Financial Regulators Distribute Overdraft Guidance at Dem's Prodding; Sarbanes Compares Service to Payday Lending

WASHINGTON – The Federal Financial Institutions Examination Council agencies, including NCUA, jointly issued proposed guidance recently on the handling of bounce protection services. The credit union industry has seen a number of vendors courting credit unions to their overdraft protection products in recent years, including Strunk & Associates, John M. Floyd & Associates, and Pinnacle Financial Strategies. The guidance was prompted by concerns from all sectors, including institutions regulators and the public about the marketing, disclosures and implementation of bounce protection services, according to a joint release. One lawmaker in particular, Senate Banking Committee Ranking Member Paul Sarbanes (D-Md.) has expressed particular interest in the issue. The senator penned a letter earlier last week asking the Federal Reserve Board to clarify that overdraft protection programs are covered by the Truth in Lending Act. “Continued inaction by the Board on this issue, or a decision to place bounce protection under the Truth in Savings Act, flaunts Congressional intent and hurts consumers,” he wrote. “In enacting TILA, Congress intended to promote meaningful disclosures about the cost of credit.” Sarbanes continued. “Uniformity in disclosure is intended to help consumers compare costs and to promote competition among financial institutions. Bounce protection is the banking industry’s foray into the extension of high-cost short term credit.” He compared it to payday lending “with fewer disclosures.” However, NCUA and the other federal financial institutions regulators’ proposed guidance stated that a regulatory exception to TILA was created for the occasional ad-hoc overdraft payments that are without written agreement, but its application to “automated and marketed overdraft protection programs could be reevaluated in the future.” The guidance also said, “Even where the institution agrees in writing to pay overdrafts as part of the deposit account agreement, fees assessed against a transaction account for overdraft protection services are finance charges only to the extent the fees exceed the charges imposed for paying or returning overdrafts on a similar transaction account that does not have overdraft protection.” Sarbanes pointed to a “written agreement” loophole, which he termed an “abuse” of Regulation Z, which implemented TILA. “The financial institutions argue that, since they reserve the right not to pay an overdraft, TILA does not apply.” In fact, though, “These statements are often contradicted by advertising that flatly tells consumers that the financial institution will cover their bounced checks.” The joint proposed guidance is aimed at ensuring adequate policies and procedures are in place regarding credit, operations, and other risk areas associated with bounce protection programs. The proposal also emphasizes that institutions involved in this service must follow all federal and state laws and provides industry best practices. The best practices include avoiding promoting poor account management and clearly disclosing program fee amounts. The proposal is out for a 60-day comment period. The Federal Reserve Board’s Consumer Advisory Council is scheduled to address the issue of overdraft protection services at its June 24 meeting. Other agenda items include foreign bank remittances and access to financial services by new immigrants, the Economic Growth and Regulatory Paperwork Reduction Act, and Community Reinvestment Act Proposed rules. E Federal Credit Union President and CEO Ken Bordelon serves on the Fed’s CAC, which provides advice to the Fed Board on its responsibilities when the Fed seeks it. [email protected]