often standardized
and generated by the
host system with no available options to customize it to contain
all of the suggested
information on the first notice. Again, examiner discretion should
be used in the
review of this practice or the practice language should be modified
to more closely
match the available technology.
• Consider daily limits. Consider limiting the number of overdrafts or
the dollar
amount of fees that will be charged against any one account each
day while
continuing to provide coverage for all overdrafts up to the overdraft
limit.
PFS Comment: The PFS position is that this is an institutional
business decision. PFS
has several institutions that have implemented this practice with
positive results.
• Monitor overdraft protection program usage. Monitor excessive consumer
usage, which may indicate a need for alternative credit arrangements
or other
services, and should inform consumers of these available options.
PFS Comment: PFS supports this best practice. PFS also recommends
financial
institution managements consider the adoption of financial education
programs for
consumers, such as the FDIC's Money Smart Program, in conjunction
with the offering
of an ODP program. Such programs could address the possible adverse
consequences of
excessive OD usage. In this regard PFS, is currently developing
procedures to assist
those of its client institutions who may be interested in implementing
such programs.
• Fairly report program usage. Institutions should not report negative
information
to consumer reporting agencies when the overdrafts are paid under
the terms of
overdraft protections programs that have been promoted by the institutions.
PFS Comment: PFS supports this best practice and actively promotes
the adaptation of
our Fresh Start program to all of our clients.
We appreciate the opportunity to respond to the agencies’ proposal
to provide guidance
to the industry and to the regulatory agency examiners for the
proper implementation of
an ODP program. We hope that the agencies will consider the areas
where we have made
suggestions or recommended regulatory forbearance. We also respectfully
request that
the agencies attempt to coordinate their monitoring and enforcement
of these programs
using this Guidance in a uniform and consistent manner so that
all institutions, regardless
of their charter or regulatory agency, are treated fairly and equally.
Sincerely,
Joseph V. Gillen
Chief Executive Officer
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