Overdraft Privilege Programs Safe From New Regulations.For Now

WASHINGTON – For now at least it looks as if overdraft privilege services will not come under any further regulation from the Federal Reserve Board. The Board requested comment about the design of overdraft or “bounced check” protection services (it received over 300), and covered the issue at a hearing a few weeks ago. Then on March 28 it said in a statement that for now these services will not be brought under Reg Z, which implements the Truth in Lending Act. While overdraft protection providers are breathing a sigh of relief, they know that the Fed and others will probably take a further look at the programs, so they want to get the word out about the good their programs do and why they are not lending products as some claim they are. Sam Davis, president of Strunk & Associates, which has been offering overdraft privilege service for years, said the media for the most part has been slamming the program without looking at the other side of the coin. “The New York Times cited a horror story about a consumer who wrote all these overdrafts and the bank paid all these overdrafts. He got sick and the bank attached him to his mother’s account. This is not the rule, but this is the kind of thing everyone is hearing about,” said Davis. Davis said a favorite bashing technique of the media is to highlight how overdraft systems often pay the largest check first, thus allowing it to fee all the smaller bad checks coming behind it. Davis said that’s a positive, not a negative. “Most consumers would much rather prefer their bank to pay the mortgage payment first for $1,500 or whatever than paying the $10 check to the florist,” said Davis. He said over the years, Strunk has determined that posting the highest dollar item first is in the best interest for the consumer because it is either for a mortgage, car payment or some other important payment. He said, however, if institutions don’t want to get into that area they can simply pay checks in ascending check number, lowest to highest. Davis said the benefits of overdraft privilege to consumers are not really debatable. The system can stop consumers from getting hit with double fees, one from their financial and one from their creditor; keeps their credit clean; can help them out when unexpected financial costs arise; avoids having their APRs increased from bouncing a check to a credit card company or other provider that raises fees after a missed payment. What’s really at the heart of the debate, said Davis, is how the programs are run. “One of the key elements is how the service is communicated, described, and disclosed to consumers,” said Davis. “A well-run program does not mislead or deceive people in its advertising and disclosure. There should be no `gotchas’ in fine print, with `goodies’ in large print.” Loans or Not Loans? However critics say terms of overdraft programs are exactly why they need further regulation, specifically as loan products. When you send members disclosures and you lay out terms, you are in effect creating a loan agreement, say critics. Elizabeth Renaurt of the National Consumer Law Center of Boston said at the Fed hearing that the programs should include APRs like are required for lending products. Davis says Strunk’s disclosures are not legally required disclosures, they are in addition to required “deposit” disclosures provided to consumers at the time of opening an account, or upon a triggering event such as a fee increase. He said disclosure is a bad word for describing the additional information Strunk is recommending clients supply their consumers, because they are not legally required. Isn’t some information on overdraft practices better than none, asked Davis. “Banks have for years been paying some NSFs and not others, without telling anyone why. What we want to do is simply describe the ground rules. We think that is much preferable than saying nothing, which banks have done forever,” said Davis. Davis said banks have been able to make discretionary decisions about which NSFs to pay and not to pay based on the deposit agreement with their customers. “That’s what we’re talking about with our disclosure, it is in addition to that deposit agreement. A separate loan agreement is not required.” One informed source said some overdraft privilege providers are tying overdraft privilege to free checking which is indirectly encouraging more bad checks by enticing low-income people to join, who are more apt to write bad checks. Davis said people who say that aren’t looking at the data. “In our experience looking at over 600 clients over 10 years, the average collected balance in the free checking portion is twice the balance in the non-free checking accounts. People who are attracted to free checking are not who the naysayers like to describe as low-income. They are people who have money and hate service charges.” Critics of overdraft privilege also say that credit unions should do their homework when selecting an overdraft provider firm because some firms also have collection subsidiaries or ties to collection companies. Thus when members default from an overdraft program, they tell the credit union they’ll go after them with their collection service, thus the firm is working both sides of the street. Davis said Strunk has no ties to collection services whatsoever but some firms do, though he was not ready to condemn those for that. “Let’s just say we’re sufficiently uncomfortable with this that we don’t endorse any collection firms,” said Davis. Davis said a well-run program won’t encourage people to be irresponsible, or encourage them to write bad checks as a matter of practice. The key to avoiding that is the language used in the “disclosures.” Strunk provided Credit Union Times with the disclosures it recommends its clients to use. The disclosures are copyrighted and Strunk asked Credit Union Times not to reproduce them or directly quote from them. Strunk’s disclosure language is rather strict and blunt. It states, among other things, that the only way the financial will consider paying the bad checks is if the person’s account has been open for a certain period of time; the account is in good standing; the consumer continues to make deposits as they have done in the past; the consumer is not in default on any loan to the financial; the consumer brings their account to a positive balance at least once every 30 days; the account does not have any liens or legal levies against it, and others. Even after all these caveats, it says the financial is still not required to pay NSF checks. He says these terms are clearly not loan term agreements and thus do not fall under Reg Z. Some would disagree. “Really who the Fed was looking at was those that don’t have the banking background, don’t understand the regulations and aren’t understanding what these programs can and can’t do,” said Davis. Strunk advises its consumers not to deviate from the disclosures Strunk recommends. Davis said Strunk provided the FDIC its disclosure language a few years back for review. He said they of course weren’t going to endorse the language, but they did tell Strunk they found no violations of law John Floyd, CEO of Floyd & Associates, another provider of the product, said much of the criticism is of very large financials who have computer models that determine which bad checks will be paid and which won’t. “Who gets paid shouldn’t be a secret. You can go to some of these big banks and no one can tell you how the model works. We encourage our customers to disclose every detail and let the consumer make the decision,” said Floyd. Floyd said one thing that’s often glossed over is the evaporation of float. “If you go to Wal-Mart and write a check, they scan it and funds are withdrawn the next day. It used to be five days before a check cleared. The Federal Reserve has done a fantastic job of eliminating float. This program helps those who depended on float,” said Floyd. Floyd said critics believe overdraft services are for uneducated, low-income consumers. Not true according to Floyd data. “At one of our credit unions that has a lot of participation, the average member is taking home $50,000 a year. The reality is low-income people aren’t the ones writing bad checks,” said Floyd. “The majority of consumers are making educated decisions. They want to save the late fee from the creditor and avoid a hit to their credit.” As for APRs, Floyd said if overdraft privilege programs should be required to have APRs, than why wouldn’t NSFs be required to be explained with an APR? He also noted that overdraft privilege is no different than getting a surcharge at an ATM. Instead of driving to a no-surcharge ATM, the consumer chooses to eat the fee for convenience. Some consumers are consciously deciding to incur an overdraft fee for the convenience of not being hit with a creditor fee. [email protected]