Hillcrest Bank
August 6, 2004
Robert E. Feldman
Executive Secretary
Attention: Comments/Executive Secretary Section
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Via e-mail: comments@fdic.gov
Subject: Overdraft Protection Guidance
Dear Mr. Feldman,
I am pleased to respond to the request for comment regarding the
Interagency Guidance on Overdraft Protection issued in Financial
Institution Letter 63-2004. I am also pleased that the regulatory
agencies are working together to ensure the financial institutions
that offer overdraft protection products manage them responsibly.
My response is on behalf of Hillcrest Bank, a one billion dollar
asset bank serving the Kansas City and Wichita communities. Hillcrest
Bank has offered an overdraft protection program since April 2002,
and we believe it has been well received by our customers.
Since the proposed guidance was issued in three primary sections,
I will provide comment in the same manner.
Safety and Soundness Considerations
I concur with the majority of the guidance issued in this area,
including that written policies and procedures should be adopted
to address credit and operational risks. I believe such procedures
should be flexible so that each financial institution can address
its safety and soundness issues in light of its goals for the overdraft
protection product. I further believe it is prudent that such programs
receive ongoing management regarding areas you identified, including
the identification of consumers who may be abusing the product, reporting
volume, profitability, and credit performance to management, and
repayment and product suspension.
I support the proposed guidance with respect to the reporting of
income and loss recognition according to GAAP and instructions for
the Call Report. It is reasonable, in my opinion, to charge overdraft
losses against the allowance for loan and lease losses and that estimates
to the ALLL be documented according to previously issued guidance.
However, I disagree that overdraft balances should generally be
charged off within 30 days from the date first overdrawn. Our customers
are promptly informed about overdrafts and are encouraged to bring
the account to a positive balance quickly. I believe that 60 or 90
days would be sufficient time to determine whether the account should
be charged off. Some customers are paid on a monthly basis, not necessarily
by direct deposit, and I believe banks would be doing that customer
a disservice if the account were charged off prior to them being
able to deposit their regular paycheck. Charging off an account may
cause the customer difficulty in establishing a banking relationship
with another financial institution. This situation should not be
taken lightly and is contrary to the mission of financial institutions
to provide financial services to its communities. I believe more
than 30 days may be necessary to provide time for the customer to
make a deposit or for the financial institution to exhaust its collection
efforts.
I also disagree
that available amounts of overdraft protection should be reported
as “unused commitments” in regulatory reports.
Paying overdrafts is still a discretionary practice by the financial
institution. Customers are not encouraged to overdraw their accounts,
and I believe it is very unlikely that the total available amount
of overdraft protection would ever be used. It appears to me that
reporting such amounts as “unused commitments” would
simply be reporting an unrealistic figure. This reporting requirement,
however, may be appropriate for traditional overdraft lines of credit
or other such formalized, binding obligations by the financial institution.
Legal Risks
I agree that the various Acts mentioned in the proposed guidance
should be addressed when developing or managing an overdraft protection
program.
Best Practices
I believe the “best practices” discussed
in the proposed guidance appear to be reasonable practices that
may assist financial
institutions and their customers with their understanding of the
overdraft protection product. I am concerned, however, that regulatory
examiners may consider the guidance to be a checklist for compliance
rather than as guidance for management to consider, but not necessarily
implement, based on the financial institutions own risk assessment
of their overdraft protection product. I suggest the final guidance
specifically state that not all best practices need to be present
or implemented in order for the product to be compliant.
I trust that you will find these comments to be respectfully submitted
and with the best interest of both the financial institution and
its customers in mind. It is my belief that our customers genuinely
appreciate the overdraft protection product, as it is less expensive
for them than incurring both an NSF fee from the Bank and a returned
item fee from a merchant. I believe that our product management practices
already are substantially similar to those discussed in the proposed
guidance and provide our customers with clear explanations of the
product.
Sincerely,
Brad Bischoff, Compliance Officer
Hillcrest Bank
Wichita, KS
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