By Thomas F. Dufner
At this writing, the pace of activity surrounding banks’ overdraft payment service programs had quickened. The FDIC had recently released its 256 page report on these products, gathering empirical data on the types, characteristics and use of overdraft programs operated by FDIC-supervised banks.
Proposed legislation governing overdraft programs is still on the table. That’s why we continue to encourage a call-to-action to defend overdraft services as viable and important products for banks and, more importantly, their customers. The remarkable acceptance and use of discretionary overdraft payment services is driven by customer demand and satisfaction, not banks’ greed or victimization of innocent consumers. We believe that once the FDIC report has been carefully analyzed, its findings will support the continued use and implementation of properly designed overdraft payment products.
Proposed legislation as described in house bill H.R.946, (the Consumer Overdraft Protection Fair Practices Act) along with proposed amendments to Regulation DD and Regulation AA, would establish more uniform governing standards for discretionary overdraft payment services. Strunk & Associates applauds these efforts and we are in full agreement that more uniform disclosures are in order. However, we take issue with some elements of the proposed actions and have addressed our concerns in a formal comment letter, submitted to the Federal Agencies of Governors of the Federal Reserve System. We’ve also summarized our position below.
As a starting point, let’s look at two areas you can address:
First, if you offer a discretionary overdraft payment service, make sure it has been designed and implemented properly and can withstand the scrutiny of examination. It’s wise to conduct an audit of your existing service before taking action to defend it. A qualified third party provider can assist with that.
Second, state your case and make your views known to important influencers and groups. If your customers want and appreciate the service, tell your state representatives, your elected officials in Washington, and your state trade associations. Present your case formally, in writing, and present it as a personal message from you. We don’t recommend a generic or form letter.
We have monitored the proposed amendments and legislation closely and we feel there are some fundamental issues that would create undue burden on both banks and their customers. Clearly, your message should reflect your position and your opinion. But feel free to also consider the talking points below.
Opting Out: For customers who decline to participate in overdraft protection, make opting out a simple process. The proposed opt-out disclosure requirement for overdraft services includes a complex list of options, some of which are cumbersome and confusing. While we have always recommended that clients offer customers an opportunity to opt out of any unwanted overdraft service, it shouldn’t be complicated – a toll free number, web site option, or speaking with a bank representative should suffice.
Timing of Opt Out: The proposed timing of opt-out notices is troublesome. The Proposal suggests that the institution include repeated and detailed notices of opt-out on each periodic statement and on a separate overdraft notice, each time an overdraft fee has been charged – whether or not the overdraft has been paid. This would be burdensome for both the consumer and the institution. Some simple text on the periodic statement inviting the customer to call if they wish to opt out would seem more practical. A more complex opt-out notice could be provided annually.
Partial Opt Out: The Proposal also creates a partial opt-out option where some transactions are included in the overdraft payment service and some are not. This could prove to be confusing and expensive. Regardless of the disclosure or education provided, it’s highly likely that consumers who “partially” opt-out, will think they will never be charged an NSF fee again. This will be an operational nightmare. We strongly support an all-or-none opt-out option for consumers.
Transaction Clearing Practices: We are certainly opposed to any financial institution manipulating their posting methods to increase fee income and we’ve counseled our clients against that. The federal agencies’ “FFIEC Guidelines for Best Practices”, in place for the past 2 years, already make clear that financial institutions should not do this. However, we’re concerned about any regulation that would require consumers to give prior consent to a specific method of clearing transactions. In our opinion, such a requirement would ignore the reality of how transactions are actually posted while providing little or no benefit to consumers.
Again, we support the effort to bring more uniformity to discretionary overdraft payment services. We have always recommended best practices and provided detailed and fully compliant sample materials so that our clients can implement and maintain their program(s) in a responsible manner. But our industry must proactively defend discretionary overdraft payment services that consumers have made clear they value and enjoy and are willing to pay for.
In summary, we’re optimistic that policymakers now have a better understanding of overdraft services, especially after the publication of the FDIC report. We’re also confident that – far from a consumer-banking fringe product – discretionary overdraft payment services are offered in nearly every financial institution in nearly every U.S. congressional district. Legislative concern with overdraft protection products continues to be largely driven by media coverage portraying all overdraft programs as predatory and exploitive. This grossly misrepresents these financial products and how the banking industry implements them. Thankfully, the general public remains supportive of these services.
Thomas F. Dufner is Regional Vice President of Strunk & Associates, L.P. serving New York State. He can be contacted directly at 908.689.6742 or via email at firstname.lastname@example.org. You can also refer to the Strunk web site at www.strunklp.com or call 800.728.3116.