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Southwestern Bank
From: Maureen Carollo
Sent: Friday, August 06, 2004 11:29 AM
To: Comments
Subject: Overdraft Protection Guidance
Importance: High
FDIC Proposed Guidance for Overdraft Protection Programs
Dear Sirs,
It is my pleasure to take this opportunity to comment on the proposed
overdraft protection guidance recently issued by the Joint Agencies.
Southwestern Bank is a 40 year old locally-owned and family-owned
institution with 3 branches located in the Oklahoma City area with
$130 million in assets. Like most of our competitors, we offer
an overdraft protection feature that is a standard option with
consumer checking accounts, much like "free checking" is
now a standard product that customers expect all banks to offer.
Our product is not marketed and is explained to our customers to
be intended for use as needed, such as for those inadvertent accounting
errors that we have all experienced at one time or another.
Our position is that we agree that written procedures and policies
need to be implemented and that guidelines addressing risk management
should be in place. We do, however, disagree with several of the
suggestions listed under the Safety and Soundness Considerations.
We question the suggestion of charging overdraft losses to the
Allowance for Loan and Lease Losses. Since this account is intended
for true loan losses, it would be detrimental to smaller banks
such as ours, to be required to reserve additional funds to offset
losses in what has been traditionally considered the "operations" side
of the bank. We also disagree with the suggested practice of reporting
the available amount of overdraft protection as unused commitments
in the Call Report, since these funds may never be used by many
customers, unlike the expectation that funds set aside and "committed" on
a traditional line of credit will be advanced for the purpose intended.
The proposed guidance refers to the "overdraft balances being
risk-weighted according to the obligor", but this language
is assuming that there is already a line of credit in place, when
in fact this is perceived by the customer as a deposit product,
since there is no separate and secured loan account with a traditional
line of credit attached. The time required to perform this task
would be monumental for a small bank our size and the guidance
offered referring to an "original maturity" would not
be applicable, since the overdraft protection is not set with a "maturity" as
a loan would be, but is rather part of the deposit account. Would
we next be required to review the deposit accounts on an annual
basis to determine what the risk-weighting factors would be?
If a prospective customer qualifies for opening a checking account
(via credit check and NSF data base like ChexSystems or Telecheck),
then the customer is always offered the feature by the Customer
Service Representatives. The overdraft limit is $500 and is clearly
explained in a disclosure the customer must acknowledge, stating
their consent and understanding of how the program works, the fees
and costs involved, and what transactions would trigger the fees.
Our program is similar to those of other banks in that the option
to use the overdraft feature is in the customer's control, not
based on the bank's discretion.
We also have issues with some of the areas mentioned under the
Legal Risks section of the guidance. The premise that banks are
promoting their ODP programs in conflict with the FTC Act (of deceptively
misrepresenting, omitting or misleading consumers) is an unfair
assumption. Our institution has spent much time and effort to ensure
that our customers are provided clear disclosures on how the program
works, what fees are involved, how the items will be paid. We also
work with customers who need assistance when they appear to have
misused the product. By the same token, we also monitor the accounts
for possible losses and are prompt in identifying those that are
not collectable and are charged off after 30 days of delinquency.
Our position with regard to the Reg Z coverage is that the ODP
feature should not be included since the fees charged for payment
of an overdraft item is the same fee as that of a returned item.
Since there is no difference in the fee, this would not constitute
a finance charged as defined in the regulation. We also feel that
since the product is presented to customers as a deposit feature
that the presentation of additional disclosures for a loan would
only confuse the consumer who is only interested in a deposit account.
We agree with most of the Best Practices described in the proposed
guidance, as it is already our practice to fully inform our customers
by encouraging good account management and fairly and clearly presenting
our ODP program. We also already promptly notify our customers
with notices when the feature has been activated. The only item
under this section we question is the area of "Alerting consumers
before a non-check transaction triggers any fees". We are
unclear of what method would be required to disclose this information,
other than the proprietary means that would be available to us
of communicating to our customers via messages on online banking
pages and telephone banking, and posting notices on proprietary
ATMs. The suggestion of banks possibly limiting the ODP feature
to check items only would circumvent the whole notion of providing
the service to our customers to use in the event that funds were
needed. If the customer would be denied electronic access to this
feature, we feel this would be a disservice to them. We do agree,
however, that the activation should be disclosed to the customer
when feasibly possible.
In closing, we would like to thank the Corporation for this opportunity
to share our views on the proposed guidance.
Sincerely,
Maureen Carollo
Compliance/Internal Control Officer
Southwestern Bank
Oklahoma City, Ok
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