WASHINGTON (8/13/10)—Although a recent consumer-protection proposal issued by the Federal Deposit Insurance Corp. (FDIC) obviously does not apply to credit unions, the head of the Credit Union National Association’s (CUNA’s) compliance department suggests credit unions pay attention to it for possible clues aobut their regulatory future. The FDIC has proposed that state-chartered banks under its jurisdiction be required to go farther in incorporating consumer protections in their overdraft protection programs than the Federal Reserve Board’s mandates in its overdraft regulations that go into effect on Aug. 15. The Fed’s Regulation E amendments, effective on July 1 for new accounts and Aug. 15--this Sunday--for existing accounts, require all banks and credit unions to obtain “opt in” consent by accountholders before charging fees for covering ATM and one-time debit transactions when there are insufficient funds in the account. An “opt-in” is not required by the Fed’s rules to cover a check or ACH payment, such as used for on-line bill paying services, when the account doesn’t have adequate funds. Regulation E implements the Electronic Fund Transfer Act. The FDIC is proposing that banks that rely on automated overdraft payment programs should establish procedures to address all types of overdrafts, including those triggered by checks and ACH transfers. The FDIC says that bank practices should:
*Promptly honor a customer’s request to decline payment rather than to cover the overdraft and charge a fee (that is, to “opt out” of an overdraft system); * Educate the accountholder about alternative overdraft payment products; *Monitor accounts and take meaningful action to limit overdraft use by a customer, including “giving customers who overdraw their accounts on more than six occasions during a 12-month period” less costly alternatives or eliminating overdraft protection on the account; * Institute “appropriate daily limits” on overdraft fees, whether by capping the amount of transactions subject to an overdraft fee or putting a dollar daily limit on the fee; and * Not process transactions in a manner designed to maximize the cost to consumers.
In approving these proposed supervisory guidelines for public comment, the FDIC board cited a 2008 study it conducted of bank overdraft practices and growing complaints it had received from consumers about overdraft fees. The agency notes that this proposal builds on a 2005 joint-agency guidance on overdraft programs (issued by NCUA in Letter to Credit Unions 05-CU-03) and is consistent with good risk management practices and oversight over third-party vendors. Bank examiners would use this guidance to evaluate the adequacy of a bank’s overdraft program. The FDIC is accepting comments until Sept. 27 on its proposed guidance. “Although this is being proposed by the FDIC, new requirements and additional restrictions on overdraft programs could very well eventually also apply to credit unions,” noted Kathy Thompson, CUNA’s senior vice president for compliance. “Many of the staff at the FDIC who are handling consumer protection issues are expected to be transferred to the new Consumer Financial Protection Bureau. And the Office of Thrift Supervision in April issued its own proposed ‘supplemental guidance’ to the 2005 joint agency guidance--and under the new regulatory reform law, OTS is being disbanded, so it’s very likely that the authors of the OTS overdraft guidance will end up at the CFPB,” Thompson said. “Many credit unions already address points raised in the FDIC’s proposal by educating members on alternatives, addressing over usage, and honoring opt-out requests,” she said. “However, having these standards subject to examiner scrutiny may result in rigid tests, a concern that has already been raised by the banking industry about the FDIC proposal. Thompson added, “Bankers have also expressed concern that while the FDIC says it is only targeting automated overdraft programs, there is nothing that really keeps examiners from also evaluating, for instance, whether banks that make case-by-case decisions are tracking how often the same customer is allowed to overdraft an account during the year. “And the FDIC didn’t just pull the ‘six-overdraft-fees-a-year’ limit out of thin air,”Thompson said. “This is a provision that appears in recent overdraft bills in Congress, as well as limits on daily overdraft fees and the order transactions are processed.” In a related development, earlier this week Wells Fargo Bank was ordered to repay $203 million in overdraft fees it assessed between 2005 and 2007 for processing transactions from “high to low,” meaning the largest dollar amounts were first handled. While financial institutions, including Wells Fargo, argue that processing the biggest payments first, which are often for mortgage and car loan payments, benefits consumers. a federal court in California found that the bank did this in order to generate more overdraft fees and failed to provide meaningful disclosure of how it processes transactions, and ruled that this violated California consumer protection laws. While the bank plans to appeal and there are other lawsuits pending on this same issue, federal regulatory pressure is already having financial institutions re-evaluate their processing practices.