CONSUMER 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
Becky Baker
Secretary to the
Board
National Credit Union Administration
1775 Duke Street
Alexandria,
VA 22314-3428
Re: Interagency Guidance on Overdraft Protection
Programs
Dear Ms. Johnson:
The Consumer Bankers Association (CBA)1
appreciates the opportunity to submit the comments below on
the proposed issuance of this Interagency Guidance. We are separately
submitting comments to the Federal Reserve Board on the parallel proposal,
Docket No. OP-1198, for amendments to Regulation DD.
1. General:
There
is a sense in the Board’s proposal that it views the use and
marketing of “automated” overdraft systems as intrinsically
suspect and undesirable. We disagree with that intimation. As discussed
below, automation of overdraft programs is as healthy and as inevitable
as the introduction of credit scoring on the underwriting side. There
is much less risk of unsafe, inconsistent or discriminatory practices
where the payment vs.dishonor decision rests on an empirical basis
which automation provides. As for marketing, of course false and
deceptive claims or practices should be unlawful – and have been under
the FTC Act and other federal and state law for decades. We do not
believe that providing overt and accurate information about overdraft
systems is undesirable, where that information has traditionally been
known only to the institutions themselves. The focus of regulatory
and enforcement agencies should be on the accuracy of the information.
2. Scope of coverage:
CBA’s major concern with the proposed Guidance
is the same as we have with respect to the Regulation DD amendments,2
and that is uncertainty about its scope of coverage. These two proposals
together would add significant new compliance responsibilities, and
before CBA members can interpret and adjust to the Guidance, they need
to know what kinds of “programs” or activities are affected.
Fairly read, the Supplementary Materials for both the Guidance and
the Regulation DD amendments express concern about some combination
of three characteristics of overdraft programs. One is that they are “automated” programs.
Two is that they are provided by third-party vendors. Three is that
the programs are advertised and marketed to customers, sometimes with
overtones of guaranteed overdraft protection. But neither the Guidance
nor the Regulation as proposed actually provide a definition of what
specific subset of institutional practices is intended to be covered
by them.
These three characteristics are by no means adequate, or even
accurate, descriptions of the type of service that we assume the regulation
and Guidance are intended to cover. First, overdraft handling is “automated” whether
or not the institution uses a third-party vendor or markets the program
to its customers. The days of an employee in green eyeshade poring
over individual overdraft items are long gone. Overdraft payment decisions
are commonly made based on reports generated from institutional databases
that are more empirically reliable in predicting risk patterns than
subjective individualized assessments. Second, it is rare in our experience
for third party vendors to provide overdraft services. Third-party
vendors, rather than selling overdraft programs, typically act as consultants,
assisting institutions in the use of existing, internal reporting systems.
The resulting decisions are more sound and consistent than traditional
ad hoc systems. Singling them out from those institutions which do
not rely on vendors does not provide a rational basis for coverage.
Lastly, the concept of marketing, alone, does not create the need for
special handling, unless it is more clearly linked to the promotion
of misleading information (such as a guarantee of repayment). It merely
creates the impression that any information that may be provided about
the program may be a form of marketing that would trigger the coverage
of the Guidance and revised Regulation. At face value, therefore, every
one of the approximately 20,000 institutions subject to Regulation
DD will have to comply with the new requirements on periodic statements
and advertising and to the broad prescription of the Guidance.
Although
definitional clarification is more appropriately done in the Regulation
and Commentary than in the separate Guidance, the Guidance is less
than helpful when the scope and thrust of the Regulation itself is
unclear. We recommend that the other agencies work with the Board to
define more clearly the scope of both the Regulation and the Guidance.
3. Safety & Soundness Considerations
The proposed Guidance begins by setting what we believe is a false
or at least questionable premise, and that is that overdraft protection
programs “expose an institution to more credit risk . . . than
. . . traditional overdraft programs because of a lack of individual
account underwriting.” While there may be more extensive underwriting
for a formal line of credit, “traditional,” seat-of-the-pants
overdraft systems often lacked any semblance of true “underwriting” or
credit assessment. Bank officials would make ad hoc judgments on which
overdrafts to pay and which to return, often with no more underwriting
than the official’s intuition. The new, often automated systems
draw on a range of institutional and customer information to set benchmarks
for when overdrafts should be paid, and up to what dollar limit. We
submit that while obviously banks need to be careful of risk exposure,
there is no more risk, and perhaps less, in the statistically based – “automated” – overdraft
programs than in their predecessors.
Several of our member banks have
reviewed their overdraft experience and concluded that charging off
uncovered overdrafts in 30 days is premature, and that, in their experience,
the percentage of customers who cover the overdraft rises dramatically
out to 45 or 60 days. It should be noted that some customers pay overdrafts
through monthly automatic deposits, which may not occur within 30 days
of the overdraft. If balances must be charged off within 30 days, the
consumers will be the worse for it. Requiring formal charge-offs on
overdrafts that are likely to be paid creates unnecessary disruption
of the account relationship if the account must be closed and a new
one established and results in negative information being reported
to credit bureaus unnecessarily. We therefore urge that the normal
charge-off period be extended to 60 days. Or at least the Guidance
should acknowledge that longer than 30 days may be reasonable for banks
that can document experience such as the CBA members mentioned above
have done.
CBA strongly disagrees with that paragraph of the proposed
guidance that begins:
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. (Emphasis
added.)
The essence of all the overdraft systems of which we are aware
is that they remain discretionary with the institution. They are – or
should be – marketed with that discretionary character clearly
revealed. Non-deceptive disclosure of a cap on overdraft amounts is
potentially very useful information to the customer – certainly
more useful than the total lack of such disclosure from institutions
which maintain internal, but unpublicized, caps. In fact some customers
are surprised that the permissible overdraft amount is so modest. If
these plans are in fact discretionary, they should not be treated as “commitments,” subject
to reporting and reserve requirements. The Agencies can’t have
it both ways. These programs are being addressed under Regulation DD
and the Guidance rather than Regulation Z for the correct reason, i.e.,
that they are not in fact credit commitments. To the extent they are
aspects of a deposit account relationship, there is no credit extended
until an overdraft is paid.
4. Legal Risks:
We do not really quarrel
with the proposed guidance concerning legal risks. Institutions that
violate the FTC Act standards, or that are not in compliance with other
federal laws, ought to be subject to sanctions. We note, however, that
the Guidance refers to possibly applicable state laws as well, including
usury, criminal laws, and unfair or deceptive practices acts. For national
banks and federal thrifts, however, some otherwise applicable state
laws may be preempted by virtue of the federal charter. The Guidance
may not be the place to address those issues expansively, but it may
be useful to acknowledge that state laws affecting overdraft programs
may be displaced by federal preemption. This could be particularly
relevant where state banking departments issue guidelines or best practices
that are different from or more restrictive than this federal Guidance.
5. Best Practices:
With respect to the Best Practices segment on “Marketing
and Communications With Consumers,” we have no quarrel with
any of the individual items listed, and we certainly agree that full
and
honest disclosure and explanation is appropriate. But to do full
justice to all the suggested items, in a form the consumer would
likely read
and understand, could require a substantial brochure or similar publication.
That raises the question of costs (which the customers ultimately pay). It also raises some concern that enhanced
disclosure for the overdraft aspect of the account may diminish the
effectiveness or impact of other required disclosures – under
Regulation Z if there is a credit line, under Regulation E if there
are electronic transfer capabilities, and under Regulation CC with
respect to funds availability.
In the segment on “Program Features
and Operations,” we question whether some of the suggested
practices are realistic or feasible.
• For example, what would consumers
opt into, or out of, under the first bulleted item (“Provide
election or opt-out of service”)? Should customers be encouraged
to demand that the bank never pay an overdraft, even for a dollar?
What is the customer benefit in that?
• As to bullet 2 (“Alert
consumers before a non-check transaction triggers any fees”),
we expect it would involve a monumental reprogramming chore, and is
perhaps impossible, to provide on ATM screens or on merchant authorization
terminals an alert that a transaction in process will trigger the overdraft
program. The same applies to bullet 3 (“Prominently distinguish
actual balances from overdraft protection funds availability”),
and is complicated further if the customer has an overdraft credit
line in place: how many balances should be disclosed?
• We believe
many banks already follow the practice described in bullet 4 (“Promptly
notify consumers of overdraft protection program usage each time used”),
but some may notify customers only when a check is returned dishonored – usually
a circumstance of more urgency for the customer. We should also
note that the requirement to notify the consumer on the same
day could
be, in many cases, logistically unfeasible. In any case, if the
overdraft feature and its cost have been fully disclosed as part
of the account
documentation, it would seem that consumers ought to have some
responsibility to monitor their use of the account within the
limits of available
funds.
Thank you for considering these comments.
Sincerely,
Steven
I. Zeisel, Special Counsel
Ralph J. Rohner, Special Counsel
________________________________
1 The Consumer Bankers Association is the recognized
voice on retail banking issues in the nation's capital. Member institutions
are the
leaders in consumer financial services, including auto finance, home
equity lending, card products, education loans, small business services,
community development, investments, deposits and delivery. CBA was
founded in 1919 and provides leadership, education, research and federal
representation on retail banking issues such as privacy, fair lending,
and consumer protection legislation/regulation. CBA members include
most of the nation's largest bank holding companies as well as regional
and super community banks that collectively hold two-thirds of the
industry's total assets.
2 The proposed amendments to Regulation DD would add
new disclosures for periodic statements under § 230.6, and would impose new
restrictions on advertising concerning certain kinds of overdraft
services under § 230.8. There would also be new explanatory
Commentary related to the revisions.
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