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FINANCIAL SERVICES ROUNDTABLE
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
Re: Interagency Guidance on Overdraft Protection Programs
Dear
Sir or Madam:
The Financial Services Roundtable1 (the “Roundtable”)
appreciates the opportunity to comment to the members of the Federal
Financial Institutions Advisory Council (“FFIEC”) in
relation to the Interagency Guidance on Overdraft Programs (the “Guidance”).
I. Background
The members of the of the FFIEC, including the
Board of Governors of the Federal Reserve System, the Office
of the Comptroller
of the Currency, Office of Thrift
Supervision, the Federal Deposit Insurance Corporation, and the
National Credit Union Administration (collectively, the “Agencies”)
issued the proposed Guidance to assist insured depository institutions
in the responsible disclosure and administration of overdraft protection
services. The proposed Guidance identifies concerns raised by institutions,
financial supervisors, and the public about the marketing, disclosure,
and implementation of overdraft protection programs.
The Agencies
have proposed guidance in three primary areas: Safety and Soundness
Considerations, Legal Risks and Best Practices. The Roundtable would
like to offer the following recommendations on this Guidance.
II.
Safety & Soundness Considerations
A. Credit, Operational
and Risk Policies and Procedures
The proposed Guidance generally
describes
that financial institutions should adopt written policies and
procedures adequate to address the credit, operational, and other
risks associated
with these programs. Roundtable member companies agree that adopting
written policies and procedures to address the risks of overdraft
protection may be beneficial to financial institutions, however
we oppose any assessment be made for credit risk. Overdraft protection
programs are not credit-based. These programs represent an operational
risk to the institution, not credit risk.
We strongly urge the
Agencies
to propose a guidance that would require institutions to adopt
policies sufficient to address the operational risk associated
with these
programs. We request that financial institutions be able to determine
whether an account or accountholder may participate in an overdraft
protection program and that the criteria not be made on a case-by-case
basis. Overdraft payment programs are designed, in part, to provide
an automated process which allows consistency and predictability
for institutions. Criteria may be established by the institution
based on its operational risk tolerance, experience, portfolio
performance and circumstances. We believe the automated nature
of an overdraft
protection program would be severely hampered if individualized
decisions are required on an account-by-account basis. We believe
this could
result in greater uncertainty and higher costs for the consumer.
The proposed Guidance suggests that programs should be administered
and adjusted, as needed, to ensure that credit risk remains in
line with expectations. Again, we disagree with treating these
programs
as a credit risk. We do however believe that reports detailing
volume, profitability and performance should be provided to management
on
a regular basis. In addition, we agree that increases, decreases
or termination from participation in the program of a specific
account holder or with respect to a particular account should
be consistent
with safe and sound operations.
Roundtable member companies believe
that measures should be put into place to monitor the operational
risk to the institution. We urge the Agencies to confirm that
such a process may be done using systems or individualized operational
determinations, based on what the financial institution believes
is consistent with its operational risk tolerance and financial
condition.
With that said, any requirement to make these determinations
on a more individualized basis would be difficult, inefficient
and costly,
and would be in conflict with the benefits that automated programs provide to
the consumer and institutions.
B. Reporting as Loans
The proposed
Guidance
states that with respect to reporting of income and loans recognition
on overdraft protection programs, institutions should follow
generally accepted accounting principles (“GAAP”) and that overdraft
balances should be reported as loans. Roundtable member companies
strongly oppose this proposal. We believe there are other methods
that can accurately assess and account for the potential losses resulting
from overdraft balances. For example, overdraft balances could be
reported as a contra account to deposit balances, or reported as
an “other asset” with the appropriate explanation. We
urge the Agencies to consider utilizing other methods to report potential
operational risks and potential losses rather than reporting overdraft
balances as loans.
In addition, it appears that the Guidance only
addresses overdraft balances resulting from an overdraft protection
program. Overdrafts can occur in other transactions, such as returned
deposited items and fees, as well as NSF transactions. We recommend
that these other types of overdraft balances be included in the analysis
for reporting of overdraft balances.
C. Allowances for Loan and Lease
Losses
The Guidance proposes that overdraft losses (other than the
portion of the loss attributable to uncollected overdraft fees) should
be charged off against the allowance for loan and lease losses. We
disagree with this assessment. As stated previously, we believe that
these losses are operating charge offs and should be reflected accordingly.
We do not believe that overdraft balances should be characterized
as credit balances.
D. Charge Off Timeframes
The Guidance indicates
that overdraft balances generally should be charged off within 30
days from the date first overdrawn. We strongly oppose the 30-day
time frame for the charge off of an overdraft balance. We believe
this time frame is too short and therefore we recommend extending
the period to a minimum of 60 days for a number of reasons.
• A
30 day charge off requirement would not allow sufficient time for
some customers to replenish their account due to the monthly payment
cycles for some customers. A 30 day charge off period often may not
even cover a statement cycle so that the account would be charged
off before the customer even receives a statement reflecting the
overdraft. In addition, significant collections of overdrafts can
occur beyond 30 days.
• Experience has shown that more
consumers will bring their account to a positive status between
30 and 60 days,
than before 30 days. Analysis of accounts from reporting member
companies demonstrates that 44 percent of accounts are brought
to a positive
status before 30 days while 56 percent are brought to a positive balance between 30 and 60 days.
• Although an overdraft
protection service is not a credit service, even unsecured consumer
credit need not be charged off until it is 120 days past due under
regulatory guidance.
• An account charged off at 30 days is
harmful to the consumer. For example, when an account is charged
off, it is reported as such to credit bureaus. Consumers reported
to credit bureaus would be faced with difficulties opening new accounts
or, at the very least, would be limited in their account choices.
• We
would also expect that fewer consumers would be willing to enter
repayment agreements if the account has been charged off and already
reported to credit bureaus.
• There will be additional expenses
to the financial institution for reporting charge offs and recoveries
on financial records and with credit reporting agencies. Also, there
would be additional costs associated with responding to consumer
and credit reporting agency inquiries in relation to the accuracy
of credit report information.
The Guidance states that some overdrafts
are individually underwritten and supported by documented assessment
of that consumer’s ability to repay. We believe that overdrafts
should not be underwritten or evaluated as a typical credit transaction
since overdrafts are the result of operational decisions related
to the instrument which was returned, historical average balances,
and/or pending deposits. Therefore, we do not believe that the
timeframes described in the FFIEC Uniform Retail Credit Classification
and Account
Management Policy would apply.
The proposed Guidance also states
that if the institution allows the consumer to cover an overdraft
through an extended repayment plan, the existence of the repayment
plan would not extend the charge off period and that any payments
received after the account is charged off, up to the amount charged
off against the allowance, should be reported as a recovery.
We recommend that in cases where a repayment plan, or promise
to pay, has been
executed between the consumer and the institution, this type
of circumstance would constitute an extension of credit thereby
deferring the charge
off of the overdraft resulting in an extension of credit. This
provides consumers an incentive to correct their account, without
negative
reporting.
E. Excessive Users
The Guidance proposes that institutions
monitor accounts on an ongoing basis to be able to identify individual
consumers who may be excessively reliant on overdraft protection
or who may represent undue credit risk to the institution. We
recommend greater flexibility in relation to monitoring excessive
users. We
believe that financial institutions should be given discretion
to take reasonable actions to review these accounts. Although
we agree
that additional guidance would be helpful in this area, we are
concerned that prescriptive requirements may unintentionally
create liability
for institutions. Therefore, we urge the Agencies to outline
examples on how institutions may comply with the Guidance while
making it
clear that institutions may use other means to monitor
accounts.
F. Unused Commitments
The Guidance states that 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. We strongly
disagree with this requirement. Elsewhere in the proposed Guidance
(and in the Federal Reserve Board’s recent proposed amendments
to Regulation DD) the Agencies have set forth guidance to retain
the discretionary nature of these programs. Reporting “unused
commitments” as loans would inappropriately characterize deposit
accounts as loans. Additionally, such reporting would detract from
the discretionary nature of the programs. Institutions with overdraft
protection programs, if administered appropriately, have disclosed
that the program can be unconditionally cancelled at any time and
the institution has no commitment to pay NSFs. It does not seem prudent
to report these as loans as the proposed Guidance suggests.
The Agencies
have indicated that they also expect proper risk-based capital treatment
of outstanding overdraft balances and unused commitments. Overdraft
balances should be risk-weighted according to obligor. Unused commitments
that are unconditionally cancelable at any time pursuant to applicable
law and those with an original maturity of one year or less, as defined
in the risk-based capital standards, are subject to a zero percent
credit conversion factor. Commitments with an original maturity of
more than one year are subject to a fifty percent credit conversion
factor and the resulting credit equivalent amount should be risk-weighted
according to obligor.
We request confirmation that “unconditionally
cancelable” applies to any program which discloses that the
institution has no obligation or commitment to pay an overdraft,
and that the program itself can be terminated at any time.
III. Legal
Risks
The Guidance states that overdraft protection programs must
comply with all applicable federal laws and state laws. The federal
laws and regulations include Section 5 of the Federal Trade Commission
Act, the Equal Credit Opportunity Act, the Truth in Lending Act,
the Truth in Savings Act, and the Electronic Fund Transfer Act. In
addition, overdraft programs must comply with state laws, such as
those dealing with usury, crime or unfair or deceptive acts or practices.
A. Truth in Lending Act
The Truth and Lending Act (“TILA”)
and Regulation Z require creditors to give cost disclosures in
connection with extensions of consumer credit. The Roundtable applauds
the Agencies’ affirmation
in the Guidance that overdraft fees are not finance charges under
TILA and Regulation Z, provided the institution has not agreed
in writing to pay overdrafts. We support the adoption of this
portion
of the Guidance.
B. Electronic Fund Transfer Act
The Electronic Fund Transfer
Act (“EFTA”) and Regulation E require an institution to provide
consumers with account-opening disclosures and to send periodic statements
for months in which an electronic fund transfer (“EFT”)
has occurred and at least quarterly if no transfer has occurred.
The proposal states that if, under an overdraft protection program,
a consumer could overdraw an account by means of an ATM withdrawal
or point-of-sale debit card transaction, both are electronic
fund transfers subject to EFTA and Regulation E. As such, periodic
statements
must be readily understandable and accurate regarding debits
made, current balances, and fees charged. Terminal receipts also
must be
readily understandable and accurate regarding the amount of the
transfer.
Depending on the processing rules of an individual
institution, it
may not be possible to disclose accurately whether a particular
transaction will incur an overdraft fee. Some institutions do
not assess fees
if accounts are brought current before the end of the day, or
may establish a cap or floor for fees to be assessed. Consumers
have
been provided fee information at account opening. We believe
that because of the programming required and the potential uncertainty
that any disclosed information will be reflective of the ultimate
experience of the consumer, disclosing whether a particular transaction
will incur an overdraft fee should not be required. We would
suggest
that terminal receipts be required to show the amount withdrawn
and, if the account is online, the current available balance
of the account
following the transaction. If the ending balance is overdrawn,
this would be noted on the terminal receipt. The Guidance should
confirm
that terminal receipts be accurate in relation to the amount
of the transfer, but not be required to display associated fees.
IV. Best
Practices
The best practices in the Guidance are intended to
provide positive examples of practices that are recommended by
the industry.
These practices address the marketing and communications that
accompany overdraft protection programs and the disclosure and
operation of
these programs.
A. Marketing and Communications with Consumers
Fairly represent overdraft protection programs and alternatives.
This best
practice would require the disclosure of the cost of alternative
products in descriptions of an overdraft protection service.
In order to take into account different pricing for alternative
products from
market to market and other situations that might result in non-uniform
pricing of alternative products, we believe institutions should
be permitted to refer customers to a customer service number
or to a
local branch to discuss such alternatives.
Clearly explain discretionary
nature of program. This best practice suggests that 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.
We agree that disclosure of this nature
is valuable to assist consumers in understanding that overdraft
protection is discretionary and not a commitment to pay by the
institution.
However, any requirement to describe the “circumstances in
which the institution would refuse to pay an overdraft” will
have the effect of converting the program from a discretionary program
to a program under which the institution will not pay an item if
one of the described circumstances exists. The practical effect of
this requirement would in essence change the discretionary nature
of the program.
Explain check clearing policies. This best practice
suggests that institutions 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). We strongly
believe this practice should be eliminated from the list of best
practices. The precise order in which checks and other items are
paid can be highly technical and not easily explained to consumers.
Institutions may base an order of payment on a number of factors,
including where the item was presented, whether the item was payable
to the institution itself, the size of the item, or the item’s
serial number.
In addition, this proposed best practice is inconsistent
with the Uniform Commercial Code, which recognizes that an institution
should be allowed to process items in any order it chooses. The disclosure
of the order of payment of items could create a contractual obligation
between the consumer and the financial institution as the institution
would be obligated to process items in that order. Subsequently,
a bank’s ability to change or modify such policies would
be hampered. In order to change its check clearing policies,
an institution
would have to provide notice to its entire customer base. An
institution should reserve the right to process items in any
order it chooses
and consumers should be encouraged to keep adequate available
funds in their account to cover all authorized transactions regardless
of the order in which presented.
B. Program Features and Operation
Alert consumers before a non-check transaction triggers any
fees.
This best practice suggests that when consumers attempt to use
means
other than checks to withdraw or transfer funds made available
through an overdraft protection program, that the institution
provide a specific
consumer notice, where feasible, that completing the withdrawal
will trigger the overdraft protection fees. The proposed best
practice
suggests that 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 proposed best practice
suggests posting 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.
This practice places serious burdens on financial institutions.
As the Guidance acknowledges, giving prior notice that a given
transaction
will trigger an overdraft fee is not always feasible and therefore
notice should be posted on proprietary ATMs. We believe that
the Guidance should clarify and acknowledge that there are situations,
including in some instances, access by an ATM, in which it is
not
possible to post notices. These include, for example, non-proprietary
ATMs (those operated by someone other than the financial institution
holding the deposit account); transactions made online, over
the phone, or at point of sale (online or offline debit); and
preauthorized
ACH transactions. Additionally, it should be noted that if the
notice is designed to be presented at the ATM as part of the
transaction, that there will be cases when the notice is not
possible, for example
in offline situations.
Also, it may not be possible to disclose
accurately
whether a particular transaction will incur an overdraft fee.
Some institutions do not assess fees if accounts are brought
current
before the end of the day, or may establish a cap or floor for
fees to be
assessed. We feel that because of the programming required, and
the potential uncertainty that any disclosed information will
be reflective
of the ultimate experience of the consumer, that disclosure of
whether a particular transaction will incur an overdraft fee
should not be
required. We would suggest that proprietary ATM terminal receipts
be required to show the amount withdrawn and, if the account
is online, the current available balance of the account, following
the transaction.
Thus, if the ending balance is overdrawn, such would be noted
on
the terminal receipt.
Promptly notify consumers of overdraft
protection program usage each time used. This best practice suggests
that
institutions promptly notify consumers when overdraft protection
has been accessed.
The notification should also identify the transaction, and disclose
the overdraft amount, fees assessed, amount of time consumers
have to return their accounts to a positive balance, and the
consequences
for not doing so.
We request clarification about reiteration
of terms for consumers who access the service for the first time.
Specifically,
we recommend that there be adequate flexibility to allow institutions
to notify consumers by whatever means is appropriate (telephone,
letter, e-mail, etc.). Additionally, we recommend that this notification
only apply to accounts that have been opened only in the last
twelve
months. Monitoring individual historical account records beyond
twelve months will be burdensome and may not result in a useful
communication
to the consumer.
We believe that since most overdrafts must be
repaid immediately, the requirement to notify a consumer about
the consequences
of not returning the account to a positive balance is unnecessary.
In addition, the consequences may be difficult to determine since
it often depends on the amount of the overdraft, the time it
takes to clear the overdraft, prior account history and the customers
other relationships with the institution.
Finally, we believe
that
requiring
an institution to notify customers in writing about the overdraft,
the fees imposed, and the period of time in which repayment can
be made, may constitute a written agreement to extend credit
and subject
the institution to liability under Regulation Z and other lending
laws.
Monitor overdraft protection program usage. This best practice
suggests that institutions monitor excessive consumer usage,
which may indicate
a need for alternative credit arrangements or other services,
and should inform consumers of these available options.
Roundtable
member companies have several concerns and recommendations in
relation
to
this best practice including:
• The guidelines do not provide
a specific definition of excessive use.
• The guidelines should
state that there is no notice requirement when there are no alternative
options available and financial institutions are not obligated to
provide alternative overdraft protection products.
• The guidelines
should make clear that, except for safety and soundness reasons,
institutions are not required to limit a consumer’s use merely
because the consumer meets a definition of “excessive use.” • We
recommend that institutions be allowed the flexibility to develop
programs that are manageable based on overall transaction volume
and account base.
V. General Comments
The Roundtable strongly urges
the Agencies to exempt the traditional practice of paying overdrafts
on a discretionary basis where the bank does not promote or disclose
the overdraft payment criteria. Unlike bounced check protection and
other programs that market the ability to use overdraft, traditional
overdraft protection is a way to manage operational risk and does
not harm consumers. We request that the exemption for traditional
overdraft protection programs apply regardless of whether or not
automated means are used.
VI. Conclusion
Roundtable member companies
appreciate the efforts of the Agencies to provide guidance on overdraft
protection services. We support the Agencies’ goals to
enhance these services, but we do have some concerns with the
Guidance. First,
although we agree that adopting written policies and procedures
to address the risks of overdraft protection may be beneficial
to financial
institutions, we oppose any assessment be made for credit risk.
We believe that overdraft protection programs represent an operational
risk to institutions, not credit risk. Second, we strongly oppose
the 30-day time frame for the charge off of an overdraft balance.
We believe this time frame is too short and therefore we recommend
extending the period to a minimum of 60 days. And finally, we
recommend
that the Agencies allow institutions sufficient time to assess,
develop, test and implement required system changes, and to train
personnel
that may be necessary to comply with the Guidance.
If you have any further questions or comments on this matter,
please do not hesitate to contact me or John Beccia at (202)
289-4322.
Sincerely,
Richard M. Whiting
Executive Director and General
Counsel
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1 The Financial Services Roundtable represents 100 of the largest
integrated financial services companies providing banking, insurance,
and investment products and services to the American consumer.
Roundtable member companies provide fuel for America's economic
engine accounting directly for $18.3 trillion in managed assets,
$678 billion in revenue, and 2.1 million jobs.
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