WORONOCO SAVINGS BANK
To: Federal Deposit Insurance Corporation
From: Susan DeFeo, Senior Vice President
Date: July 30, 2004
RE: Comments on Proposed Guidance on Overdraft Protection Programs
Management at Woronoco Savings Bank has reviewed the proposed
Interagency Guidance on Overdraft Protection Programs and request that
the Agencies reconsider the following proposals.
SAFETY & SOUNDNESS CONSIDERATIONS
Charge Off Overdrafts At 30 Days
The 30-day charge off period is too short. Each institution should be
able to establish its own charge off policy based on the program’s
customer eligibility standards, collection efforts, and charge off and
recovery experience. It has been the bank’s experience that many
negative balances are cleared up between 30-45 days. An average of 10
accounts per week, are brought to a positive balance that were overdrawn
more than 30 days. The proposed 30-day period is too restrictive and
does not consider the impact of the frequency or timing of payments by
employers to consumers, unanticipated additional expenses, and
unexpected travel many customers routinely experience. At a minimum, the
charge off period should be no less than one entire monthly cycle, of
which 5 times a year equals 31 days.
Having a 30-day charge off requirement would be detrimental to the
credit history of many consumers. At the point where the bank charges
off an account, the customer is reported to the credit bureau for
nonpayment and the account is closed. Customers reported for poor
account management are likely to have difficulty opening an account at
other financial institutions, could become the un-banked, and are likely
to become users of high-cost check cashing services. Additionally,
experience has proven that the bank is more likely to collect if the
customer is allowed to keep the account open, rather than try to work
with the customer after the bank has taken adverse action. The solution
is not to delay reporting the customer to a credit bureau when the
account is charged off, but to base the charge off period on an analysis
of each individual financial institution’s historical loss experience,
minimum account and customer eligibility standards (to receive the
overdraft protection), and collection efforts.
The risks inherent in overdraft programs are similar for credit
unions and banks; therefore, loss recognition standards should also be
consistent. Federal credit unions are permitted to take up to 45 days to
clear up negative balances. No valid reason exists to support a 45-day
period for federal credit unions and 30-day period for all other
institutions.
We offer our customers a four month interest-free repayment plan at
20 days overdue; of which approximately only 50% of them are likely to
default. It is overly aggressive to charge off these accounts as soon as
they enter the repayment plan, especially if they enter the repayment
plan earlier than the required charge off period. Generally, the
customer’s payment history during the repayment plan is a good
indication of whether the overdraft will be paid in full. Our experience
has shown that if any payment is missed the bank is likely to incur a
loss. Therefore, rather than automatically charge off the amount when
the customer enters the plan, the charge off should occur no sooner than
when the first payment in the plan is missed.
Unused Commitments
Discretionary overdrafts should not be reported as unused commitments,
especially in light of the required disclosure and advertising
requirements concurrently proposed. These limits are revocable by the
bank at any time, for any reason, without advance notice to the
customer. Under these programs, the bank is not obligated to honor any
item when there are insufficient funds, therefore, these limits cannot
be considered “commitments”. Furthermore, if the disclosure and
advertisement requirements are adopted, then there should be no question
to the customer that this type of service is not “guaranteed” and
therefore, should not be considered a commitment in the eyes of the
customer.
If this requirement is adopted, the term “routinely communicates the
available amount” needs to be defined and should state that a bank that
sends any required disclosure, a one-time notice of availability,
counseling letters, or NSF/fee notices that include the available amount
is not considered to be “routinely communicating” the service to its
customers.
BEST PRACTICES
Explain Check Clearing Policies
Although misleading by the title, this applies to all debits processed
against an account, not just checks. Payment order is equally important
to all banks, not just those banks that have discretionary overdraft
programs. The same philosophy behind disclosing this process for a bank
that has an overdraft program can be applied to any bank that returns
items and charges a fee for each item. Furthermore, if customers manage
their accounts properly, it wouldn’t matter what order items are paid.
If anything, this is an account-related disclosure and not an overdraft
program best practice.
Alert Consumers Before A Non-Check Transaction Triggers Any Fees
This is nearly impossible for a number of reasons, including cost and
burden of reprogramming every ATM network and computer system which
processes electronic debits. An integral part of this process involves
requiring merchants and third parties who process POS and ACH
transactions to provide the fee notification to the customer prior to
processing the transaction, which given their lackadaisical efforts to
verify signatures on credit and debit cards is not likely to be
effective.
Financial institutions have control over alerting customers when the
transactions are conducted through the bank’s own systems (teller line,
online banking, and bank-owned ATMs). However, when transactions are
conducted through external points (POS, ACH, or at other bank’s ATMs),
the bank has little control over the information provided to the
customer at the time of the transaction. By providing the information in
some environments and not in others, customers might feel a false
impression of when a fee is or is not being imposed. A more practical
alternative is to clearly disclose to the customer when a fee might be
imposed.
Consider Daily Limits
The bank earns the overdraft fee for the credit risk incurred when
paying an item against an account with insufficient funds. By
implementing a daily limit, there is no incentive for a customer to
manage their account and the bank is not compensated for the additional
risk exposure. Given the proposed disclosure and advertising
requirements, the customer should understand the fees associated with
each overdraft item presented for payment. In addition the customer
should take some responsibility and accountability for knowing the
available balance in their account.
