America’s
Community Bankers
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 69 FR 31858 (June 7,
2004)
Dear Sir or Madam:
America’s Community Bankers (“ACB”)1 welcomes the
opportunity to comment on the proposed interagency guidance on overdraft
protection programs, which was issued by the Office of the Comptroller
of the Currency, the Board of Governors of the Federal Reserve System,
the Federal Deposit Insurance Corporation, the Office of Thrift Supervision
and the National Credit Union Administration (collectively, the “Agencies”).
Specifically, the Agencies have issued proposed guidance intended
to assist insured depository institutions with the disclosures for,
and administration of, overdraft protection services.2 In issuing
this proposal, the Agencies note that, while both the availability
and customer acceptance of overdraft protection services have increased,
certain aspects of marketing, disclosure and implementation have
raised concerns.
ACB Position
ACB supports the ability of community banks to offer overdraft protection
services to their customers. Community banks also believe it is important
to assist their customers in better managing their finances. We also
believe that fair and accurate disclosures, together with regular
financial education, help avoid confusion and misunderstanding among
consumers about the true nature of overdraft protection and its costs.
W hile
we generally support the efforts of the Agencies to provide meaningful
examples
of optimal practices relating to overdraft
protection
services, we have several concerns about the proposed guidance, both
in terms of format and content. We urge the Agencies to revise the
proposed guidance to both narrow its scope of application and to
address certain ambiguities. In particular:
• The proposed guidance does not draw the important,
necessary distinction between the discretionary nature of overdraft
protection services
, which increasingly are automated, and overdraft lines of credit
, which are promises to extend credit under certain defined terms.
• ACB opposes aspects of the guidance that would incorrectly label
all forms of overdraft protection as a credit service. To the contrary,
only specifically developed overdraft lines of credit or similar
credit products should be treated as loans, assessed for credit
risk and subject to the Truth in Lending Act (TILA) and its implementing
regulation, Regulation Z.3
• The proposed guidance fails to recognize that overdraft protection
services are a response to customer-initiated transactions. All
institutions must decide whether to pay checks or other items initiated
by customers and presented against insufficient funds.
• At the same tine, the proposed guidance also does not take into
account that many customers have come to expect some form of overdraft
coverage. For institutions that do offer some form of non-credit
overdraft protection, many report that customers respond very favorably
to the service.
•
The proposed recommendation to “charge off” overdraft
balances after 30 days is unworkable from an operational standpoint
and also would negatively impact customers unnecessarily. It should
be increased to at least 60 days.
• ACB strongly urges the Agencies to confirm that any best practices
should not be seen as mandatory requirements that must be adopted
in full by all banks. Institutions should be able to tailor
their policies and procedures to the specific facts and circumstances
of their institution, its customers and the particular aspects
of the overdraft protection service.
• In addition, several of the specific proposed best practices, while
laudable in concept, would be difficult or costly to implement
and would not necessarily provide consumers with any additional,
meaningful information to assist in their understanding of overdraft
protection.
Background
In issuing this proposed
guidance, the Agencies are responding to recent, negative publicity
regarding certain marketing practices
involving overdraft protection and consumers’ perceived abuses
in the administration of the services. In addition, the proposed
guidance reflects information from comments received by the Board
of Governors of the Federal Reserve System in response to its request
for feedback about the operation of overdraft protection programs.4
The proposed guidance covers three key areas: safety and soundness
considerations, legal risks, and best practices, which include 17
specific recommendations.
Financial Education and Informed Customers
ACB supports efforts to
inform and educate consumers. In this instance, we believe it is
important to inform and educate customers about
the appropriate use and operation of discretionary overdraft protection
services, as well as how to better manage one’s personal finances.
We agree with the Agencies that clear disclosures and explanations
about overdraft protection help consumers use the service more responsibly.
In fact, community banks are particularly effective in working with
their customers to address overdraft issues promptly while helping
them improve their financial literacy and money management skills.
Many deposit account agreements include language describing the discretionary
nature in which the institution will respond to overdraft occurrences.
And, as noted earlier, customers today increasingly expect their
financial institution will honor overdrafts when they occur, to help
a customer avoid additional costs and embarrassment.
Safety and Soundness Concerns
Deposit Service
or Credit Product. Although the Agencies attempt to note the different approaches
to overdraft protection, the proposed
guidance fails to draw an important distinction between overdraft
lines of credit and automated overdraft protection. An overdraft
line of credit is a promise to pay overdrafts under certain defined
terms. By comparison, overdraft protection services, regardless of
how automated, are discretionary and utilized on a case-by-case basis,
based on the institution’s knowledge of its customer, the account
history and other important factors.
As an example of this
failure to distinguish, while attempting to note differences, the
proposed guidance goes on to state that all
overdraft balances should be reported as loans for purposes of required,
quarterly financial reports, and that institutions should adopt written
policies and procedures to assess credit and other risks.5 In another
example, the proposed guidance also suggests that available amounts
of overdraft protection be reported as “unused commitments.”
ACB strongly urges the Agencies to clarify that only those forms
of overdraft protection specifically designed and offered as a credit
product, i.e., a loan, should be reported as loans and assessed for
credit risk. Making a distinction for financial reporting purposes
will clarify that discretionary programs are not extensions of credit.
Other forms of overdraft protection that do not meet the requirements
of the statute or regulation, whether managed on an automated or
occasional basis, should specifically fall outside the scope of TILA
and Regulation Z.
While ACB supports the contention that general risk management principles
should be applied to customer overdrafts, the proposed guidance could
result in all institutions treating overdraft protection as a loan
product. We oppose such an approach and urge the Agencies to revise
their proposed guidance to address this ambiguity.
Charge-offs The proposed guidance indicates that overdraft balances
generally should be charged off within 30 days of the date the
overdraft first occurs.6 This timeframe is too short and will prove
unworkable for institutions seeking to implement this aspect of
the proposed guidance. General experience among community banks
suggests that most customers will bring an account to a positive
balance within a longer average time period, usually between 30
and 60 days. Requiring charge-offs within 30 days also will generate
additional costs for community banks as they report this information
to credit reporting agencies and respond to inquiries about such
information.
Just as important, customers would likely face unnecessary consequences
if financial institutions were forced to follow a 30-day charge-off
rule. Customers would have to deal with negative information being
reported to credit bureaus and check monitoring services, which likely
would result in a damaged credit rating and potentially impair their
ability to obtain additional credit in the future.
ACB does not believe, however, that fees associated with continuing
overdrafts should continue indefinitely as the account is brought
to positive balance.
Legal Risks
ACB generally supports
the Agencies’ effort to highlight potential
legal risks under various, applicable federal laws and regulations,
including TILA, the Equal Credit Opportunity Act and the Truth in
Savings Act.
As noted earlier, we support
the Agencies’ confirmation that
overdraft fees are not finance charges under TILA and Regulation
Z, provided the institution has not agreed in writing to pay overdrafts.
This comports with the important distinction we believe is necessary
elsewhere in the proposed guidance.
With respect to the Electronic Funds Transfer Act, ACB supports
the general guidance that automated teller machine terminal receipts
should accurately reflect the available balance without including
overdraft protection funds. We understand that it may not always
be possible, however, to provide accurate information about whether
a particular transaction will trigger an overdraft. By way of example,
some institutions do not assess fees if accounts are brought current
before the end of the day, while others may establish a cap or floor
for fees to be assessed. ACB urges the Agencies to clarify that it
is sufficient to provide terminal receipts (or online screen information)
that reflect accurate available balances without overdraft protection,
including when an account has a resulting negative balance and any
fees that will be incurred.
Best Practices
The Agencies have proposed
best practices for financial institutions that provide overdraft
protection to their customers. The practices
are grouped into marketing and communications, and program features
and operation. While ACB supports efforts to provide examples of
optimal practices, we believe the Agencies must take into account
the individual aspects of a financial institution’s operations,
customer base and resources. The proposed best practices should not
be viewed as a minimum standard, but rather as offering a range of
optimal practices that may be adapted to fit an individual institution’s
program and customer base. We also are concerned that examiners,
consumers and others will view these best practices as mandatory
requirements, which may lead to criticism and the potential for litigation.
ACB strongly urges that the Agencies clarify that it is not necessary
to adopt all of the suggested practices and that the practices are
only guidance. We think this is particularly necessary as the Agencies
otherwise explore opportunities to reduce regulatory burdens.
With respect to the specific proposed best practices:
Avoid promoting poor account management. Community banks have long
been involved in helping to advance the financial literacy of the
communities they serve, and ACB supports this aspect of the proposed
guidance. The use of overdraft protection services should be an
exception and not the rule. Customers should not regularly rely
on overdraft protection services as a means of managing their finances.
Fairly represent
overdraft protection programs and alternatives.
Similarly, we support providing customers with clear and accurate
disclosures about the nature of their overdraft protection coverage,
and whether it is a deposit service or a line of credit.
Train staff
to explain program features and other choices. ACB generally
supports this recommendation but, again, encourages the Agencies
to recognize that any training recommendations must take into account
individual resources, customer experience and other factors.
Clearly explain
discretionary nature of program. With respect to non-credit
overdraft protection, while customers should have a clear
understanding of the discretionary nature of any overdraft protection
service, ACB is concerned about listing circumstances in which an
institution will not pay an overdraft item or suspend overdraft protection
coverage. We believe this could give rise to an unreasonable expectation
that a “safe harbor” exists when, in fact, none does.
As noted previously, unless a customer has obtained a pre-approved
line of credit, the decision to honor an overdraft remains discretionary
and will depend upon a variety of circumstances, including some outside
the control of the financial institution, such as instances when
deposit items have been returned. We encourage the Agencies to modify
this aspect of the proposed guidance to simply state that customers
should receive an accurate description of whether the overdraft protection
coverage provided for the specific account is discretionary or not.
Free accounts,
program fees and multiple fees. ACB supports informing
customers fully about the nature and costs associated with their
particular form of overdraft protection.
Explain check-clearing
processes. While ACB understands the rationale
behind this proposed best practice, we believe that the information
needed to accurately describe the check clearing process, and its
many variables, likely would confuse customers or, alternatively,
create an unintended expectation of a contractual obligation between
the customer and the financial institution. ACB suggests in the alternative
that financial institutions be prepared to explain that the check
clearing process is a complicated one involving a variety of legitimate
factors, which may impact when items are presented for payment.
Alert consumers
before a non-check transaction triggers any fees.
As noted earlier, it may not always be possible to accurately disclose
when, or if, a non-check transaction will trigger any overdraft protection
fees. We believe that ATM terminal receipts or other transaction
receipts should disclose the available balance following a transaction
without including any overdraft protection amounts, including if
a negative balance will result and any fees will be incurred. If
the account will be overdrawn following a non-check transaction,
the receipt similarly should disclose that information.
Usage of
overdraft protection by customers. ACB believes that financial
institutions must have the necessary flexibility to assess overdraft
protection occurrences by customers, and to take appropriate, responsive
action. Community bankers must have the flexibility to work with
their customers to address overdraft occurrences and what responses
are most appropriate. There should not be a required, formulaic approach
to deciding on the specific availability of overdraft protection
coverage. To reiterate, ACB supports efforts to educate customers
about managing finances and avoiding overdrafts and this should be
the focus of dealing with repeated overdraft situations.
Conclusion
ACB appreciates the opportunity to comment on this important matter
and we support the Agencies in their efforts to provide meaningful
guidance on overdraft protection. We stand ready to work with the
Agencies to finalize revised guidance to assist financial institutions
in responding to customer needs when overdrafts occur.
Should you have any questions, please contact the undersigned at
202-857-3122 or via e-mail at mbriggs@acbankers.org; Charlotte M.
Bahin, Senior Vice President, Regulatory Affairs, at (202) 857-3121
or via email at cbahin@acbankers.org.
Sincerely,
Michael W. Briggs
Chief Legal Officer
__________________________________
1 America's Community
Bankers is the member driven national trade association representing
community banks that pursue progressive,
entrepreneurial and service-oriented strategies to benefit their
customers and communities. To learn more about ACB, visit www.AmericasCommunityBankers.com.
2 69 Fed. Reg. 31858 (June 7, 2004).
3 15 U.S.C. § 1601
et seq., 12 C.F.R. Part 226.
4 67 Fed. Reg. 72618 (December 6, 2002).
5 69
Fed. Reg. 31861.
6 Id.
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