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AMERICAN
BANKERS ASSOCIATION
August 6, 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: Proposed Interagency Guidance on Overdraft Protection Programs
7 June 2004 Federal Register
Dear Ms. Johnson,
The American
Bankers Association (“ABA”) is pleased
to submit its comments to the Federal Reserve Board, Office of the
Comptroller of the Currency, Federal Deposit Insurance Corporation,
Office of Thrift Supervision, and the National Credit Union Administration
(“the Agencies’) on their proposed Interagency Guidance
on Overdraft Protection Programs. The proposed Guidance is intended
to assist insured depository institutions in the responsible disclosure
and administration of overdraft protection services.
The ABA brings
together all elements of the banking community to represent the
interests
of this rapidly changing industry. Its membership – which
includes community, regional, and money center banks and holding
companies, as well as savings associations, trust companies, and
savings banks – makes ABA the largest banking trade association
in the country.
Background.
The Agencies
have developed the proposed Guidance to address services offered
by banks and
other depository institutions commonly referred
to as “bounced-check protection.” These programs are,
in essence, a variation on the traditional practice of paying customer
overdrafts under certain circumstances. The proposed Guidance points
out that these newer programs differ from traditional practices in
that they are marketed to consumers and typically disclose to consumers
an overdraft limit. The proposal is intended to address aspects of
the newer programs that have raised concerns with the Agencies. The
proposed Guidance is divided into three sections: Safety and Soundness
Considerations, Legal Risks, and Best Practices.
Discussion.
ABA generally
agrees with much of the proposed Guidance. Many of the recommendations
are
appropriate and fair and will help ensure
that consumers understand overdraft policies and fees. Many reflect
ABA’s own suggestions to its members, provided in a variety
of media. This includes a March 31, 2003 letter to all ABA members
that dealt exclusively with bounced check programs. ABA also developed
with Alex Sheshunoff Management, a provider of bounced check programs, “Overdraft
Protection: A Guide for Bankers,” a brochure that explains
such programs, identifies potential risks, and offers “best
practices.”
While we generally
agree with the proposed Guidance, we believe that the agencies’ Guidance will only be useful so long as
it is not misinterpreted as mandatory or that failure to comply with
one or more of the guidelines is necessarily deemed to be unfair
or deceptive. This should be made clear in the final Guidance. In
addition, we suggest that the Agencies address several internal inconsistencies
and improve the clarification of the distinctions among the various
practices and programs so there is no question that the Guidance
addresses only programs that disclose a discretionary limit. The
Guidance should also recognize the discretionary nature of overdraft
payments and not classify discretionary limits as “commitments” nor
require the disclosure of instances when the overdraft will not be
paid. We have also made suggestions to specific sections of the Guidance.
Introduction of Proposed Guidance.
The description
of “overdraft protection program” is
confusing and should clarify that the Guidance only applies to programs
that are “promoted” and disclose a specific discretionary
limit. The Introduction of the proposal strongly suggests that the
Guidance is intended to only cover certain types of “overdraft
protection” programs. It states:
Unlike the discretionary accommodation traditionally provided to
those lacking a line of credit or other type of overdraft service.
. . these overdraft protection programs are marketed to consumers
essentially as short-term credit facilities, and typically provide
consumers with an express overdraft limit that applies to their accounts.
(Emphasis added.)
The proposal also lists a variety of characteristics attributable
to such programs, including that the banks inform consumers of the
feature, including the discretionary limit and promote its use. The
Agencies also express their concerns that the program is promoted
as credit; that some institutions appear to encourage overdrafts;
and that promotions may lead consumers to believe that overdrafts
will automatically be paid when the bank retains discretion not to
pay overdrafts. Thus, it appears that the Agencies are attempting
to address overdraft protection programs that are promoted and for
which the discretionary limit is disclosed.
However, the Guidance could apply to traditional practices, albeit
automated, of paying overdrafts on a discretionary basis where the
practice is not promoted nor the discretionary limit disclosed. For
example, the proposal includes as a characteristic of a covered overdraft
protection program a disclosure that the bank may pay an overdraft,
but has no legal obligation. This is standard deposit agreement language
required in order for the bank to pay an overdraft. That a flat fee
is charged for each overdraft and is the same as if the item were
not paid would also indicate that the program is covered. Again,
this is common practice for all institutions.
The Agencies
should make clear that the Guidance refers only to those programs
that are
promoted and for which the discretionary
limit is disclosed, which appears to be their target. While many
banks have automated the traditional practice of paying overdrafts
on a discretionary basis, it is a little different from providing
the same courtesy manually, except that it is more efficient and
less subjective. There appears to be little complaint or concern
about these practices to justify imposing new unnecessary regulatory
burdens. In any case, the Guidance should not focus on whether the
program is “automated” or not. Such a distinction is
artificial, confusing, and meaningless.
Safety and Soundness Considerations.
We agree with
the Agencies that institutions should address the operational and
other risks
associated with paying overdrafts. We
also agree with the suggestion that management practices include
the establishment of “express account eligibility standards.” However,
the Agencies should clarify that such standards need not include
typical underwriting standards where “creditworthiness” is
evaluated. While it varies from bank to bank, whether or not they
promote their program or disclose the discretionary limit, banks
rely on a variety of criteria such as the average daily balance,
the age of the account, whether regular deposits are being made,
for example. Criteria are not, for example, based on whether the
customer has filed bankruptcy or not repaid a loan, as the Guidance
suggests. No underwriting is done. Decisions are not based on external
influences. No credit reports are reviewed. Otherwise, overdrafts
would only be paid for accountholders with good credit history. The
rest would have to suffer the adverse consequences of bounced checks.
The Agencies
also recommend that institutions “monitor these
accounts on an ongoing basis and be able to identify individual consumers
who may be excessively reliant on the product or who may represent
an undue credit risk to the institution.” We agree that banks
should monitor for any undue risk to the institution and for abuses.
We object, however, to the recommendation that the bank monitor accounts
to identify those who are “excessively reliant” on the
product. “Excessively reliant” is too vague to provide
guidance. Moreover, while large institutions that do not promote
or disclose their discretionary limits monitor accounts to detect
large overdrafts as a matter of safety and soundness, they do not
flag low dollar overdrafts or frequency of overdrafts. As a practical
matter, these factors do not pose safety and soundness issues. To
require such monitoring would require extensive new systems and is
not justified, given that low dollar overdrafts generally do not
pose safety and soundness issues. If the suggestion is retained,
it should make clear that it is only necessary if there is a valid
safety and soundness issue.
The proposal
includes the suggestion that banks establish specific timeframes
for repaying
the overdraft balances. The Agencies should
make clear that “Due immediately,” “Due upon receipt,” and
similar language is acceptable. This is a common requirement.
The proposal
notes that overdraft balances should generally be charged off within
30 days
from the date of the first overdraft. We strongly
recommend that the time be extended to at least 60 days. This will
benefit consumers. Once the balance is charged off, banks report
the negative information to consumer reporting agencies. This may
mean that the consumer will have difficulty in opening an account
in the future. However, a large percentage of overdrafts are cured
between 30 and 60 days after the date of the overdraft. Allowing
a little extra time will mean fewer consumers will suffer adverse
reports. Moreover, the bank is more likely to be repaid: the consumers’ incentive
to repay decreases once the adverse information has been reported.
The proposal recommends procedures for suspension of overdraft services
when the customer no longer meets the eligibility criteria and supplies
as examples bankruptcy or default on another loan. As discussed earlier,
these are not and should not be typical criteria for determining
eligibility for overdraft payment. Otherwise, only the most creditworthy
customers would qualify. Moreover, banks may not know that the customer
has filed bankruptcy or defaulted on a loan, as credit reports are
not reviewed, neither initially nor periodically.
The proposal
provides, “When the bank routinely communicates
the available amount of overdraft protection to depositors, these
available amounts should be reported as “unused commitments” in
regulatory reports.” We strongly object to this language and
recommend its deletion. The discretionary limits are neither “available” nor “commitments,” either
by agreement with the customer or under the proposed Guidance.
Banks choosing
to pay overdrafts generally reserve the right not to pay and under
a variety
of circumstances, do not pay. Unlike overdraft
lines of credit, the bank has no obligation to pay an overdraft.
Indeed, ABA has worked with the industry to ensure that banks are
not misleading consumers into believing that overdrafts will “automatically” be
paid. Classifying them now as “commitments” sends the
wrong message and will confuse banks about their obligations. If
they are commitments, must the bank pay? May the bank then inform
customers that certain overdrafts will automatically be paid?
This message
contradicts the proposed Guidance, which insists that banks must
make clear
to customers that the bank is not promising
to pay. It recommends, “[I]f payment of overdrafts is discretionary,
information provided to consumers should not contain any representations
that would lead a consumer to expect that the payment of overdrafts
is guaranteed or assured.”
Best practices.
Avoid
promoting poor account management. We agree with this suggestion.
Fairly
represent overdraft protection programs and alternatives.
This section states:
When informing consumers about an overdraft protection program,
inform consumers generally of other available overdraft services
or credit products, explain to consumers the costs and advantages
of various alternatives to the overdraft protection program, and
identify for consumers the risks and problems in relying on the program
and the consequences of abuse.
The provision
should make clear that the bank need only inform consumers about
alternatives
the bank actually offers. “[T]hat the bank
offers” should be added after “credit products.”
In addition,
the provision should make clear that “informing
consumers about an overdraft protection program” does not include
a notation on a statement of the discretionary limit. Adding such
extensive information on the statement will obscure more important
information.
Clearly
explain discretionary nature of program. We agree that if
payment of overdrafts is discretionary, information provided to consumers
should not contain representations that would lead a consumer to
expect that the payment of overdrafts is guaranteed or assured. Our
communications to banks have so recommended.
However, we disagree that the bank should describe the circumstances
in which the institution would refuse to pay. There are numerous
and ever-changing reasons why the bank may refuse to pay. Many banks
do not disclose those reasons because they do not want fraudsters
to take advantage of the system. Moreover, requiring disclosure means
that even though there may be a justified reason not to pay, the
bank will be obligated to pay if that reason was not specifically
disclosed. Furthermore, listing the reasons for not paying implies
a commitment to pay absent one of those enumerated reasons. This
means that payment is no longer discretionary, implicating other
regulations such as Regulation Z.
Clearly
disclose program fee amounts. We agree with the recommendation
to clearly disclose the dollar amount of any overdraft protection
fees and any interest rate or other fees that may apply.
Explain
check clearing policies. We strongly object to the recommendation that
banks “[c]learly disclose to consumers the order in which
the institution pays checks or processes other transactions, (e.g.
transactions at the ATM or point-of-sale terminal).” This section
should be deleted.
The order of
payment is a very complex system that is virtually impossible to
explain in
a manner understandable to most consumers.
The explanation could take several pages. In a system with multiple
and varied payment mechanisms, it is not simply a question of paying “high
to low.” One bank reported some 29 potential scenarios. Some
items take priority and must be “force posted.” For example,
electronic transactions generally take priority because they are
assumed to settle the next day. Even among electronic payments, priority
may vary. For example, banks may have to pay a debit card transaction
that needed no prior approval because it fell below the required
threshold. Moreover, even banks that rely on automated systems will
still review transactions manually. In those cases, a bank may give
priority to important transactions such as mortgage and insurance
premium payments. Finally, many banks are conscious that fraudsters
attempt to learn the bank’s system in order to use the knowledge
to commit fraud. For these reasons, many banks disclose that they
pay items in the “order we choose” to avoid liability
and ensure necessary flexibility.
We see no value in trying to explain a complex system that customers
will simply not understand or be able to use. Even if they understand
the order, they cannot know when a check or other transaction will
actually reach their bank.
Illustrate
the type of transactions covered. The proposal notes
that banks should clearly disclose that overdraft protection fees
may be imposed in connection with transactions such as ATM withdrawals,
debit card transactions, etc., if applicable. We strongly agree with
this recommendation. It is critical that consumers understand that
a transaction may be approved under these circumstances, a message
we have relayed in our communications to members.
Program Features and Operation.
Provide
election or opt-out of service. The Agencies suggest that banks “[ob]tain affirmative consent of consumers to receive
overdraft protection.” We strongly recommend deletion of this
recommendation for the sake of consumers.
Whether or not
specifically informed, many consumers are aware, based on experience,
that their
bank may pay overdrafts on an occasional
basis. Indeed, consumers with long-standing relationships and little
history of overdrawing, expect and want the bank to pay an accidental
overdraft. This represents most customers. Aware of the bank’s
practice, they may glance at and then discard a notice to opt-in,
on the basis that they believe that they are already covered for
that occasional overdraft, or they may mistake the program for an
overdraft line of credit that they do not need or want. They are
then furious when they inadvertently overdraw and the bank returns
the check. A typical response is, ”Why did the bank return
the check? I have been a good customer for years and have rarely
overdrawn. In the past they paid them when I made a mistake.” We
believe that a system of opting in, particularly if the final Guidance
covers banks that do not advertise their policies or disclose the
discretionary limit, will be detrimental to consumers.
Alert
consumers before a non-check transaction triggers any fees. The proposal
suggests
that banks alert consumers “where feasible” that
completing a transaction using means other than a check will trigger
a fee. We agree, assuming that “where feasible” is retained.
In many cases, especially with point-of-sale and ATM debit card transactions,
it is not always possible to know whether a fee will be assessed.
For example, if a point-of-sale transaction amount is under the approval
threshold, the bank will not know of the transaction nor that the
account will overdraw. Even if known, it may not be operationally
possible to relay the information.
Prominently
distinguish actual balances from overdraft protection funds availability. While
we generally agree with this concept, it
may not be feasible in some cases. Our understanding is that in order
to make the additional amount available, in some cases, e.g., at
an ATM, the system must combine the actual funds available and those
funds available through the overdraft program. Accordingly, the final
Guidance should insert “where feasible” after “by
any means.”
Consider
daily limits. The proposal recommends that banks consider
limiting the number of overdrafts or the dollar amount of fees that
will be charged while continuing to cover overdrafts up to the limit.
This is acceptable so long as the bank may do so on an individual
account basis rather than necessarily as a strict policy. Most banks
today may limit fees or waive them when multiple overdrafts occur
as a single incident. However, consumers can abuse such policies.
Accordingly, it should be clear that banks may use their discretion
and make individual decisions.
Monitor
overdraft protection program usage. The proposed Guidance
advises banks to monitor excessive consumer usage and inform consumers
of alternative credit arrangements. As noted earlier, many large
institutions that do not promote or disclose their discretionary
limits monitor accounts to detect large overdrafts as a matter of
safety and soundness. However, they do not flag low-dollar overdrafts
or frequent overdrafts. Setting up a system to monitor would pose
significant costs and effort for banks with millions of accounts,
for the sake of the small percentage who overdraw frequently. Accordingly,
if the final Guidance includes institutions that do not promote or
disclose the discretionary amount, it should exclude those institutions
from this provision.
Conclusion.
The ABA appreciates the opportunity to comment on this important
proposal. We believe that generally, the proposed Guidance moves
in the right direction, so long as it is clear that it is should
not be interpreted or applied as a requirement. We agree with many
of the specific proposed suggestions. However, we strongly recommend
that the final Guidance apply only to programs that are promoted
and disclose a specific discretionary limit. In addition, the Agencies
should emphasize the discretionary nature of most overdraft payments
and not confuse the matter by labeling discretionary limits as commitments
or requiring disclosures explaining when payments will not be paid.
Regards,
Nessa Eileen Feddis
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