January 27, 2003
Jennifer J. Johnson
Secretary of the Board
Board of Governors of the Federal Reserve System
20th Street & Constitution Avenue, NW
Washington, DC 20551
RE: Docket No. R-1136 ? Official Staff Commentary to Regulation
Z; Treatment of ?Bounce Protection?
Dear Ms. Johnson:
The Conference of State Bank Supervisors (CSBS) is pleased to have
the opportunity to comment on the Board of Governors of the
Federal Reserve System?s (Board?s) proposed amendments (Proposal)
to the official staff commentary to Regulation Z, which implements
the Truth in Lending Act (TILA). CSBS is the national organization
of state officials responsible for chartering, regulating and
supervising the nation?s 6,500 state chartered commercial and
savings banks and over 400 state-licensed branches and agencies of
foreign banks.
The Proposal clarifies several key issues surrounding the
application of Regulation Z, such as rules governing the issuance
of credit cards and requirements associated with designated
closed-end mortgages. The Proposal also specifically requests
information on overdraft protection programs, often called ?bounce
protection? products that are offered by a growing number of
financial institutions. While the Proposal addresses several
important issues, CSBS has chosen to focus on the request for
information surrounding bounce protection programs.
Bounce protection products can vary widely in terms of the fees
charged and the amount of discretion the institution exercises
when determining whether to pay an overdraft. The degree of
variation in fees and policies makes it challenging to make
categorical statements. CSBS is continuing to monitor and collect
data on bounce protection products and would be happy to provide
additional information as appropriate. The following discussion is
based on various bounce protection products that have been
reviewed by numerous state banking departments during the course
of supervising state chartered financial institutions.
Field Observations
Product Terms & Practices
When an item that overdraws a consumer?s account is presented to a
bank that offers a bounce protection program, a (NSF) check, the
institution will generally charge its customer the standard
insufficient fund (NSF) fee, determine whether to pay the
overdraft, and require the customer to promptly bring their
account back to a positive balance. Some bounce protection
products impose a $5.00 per day fee, in addition to the NSF
charge, until the account is brought to a positive balance.
Bounce protection plans are generally not offered as credit lines.
Rather, when triggered, the institution generally forwards a
notification/announcement to the customer, phrased in a variety of
ways, that advises the customer that the bank ?will? or ?generally
will,? pay one or more NSF items. Such announcements also
generally make clear that the institution is not legally required
to pay NSF items on the account.
Bounce protection products differ from traditional credit products
because they are not evaluated and approved based upon a credit
application submitted by the customer. In addition, the customer
is generally not required to sign an agreement to repay the
financial institution, with the exception of the bank?s deposit
account agreement which typically states that the customer is
responsible for all items paid on and charges applied to his or
her account.
Several institutions have included in their notices certain
criteria that customer must meet (a ?good standing? requirement)
in order for an insufficient item to be paid. Some institutions
offer bounce protection programs that reserve to the bank broad
discretion in determining which NSF items they will pay. Other
institutions offer programs with more structured standards
governing whether to pay the item if the customer meets
established conditions and policies.
CSBS believes that although a bank may provide a written document
to the consumer that states it is not legally required to pay
insufficient items, if the consumer has reason to assume, based on
information received from the bank, that an overdraft will be paid
(and indeed that is the bank?s general practice), there exists an
agreement or contract between the two parties and the bank should
have limited discretion in paying items if the customer meets
previously disclosed eligibility criteria.
In other words, CSBS would suggest evaluating several related
factors in making a determination as to whether a program is
?discretionary? or ?non-discretionary?, including the
documentation that is provided to consumers regarding the program,
advertisements about the product, oral communications made by bank
employees, and a historical review of the bank?s actual practices
when administering the program. Determining whether an agreement
exists cannot be achieved simply based on the original account
document provided to the consumer. If the product is deemed to be
non-discretionary, then the agreement would be considered a
contract based on most state codes reviewed.
Public Policy Issues - Applicability of Regulation Z
Numerous state banking departments have issued guidance on bounce
protection programs (also referred to as overdraft privilege
programs) and we have attached several for your review. One of the
issues that has concerned numerous state banking agencies is the
appearance that some bounce protection programs are offered in a
manner designed to specifically avoid the disclosure requirements
of Regulation Z, while charging what some would consider
exorbitant annual percentage rates. As various states have issued
specific guidance or opinion letters, some institutions have
modified their product in a manner that appears to intentionally
avoid coverage of Regulation Z.
Product Marketing
Bounce protection products are often marketed to bank customers by
indicating that their checking accounts are automatically
pre-approved for an ?overdraft limit.? The use of such language
distinguishes bounce protection programs from overdraft lines of
credit and the ad hoc, discretionary practice of paying NSF items
for established customers. Informing customers that they are
pre-approved for a certain overdraft limit could result in some
customers viewing the bounce protection product as an ongoing
financial management tool that could be very costly if used
repeatedly. Additionally, some of the marketing techniques used in
connection with bounce protection programs can be viewed as
welcoming or encouraging overdrafts - and the fees associated with
processing them.
Other Areas of Concern
The following additional concerns have been raised during CSBS
policy discussions by multiple state banking departments:
-
In the majority of
the banks reviewed, there were no controls on how many times an
accountholder could access the bounce protection product. For
example, an accountholder can access the overdraft product for
$400 on the 20th of each month and pay it back on the 1st when
he gets paid. Therefore, a consumer may be able to use the
product as a regular source of cash as he runs short each and
every month. This could lead to a type of ?debt treadmill?
situation. The customer is in a situation where he or she may
become obligated for more in fees than the original principal
amount.
-
Similarly, no cooling
off period exists following repayment of an overdraft during
which no overdrafts would be paid. This could increase the
likelihood that a customer would consciously resort to the
product to pay for ordinary day-to-day expenses. Accordingly, is
this product similar to a payday loan, with the same outstanding
consumer protection issues and safety and soundness risks?
Should management address the risks involved in bounce
protection, such as transaction, reputation, and compliance?
Should the institution identify contingent liability risks if
they were sued under the program? Should the bank?s Board of
Directors be informed of the program and its possible contingent
liabilities?
-
If the bounce
protection product is similar to a ?payday loan? and, as the
Board clarified after soliciting comment in 2000, a ?payday
loan? meets the definition for credit for purposes of TILA,
should similar treatment and standards apply to bounce
protection programs? CSBS would suggest that the Board solicit
input on methods of strengthening the regulation by inserting
prohibitions of designing credit products with the specific
intent of evading the consumer protections dictated by that
regulation.
-
If a bank changed its
method of paying checks from a low to high sequence to a serial
number order with the sole purpose of increasing their fee
income, should it have any affect on its CRA rating?
-
If a financial
institution has discretion over which overdraft items are paid,
how does the institution avoid the appearance of bias and
preferential treatment prohibited under Regulation B?
-
If a bank does not
pay an overdraft because a consumer is not deemed, ?in good
standing,? under what circumstances might the bank need to take
into account the Fair Credit Reporting Act?
-
By forwarding
marketing material suggesting ?Write a check for more than is in
the bank ? the check may be covered!? the bank seems to
encourage account holders to write checks when they know the
funds are not in their account, which is technically a criminal
activity. Could the bank be held responsible for such a charge,
especially if it denies the overdraft? What are the implications
to safety and soundness of this type of program?
Analysis
In determining whether a product falls within the purview of
Regulation Z, a bank must evaluate several factors, including
whether there exists a preexisting agreement between the
institution and the customer and whether the product offered is an
extension of credit, subject to a finance charge.
Additionally, if the financial institution is assessing the same
fee to those individuals with bounce protection as to those
without, section 226.4(b)(2) of regulation Z would exclude the fee
from the definition of a finance charge. If, however, the
financial institution charges a per diem rate until the item is
paid by the consumer, the product would meet the definition of a
finance charge, and accordingly, would trigger the disclosures
under regulation Z.
CSBS has received requests for clarification on the issue of
whether bounce protection falls within the disclosure requirements
of Regulation Z. Several state commissioners have also requested
legal opinions form their local Federal Reserve Bank or regional
FDIC office. CSBS applauds the Federal Reserve Board for seeking
information about bounce protection programs in order to consider
whether and how Regulation Z may apply to such programs. CSBS
seeks such guidance from the Reserve Board in order to ensure
uniform implementation for all financial institutions.
More specifically, CSBS requests the Board?s interpretation of the
treatment of bounce protection programs that allow overdrafts to
occur from ATM withdrawals or debit card payments. In addition,
how would the Board?s Regulation Z resolve opposite
interpretations between sections 226.4(b)(2) and 226.4(c)(3) in
the case where a bank may not have a discretionary overdraft
policy, but meets the definition of a finance charge because of
per diem charges.
Conclusion
CSBS believes that cooperative efforts between federal and state
authorities to ensure that financial institutions fully understand
compliance requirements, especially in regard to consumer
disclosures, will have a greater impact than individual efforts at
either the state or federal level. We would welcome opportunities
to work with the Board and the other relevant federal regulatory
agencies, to develop joint initiatives and guidance in this area.
Thank you for your consideration and we invite you to call on us
if we can provide additional information.
Best Personal Regards,
Neil Milner
President and CEO |
