August 2, 2004
RE: Overdraft Protection Guidance
Gentlemen and Ladies:
Jefferson State Bank (the "Bank") is pleased to have this
opportunity to comment on the questions raised by the member agencies
of the Federal Financial Institutions Examination Council ("FFEIC");
Office of the Comptroller of the Currency, Treasury ("OCC");
Board of Governors of the Federal Reserve System ("Board");
Federal Deposit Insurance Corporation ("FDIC"); Office
of Thrift Supervision, Treasury ("OTS"); and National Credit
Union Administration ("NCUA") about potential changes to
regulatory guidance regarding overdraft protection services. The
above listed agencies have requested comments regarding the proposed
Interagency Guidance on Overdraft Protection Programs ("Guidance")
published in the Federal Register on June 7, 2004.
The Bank maintains an overdraft management program ("Program")
of the general type referred to in the request for comments, although
the Bank believes our Program to be significantly more conservative
and responsible than some programs. This letter is submitted, as
requested by the Agencies, to provide information and comment regarding
the proposed Guidance and its implications for overdraft protection
programs.
DISCUSSION
After an Executive Summary, this letter is divided into five sections,
as follows:
Section I: Background
Section II: Concerns
Section III: Safety & Soundness Considerations
Section IV: Legal Risks
Section V: Best Practices
EXECUTIVE SUMMARY
In the Bank's opinion, the Guidance supplies financial institutions
with welcome direction regarding overdraft protection programs. Many
financial institutions are meeting and exceeding the recommendations
of the Agencies today, and those institutions and vendors who are
not should meet the standards set forth in the Guidance. This kind
of standardization will certainly be beneficial for consumers and
for the financial services industry as a whole.
As discussed in greater detail below, our Bank's Program was carefully
designed neither to grant nor even suggest that the account holder
has a right to overdraw his or her checking account. Secondly, as
part of our Program, we have modified our written policies for managing
credit, operational, and other risks associated with paying NSFs
to ensure that these are monitored closely and consistently. Thirdly,
our Program already closely follows the Best Practices outlined by
the Agencies in the Guidance. As such, we firmly believe our Program
meets and exceeds many of the recommendations suggested by the Agencies.
The Bank, however, wishes to voice concern regarding three areas
discussed in the Guidance. First, the "Safety & Soundness" section
of the Guidance states, "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". Most customers never overdraw their accounts, but
for operational purposes, financial institutions have found it helpful
to automate payment of their NSFs in the event one is presented on
the account. According to the Guidance, significant "unused
commitments" will need to be defined and reported. In our
opinion, reporting the difference between a customer's balance
and what an
institution will pay for every customer in overdraft as unused
commitments is unnecessary and will not have the overall risk management
benefit
anticipated by the Agencies.
The second remarks in the inter-agency guidelines indicate that
overdraft balances should generally charged off within 30 days from
the first date overdrawn. The Bank believes that this flies flatly
in the face of existing accounting statements and current requirements.
The overdraft, rather, should be written off only after a minimum
of 60-120 days to be in conformity to other existing guidelines with
regard to problem debt. Again, the Bank program has a system for
collection that begins a series of collection letters at 15 days
in order to assure that the customer remains on a sound footing.
However, requiring an absolute charge-off at 30 days is unnecessary
and contrary to current normal practices.
The Guidance also states in the "Legal Risks" section
regarding the Truth in Lending Act, "... fees for paying overdraft
items currently are not considered finance charges under Regulation
Z if the institution has not agreed in writing to pay overdrafts.
Since this regulatory exception was created for the occasional ad-hoc
payment of overdrafts, its application to these automated and marketed
overdraft protection programs could be reevaluated in the future".
Charging a fee for presenting an item on an account where insufficient
funds exist can never be considered interest because at the time
the fee is charged, no decision has been made to pay the item or
create a negative balance. Consequently, overdrafts permitted under
the Program are not extensions of "credit" under either
Regulation B or Regulation Z, making both regulations non-applicable.
Efforts to change regulations so that NSFs fall under Reg Z simply
because the volume has grown in total or because of the financial
imprudence of a limited number of customers does not match the
logic and long-defined precedence of fees being charged for the
presentment
of NSFs. The Bank has concluded that if, in fact, the disclosure
and other requirements of Regulation Z are imposed on this very
popular service, the cost may render the product ineffective for
banks to
offer, thereby depriving many customers of important protection.
Perhaps most significantly, most of the programs of which we are
aware offer the inadvertent overdraft privilege to all customers
without requiring the customers to go through an underwriting process.
This decreases the cost of providing the service. In addition,
it makes the protection available to persons who might otherwise
not
qualify for open-end consumer credit.
I. BACKGROUND
The Bank has implemented an overdraft management program known
as the Overdraft Privilege Program, which is operated under license
from Pinnacle Financial Strategies. We have been using the Overdraft
Privilege Program for approximately four months.
As we believe will appear from the discussion below, the Overdraft
Privilege Program is a highly responsible approach to automated
overdraft management that is made available (but not actively promoted)
to
the Bank's individual checking account customers. Unlike some of
the aggressive "bounce protection" services that have appeared
in the industry and raised well-known regulatory concerns, the Overdraft
Privilege Program includes a system of straightforward communications
to the consumer while providing the Bank with a systematic, centrally
managed tool for administering overdrafts, as opposed to the "seat
of the pants" approach used at some times in the past.
About the Bank. Jefferson State Bank is a state chartered bank
located in
San Antonio, Texas with assets of $537 million. The Bank has nine
banking centers and is a locally owned community bank.
II. CONCERNS
The Guidance states that a chief concern among the Agencies are
certain aspects of the marketing, disclosure, implementation of
some overdraft protection programs. Specifically, "some institutions
have promoted this Overdraft Privilege Program in a manner that leads
consumers to believe that it is a line of credit by informing consumers
that their account includes an overdraft protection limit of a specified
dollar amount without clearly disclosing the terms and conditions
of the service including how fees impact overdraft protection dollar
limits, and how the service differs from a line of credit".
In addition, the Agencies voice concern about the marketing practices
adopted by some financial institutions with overdraft protection
programs, particularly the ones that appear to encourage customers
to overdraw their accounts.
We support the Guidance's recommendation that institutions should
carefully examine the risks presented by overdraft protection programs
and review their programs to ensure they are responsible, not misleading
consumers or encouraging irresponsible fiscal behavior. We are proud
to state that our Program does not use any heavy marketing or advertising
for exactly these reasons. Furthermore, studies have shown that most
people do not present NSFs, nor do they want to - one estimates that
nearly 60% of consumers have little or no interest in NSF services.
Attempting to promote the Program through spending money on heavy
advertising does not make good business sense because the majority
of our customers have no desire to use the service. We will continue
to adhere to our current disclosure and communication practices as
they meet the recommendations of the Guidance.
III. SAFETY & SOUNDNESS CONSIDERATIONS
The Guidance establishes a clear safety and soundness standard
that overdrafts must be charged off within 30 days. The Bank
believes this is unnecessary, very consumer-unfriendly, and in
contravention
of existing regulatory guidance concerning the classification
of unsecured consumer debt. The uniform classification of unsecured
consumer credit does not suggest a "loss" classification
until delinquency reaches 120 days. The OCC Comptroller handbook
on "check credit" similarly lists the same 120 day
charge-off requirement for unsecured lines of credit initiated
by overdrafts.
The Bank suggests a customer-friendly approach that's based on
safety and soundness standards requiring prompt notifications
to the customer of the overdraft and an encouragement to bring
the
account to a positive balance as soon as possible. The Bank's
Overdraft Privilege Program is discontinued at the 30 day mark
with continued
customer letters used for further collection. Procedures provide
for the charge off of the overdrawn balance at 60 days, at which
time additional collection efforts are made.
Based on the experience of the Bank, shortening the charge off period
will not result in a greater amount of net quarterly or year-end
losses as reconciled by reviewing the ALLL and Provision for Loan
Loss accounts. The Bank supports a longer charge off policy than
the 30 days proposed and recommends that 60 or 90 days would allow
for the reasonable collection of a depositor account while maintaining
transparency in the regulatory and financial reporting of the institution.
This longer charge off policy is also more favorable to the consumer
since no credit damage would be done to depositors by the premature
reporting of charged off accounts to the credit bureaus (as is customary
when banks charge off an OD as uncollectible).
The guidance provides a new interpretation of reporting requirements
for unused loan commitments that would include reporting the
total of all potential overdraft
approvals under the ODP program as an "unused (loan) commitments." While
the guidance is generally otherwise specific that the ODP program must be
non-contractual and that the banks right to pay or not to pay an overdraft
must continue to
be discretionary, the Guidance in this section suggests that even non-contractual
programs may be required to report their unused limit on call reports under
contractual obligations of unfounded loan commitments.
It appears the authors intend to present the position that an institutional
program that "routinely communicates the available amount of
overdraft protection to depositors..." could constitute a de
facto obligation and an effective binding commitment. The term "routinely
communicates" might be further interpreted to be as contained
in disclosure materials, in periodic statements, or on ATM receipts.
With this language in the Guidance, any "disclosed program" would
appear subject to the reporting requirement. The Bank's position
is that this reporting requirement should be reserved only for
contractually binding obligations such as traditional overdraft
lines of credit
or other formal credit facilities.
IV. LEGAL RISKS
We agree with the caution expressed by the Agencies regarding the
legal risks imposed by overdraft protection programs, and we had
counsel review our Bank's Program in detail for compliance with applicable
state and federal laws prior to implementation.
Regarding each recommendation stated in the Guidance, our comments
are as follows:
Federal Trade Commission Act / Advertising Rules.
Our Program provides comprehensive communication to customers through
letters, and phone calls. Our policy is to give our customers straight
talk and sound advice, as all responsible financial institutions
should. Specifically, we state that other alternatives (such as
lines of credit and transfers from savings) are available, and
encourage customers to contact the Bank to discuss them, if desired.
Truth in Lending Act.
Our Program ensures that all communication and disclosure documents
include that the payment of an NSF item into overdrawn status is
discretionary, and no written agreement is in place regarding the
payment of overdrafts. We establish the same fee for all accounts
whether the NSF item is paid or returned, as suggested by the Guidance.
The Guidance does indicate that the application of Reg Z to overdraft
protection programs could be reevaluated in the future. We are
not in favor of any changes to Reg Z that could prevent the payment
of
overdrafts as a service to the customer. Credit laws apply when
a financial institution extends credit to a consumer. According to
Regulation B, the Equal Credit Opportunity Act, "Credit means
the right granted by a creditor to an applicant to defer payment
of a debt, incur debt and defer its payment, or purchase property
or services and defer payment therefore." The customer does
not apply for this service (i.e., they are not an applicant) and
a "right" to overdraw is not granted by the financial
institution (it is a discretionary activity). Credit laws have
not applied to
overdrafts in the past, nor should they going forward.
Equal Credit Opportunity Act.
Our Program is designed so that no discrimination exists. Customer
accounts are qualified into the Program based upon objective criteria,
so the possibility for discrimination is nonexistent. In fact,
the automation provided by the Program software reduces the potential
discrimination and bias that exists under manual NSF pay/return
processes.
Truth in Savings Act.
Our Program does not utilize heavy marketing at all and instead provides
sound, prudent advice in every single letter, phone call and email
sent to customers on the expense of NSFs and overdrafts. The goal
of our Program is to provide a valuable service to our customers,
not encourage irresponsible financial management.
Electronic Fund Transfer Act.
Our Program implements payment of NSF items through ATM and POS channels
with appropriate reporting on statements, understandable communication,
and easy-to-read terminal receipts wherever feasible, and notices
at Bank-owned ATMs, as recommended in the Guidance.
V. BEST PRACTICES
This section contains seventeen bulleted (unnumbered) Best Practices
with varying degrees of implied importance. Most of these Best
Practices have been previously adopted by the Bank. Of particular
concern,
the twelfth and thirteenth Best Practice bullets are focused on
consumer groups' and regulators' concerns that providing Overdraft
Protection
Programs at a point of sale terminal and at the ATM has the greatest
potential for the imposition of "hidden" fees. With the
Bank's data processing systems, a customer may receive funds at
an ATM or POS and, because of the timing of the clearing of other
checks,
the customers electronic transaction may overdraw the account even
without an Overdraft Protection Program. We also note that authorizations
for debit cards using point of sale terminals may in fact be processed
as credit card transactions that may take several days to clear
and post resulting in an NSF situation, again, even when no Overdraft
Protection Program limit is being considered. The Bank believes
the
regulators need to be informed that financial institutions clearly
do not have complete control in preventing customers from overdrawing
their accounts using non-check transactions.
The twelfth Best Practice bullet suggests that a consumer be warned
before he can access funds that are known by the institution not
to be "the customer's own funds," such as when accessing
an Overdraft Protection Program. This section appears to recognize
limited availability of bank owned ATMs. The Guidance does not,
however, address Point of Sale terminals, most of which are located
in retail
stores throughout the country. The absences of clear guidance concerning
the inability of institutions to provide advance notice to consumers
at Point of Sales may create an expectation that institutions should
not make Overdraft Privilege available at point of sale locations.
In most cases, the ATM and Point of Sale systems are driven by
the same balance mechanisms. Clearly, customers want access to
their
Overdraft Privilege limits at these locations, so regulatory forbearance
is needed until technology catches up with new banking products.
The thirteenth Best Practice bullet is clearly meant to address
the displayed balances shown during balance inquiries at ATMs and
on ATM receipts. It suggests that the only balance that should
be displayed is the balance reflecting the "customer's own funds
available without the overdraft protection funds included." The
bank makes good faith efforts to notify customers by providing
notices on their bank owned ATMs, using pre-printed receipts for
balance
inquiries advising of their limit inclusion, and by providing clear
prior disclosures, should be allowed to continue providing Overdraft
Privilege at their ATM without undue criticism.
Again, the Bank appreciates this opportunity to provide comment on the Interagency
Guidance on Overdraft Protection Programs. We trust this letter has been helpful.
If the Board or Staff has any questions, please feel free to contact the undersigned
at (210) 736-7660 or cputnam@jeffersonbank.com.
Yours very truly,
