Regulator's Overdraft Recommendations Pose Few Problems for Pennsylvania CUs

HARRISBURG, Penn. – Pennsylvania credit unions have gotten the go-ahead from the state Department of Banking to offer overdraft protection programs and to proceed – but with caution. Credit unions in the state recently received letters from A. William Schenck III, secretary of banking, that outlined recommended practices for overdraft or “bounce” protection programs. Schenck sent similar letters to other financial institutions. The letters noted the department’s position that state-chartered credit unions may offer overdraft protection programs in the same manner and under the same restrictions applied by NCUA to federal credit unions. However, Schenck went on to warn while an overdraft program may comply with all federal and state rules, “there is also a significant amount of reputational risk associated with an overdraft or `bounce’ protection program that is not administered in a manner that customers perceive as being fair.” He cited some examples: * A consumer receives no prior notice he is enrolled in a new overdraft protection plan until noticing an overdraft fee of $25 pus an additional $5 charge for every day the account remained overdrawn. * A consumer withdraws cash from her account using an ATM. Before the cash is dispensed, a notice appears on the screen stating “Account balance = $100. Available balance = $150. Are you sure you want to continue with the transaction?” The consumer chooses to withdraw $150. Three weeks later her statement includes an overdraft charge of $25 plus a daily charge of $5 for 15 days the account remained overdrawn for a total of $100 in service charges. * In some cases, consumers who would not qualify for an unsecured line of credit are given “overdraft protection” as part of a “totally free” checking account. “The practice may be considered predatory lending if the customers being targeted for this service are not otherwise entitled to such a `privilege’,” Schenck wrote. “Even though the examples listed above may not describe violations of federal or state law, one disgruntled consumer could publicize his negative opinion of the program and it may be difficult for you to justify the program in the `court of public opinion’,” Schenk noted. He outlined in the letter some practices the agency would like to see credit unions follow. Those steps include: * Describing the benefits of the program and allowing consumers the opportunity to refuse the service before being automatically enrolled. * Reserving the program for consumers who would otherwise qualify for a small, unsecured loan or those for whom the credit union would normally pay reasonable overdrafts. * Notifying the consumer when an account goes into overdraft status. * Evaluating each consumer enrolling in the program, setting reasonable limits on overdraft amounts and frequency, and notifying the consumer of those limits. * Guiding consumers caught in a cycle of overdrafts to debt counseling. `At this point, these and other points in the letter are considered recommendations. However, the letter also indicated examiners will assess the risk a credit union has accepted by offering an overdraft protection program. Deficiencies, Schenck added, will be reflected in the appropriate CAMEL component. Michael Wishnow, vp/communications and marketing at the Pennsylvania Credit Union Association, indicated the letter hasn’t stirred a lot of concern among Keystone State credit unions. “Not that many have overdraft protection,” he said. “”Of those that do, many offer it without a fee at all. Those that do charge a fee typically charge a one-time fee that’s less than or equal to what their NSF fee would be.” “My understanding of the secretary’s letter is that his concern is with overdraft protection products that sort of trap people. There are financial service providers out there that in addition to charging a one-time NSF fee are charging per day fees or are slipping overdraft protection into a personal loan with an unconscionably high rate,” Wishnow continued. “I’m not aware of any credit unions this (letter) is aimed at. I think by and large our credit unions do a good job of explaining the product. I don’t think they’re hearing any problems from their own members saying they didn’t understand the product.” Paul Wenzel Jr., spokesman for the Pennsylvania Department of Banking, says the department hasn’t received many consumer complaints – “but we expect we could get some. So we thought this was an appropriate time to set out what we think are best practices and take a proactive approach rather than waiting until complaints do come in. “Secretary Schenck was on a panel at a Pennsylvania Credit Union Association meeting back at the beginning of September when some of this type of stuff was discussed – check cashing, payday lending and bounce protection. I think he got a feel for it that day,” said Wenzel. – [email protected]