Federal Deposit
Insurance Corporation

Thank you for the opportunity to comment on a growing practice that I believe will eventually cause great reputation risk not only to banks that offer “Bounce Protection” type products but to all banks that will be painted by the same “greed” brush.

There is just one reason that so many banks have jumped on this product so quickly and that of course is the huge increase in fee income. Although bankers that have this product will extol how their customers love the product, their first comments are the huge amounts of money they are able to make. It is not uncommon to hear bankers talk about doubling, tripling, and even quadrupling their overdraft service charge income. The bankers will tell you that they are not encouraging their customers to overdraw their accounts with this product but how else could their overdraft income increase so dramatically (keeping the same per check fees) if customers aren’t doubling and tripling their overdrafts when they have “bounce protection”. Adding to this reputation risk are the seminars and bankers that encourage paying checks by largest amount first so the overdraft will be created sooner and thus more fees. Again, the bankers rationalize that the customers want their larger checks paid first as they are often for their mortgage, insurance, etc. but how can we as bankers know what the customer wants unless it’s on an individual basis and that of course is impractical. It would seem the fair and neutral way would be to pay by check number (lower numbers paid first) when more than one check is presented the same day.

The Guidance that overdraft balances generally should be charged-off within 30 days is reasonable. I doubt that these programs will cause any safety and soundness risks as historically the fees collected are far greater than the charge-offs. As I mentioned though, it seems that the reputation risk could be steep.

The Guidance asks that clear disclosures and explanations be given to consumers about the operation, costs, and limitations of overdraft protection services. It further asks that institutions be sure that their programs do not lead consumers to believe the service is a traditional line of credit, do not encourage irresponsible consumer financial behavior, and do not mislead consumers about the costs or scope of the overdraft protection offered. I seriously doubt that given the huge fee income increases under these programs that banks are going to monitor this aspect very much. They may give out cleverly worded disclosures, if required, but again, the purpose is to dramatically increase fee income!

With regard to the FTC Act, “Bounce Protection” programs could be very deceptive as each overdraft generates fees that must be paid within the 30 day deposit requirement most programs have. For lower income customers, this could mean that their next deposit would be used entirely to pay the overdraft fees, still leaving the account overdrawn. Or, possible even worse, the deposit could cover all the current overdraft (and extending the overdraft privilege for another month) but leave a very small

balance and thus the potential for even more overdraft fees. I doubt that a lot of customers will think of this compounding effect and certainly question whether banks will do any counseling in this regard.

With regard to Truth in Lending, it is hard for me to imagine how “Bounce Protection” programs are not an extension of credit. The bank is agreeing to pay overdrafts up to a certain amount and there is a fee for doing this, the overdraft fee. I fail to see the difference in an overdraft fee in this circumstance and an application and documentation fee, origination fee, etc. on a loan as the paying of the overdraft is no longer discretionary. Both are for a service rendered and should probably trigger Reg. Z disclosures.

On the marketing and communications with consumers, it is not likely that banks are going to present alternatives, such as personal lines of credit tied to checking accounts, as the huge fees for the overdraft programs will dwarf interest earned on a line of credit. With regard to advertising “free checking” in connection with “Bounce Protection”, banks will usually direct all their attention to the free aspect of checking as it is the overdraft protection program that allows them to eliminate regular service charges on checking accounts. The more “free” accounts they can get the more potential customers they have who will overdraw their accounts. It is my understanding that most overdraft programs automatically go on a checking account once the account has been opened for a certain period of time and meet the monthly deposit guidelines.

In summary, the huge fees generated by these overdraft programs will make it unlikely that banks will do anything but make it as easy as possible for customers to overdraw their accounts. The fees generated should be considered interest as they are collected under an agreement to repay within a time certain a credit extended by the bank to its customer. Banks that would otherwise not offer this type of program are being forced to offer them as they are losing customers to banks that are aggressively marketing “free” checking accounts and paying for this expense with fees from the overdraft programs.

Thank you once again for the opportunity to express my comments on the interagency guidance on overdraft protection programs. If adopted in its entirety, it would probably not make a dent on the way these programs are currently being handled.

Jack W. Strother, Jr.
President/CEO
The Commercial Bank of Grayson
P. O. Box 7
Grayson, Ky. 41143