…And How Bankers Have Reacted

Because there's nothing to be gained from arousing regulator interest, most banks that rely on either NSF fee and overdraft protection fee income prefer to remain mum. But the interagency guidance attracted a total of 149 comments, including from industry organizations, vendors, small banks and credit unions. Below are excerpts from some of the banker comments.

Ronald L. Magoon, Senior Vice President, Treasurer & CFO, Franklin Savings Bank, Franklin, N.H.:
"Unlike an extension of credit, we offer this opportunity to all customers. We currently pay checks written against insufficient funds for customers up to a pre-determined level. The customer incurs an NSF fee for each check that is paid against insufficient funds; however, by paying the check the customer avoids an additional returned check fee from the merchant, as well as the associated embarrassment. This program is a privilege program and if the customer does not honor their obligation with the Bank, outstanding balances must be charged off and accounts must be closed. This is much different from a credit decision where a review of the creditworthiness of each borrower is required with each extension of credit."

Steve Gramling, President and Chief Operating Officer, American State Bank, Jonesboro, Ark.:
"We strongly oppose the suggestion that institutions require consumers to 'opt-in' before providing overdraft services or, alternatively, permit consumers to opt-out of an overdraft program…Providing an 'opt-in' notice to consumers for overdraft programs is not supported by existing law…It would work great hardship on consumers and would result in consumers paying greater amounts for checks returned unpaid (due to merchant fees, for example)."

"…Technologically, an institution could not implement such a requirement [to alert consumers before a non-check transaction triggers any fees], and any such approach would require the expenditure of extraordinary sums. Second, because systems that permit access to funds do not operate in 'real time,' it is simply impossible to know whether, at the time of a withdrawal, a specific transaction will overdraw an account…In addition, even if a transaction occurs in real-time, other transactions, such as withdrawals by check, are not integrated into the 'real-time' evaluation of a consumer's funds on deposit, and it is impossible to know, at that time, if a transaction will overdraw an account, because of the processing of other deposits and withdrawals."

Lloyd G. Harris, Vice President and Assistant General Counsel, Legal Department, JP Morgan Chase & Co., New York:
"Generally, overdrafts are inadvertent rather than improper use of an account. In our experience approximately 45% of customers' accounts overdrawn for 30 days receive a deposit to eliminate the overdraft within 60 days from the date of the overdraft. A charge-off after 30 days and the associated negative reporting to credit bureaus that ensues would result in an unintended adverse consequence to these customers, penalizing them for innocuous account behavior."

"This proposed practice [the requirement to explain check clearing policies] suggests that institutions clearly disclose to consumers the order in which the institution pays checks or processes other transactions (e.g., transactions at the ATM or POS terminal). We strongly believe this practice should not be considered a best practice. The precise order in which checks and other items are paid can be highly technical and not easily explained to consumers. Institutions may consider a number of factors, including where the item was presented, whether the item was payable to the institution itself, the size of the item, or the item's serial number when determining payment order. In addition, this proposed best practice is inconsistent with the Uniform Commercial Code, which recognizes that an institution should be allowed to process items in any order it chooses."

Hollis G. Swift, Corporate Counsel, Compass Bank, Birmingham, Ala.:
"We prefer not to actively market a program for paying overdrafts to our customers. One might think the provisions of this Guidance would not apply in our case…It is not at all clear that this Guidance does not apply to every financial institution in the country, since every institution allows overdrafts on accounts with at least some of the features described. If the guidance applies as broadly as it seems to, then there will be no point in not actively advertising and marketing such a program, and this may lead more institutions to promote overdraft services to their customers."