HOUSTON – For years, John Floyd suggests, bank customers who know senior VPs by name and golf with the bank president have enjoyed overdraft privileges. If a preferred customer writes a check without enough money on deposit to cover it, the bank honors the check, Floyd says. The bank then makes a discrete call to the customer advising him he needs to replenish his account. Floyd, CEO of John M. Floyd & Associates, a consultant to financial institutions and financial services firms in the U.S. and Central America, figures many credit union members deserve the same courtesy. However, he stresses a credit union offering overdraft privileges needs to educate members about what's involved. He also distinguishes between overdraft protection and overdraft privilege. Overdraft protection involves a credit application, a credit check, and full Reg Z disclosure. "Overdraft protection has just not been popular with the consumer," Floyd says. "I would imagine less than 15% of consumer checking accounts have that product. There's huge consumer resistance. They don't want to fill out that application. They don't want the financial institution running a credit check." Floyd estimates more than 1,500 U.S. financial institutions out of approximately 18,000 offer overdraft privileges, the product he champions. With overdraft privilege, the member doesn't apply for anything. Members are given an overdraft privilege limit based on deposit patterns and account analysis. The privilege may extend to a member's ATM and debit cards. An overdrawn account must be restored to a positive balance every 30 days. "When we finish, all people in any given group get the same limit. There's no saying Sally gets one limit and Bob gets another. That's not what we do. We have a client that is a college credit union. Of course there's a dramatic difference between the students and the professors," Floyd says. "You use different limits for the groups. Interestingly enough, within each group consumers have almost identical patterns." The credit union then notifies members by mail of their limit. "The letter very carefully explains that, if the member uses that privilege, they will be charged the NSF fee they would normally have paid if the check had been returned. Until July, 2000, credit unions really couldn't pay a member negative because of the law," Floyd notes. "The key is to make the consumer aware of the program, how it works, and what it costs. Members respect the program. They stay within the parameters of the program. They're extremely appreciative of it. Sure, there have been a few chargeoffs, but people are basically very responsible." Floyd says the overdraft privilege actually saves the member money. An ordinary overdraft could be presented twice, doubling the NSF fee. The credit card company, retailer, landlord or other payee could also assess a charge. While every financial institution wants rich account holders, they are a tiny percentage of total account holders, Floyd says. It's underserved low- and moderate-income households who require help managing their funds and cash flow within the safety of a financial institution account. "Indeed, many Americans live from paycheck to paycheck," Floyd says. "Many do not have the desire or time to pursue a line of credit, nor would they qualify. As they struggle to pay bills or save anything at all, they need a financial institution that understands how they live and provides them with a financial safety net." Even so, he emphasizes, "Financial institutions must responsibly deploy such programs, educating and frequently reminding consumers of the terms and use of overdraft privilege programs – while avoiding messages that encourage consumers with low balances to overdraw their checking accounts." -

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