CUNA Comment Letter
Overdraft Protection Guidance
August 6, 2004
Ms. Becky Baker
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314-3428
Dear Ms. Baker:
The Credit Union National Association (CUNA) appreciates the opportunity to comment on the interagency proposed guidance intended to assist financial institutions regarding the responsible disclosure and administration of overdraft protection services. CUNA represents approximately 90 percent of our nations nearly 9,400 state and federal credit unions. The following comments were developed by CUNA with input from credit unions, credit union leagues, and CUNAs Consumer Protection Subcommittee.
Summary of CUNA's Position
- CUNA generally supports the issuance of the guidance that we believe will promote consumer understanding and responsible use of overdraft protection programs. However, we do have a number of concerns, as described below.
- The guidance suggests that overdraft balances should be charged off within 30 days from the date the overdraft occurred. We believe this time period is too short, which would be detrimental for both credit unions and their members.
- We disagree with the suggestion in the guidance that overdraft balances should be reported as loans on the Call Report, that losses should be charged off against the allowance for loan and lease losses, and that the amount of overdraft protection should be reported as unused commitments, which would necessitate risk-based net worth treatment for these overdraft balances. Overdraft balances are not loans and they should not be considered unused commitments since the payment of the overdraft is discretionary on the part of the credit union.
- We agree that many of the best practices in the guidance should achieve the goal of minimizing consumer confusion, while reducing potential risks to financial institutions. However, we would appreciate clarification that it would not be expected that all overdraft protection programs should include all of the best practices. It is unlikely any existing program includes all of these practices, and it would simply not be feasible to establish a program that would include all of them. We also have specific concerns with a few of the best practices included in the guidance.
- CUNA supports the substance and format of the information presented in the Legal Risks portion of the guidance.
CUNA generally supports the issuance of interagency guidance on this important topic. We believe such guidance for financial institutions on the marketing, disclosure, and administration of overdraft protection programs will promote consumer understanding and responsible use of these programs, and will minimize financial institution reputational and other risks. However, we do have concerns regarding the guidance, as outlined below.
Safety and Soundness Considerations
CUNA supports the majority of the provisions in the Safety and Soundness Considerations section of the proposed guidance. We agree that institutions offering overdraft protection programs should establish account eligibility standards and well-defined dollar limit decision criteria. We also agree that institutions should periodically monitor these accounts to identify members who may be excessively reliant on the service, and disqualify them from future use if necessary.
With regard to the provisions of the guidance addressing safety and soundness considerations, we are concerned with the suggestion that overdraft balances should be charged off within 30 days from the date the overdraft occurred. We believe this time period is too short. The NCUA rules regarding overdrafts that apply to federal credit unions, as outlined in 12 CFR § 701.21(c)(3), allow credit unions to set a time period of up 45 calendar days for members to cover an overdraft, either by depositing funds into their account or by obtaining a loan from the credit union. This 45-day time period is inconsistent with the proposed guidance that would impose a 30-day charge-off period.
Not only is the 30-day charge-off period inconsistent with NCUA rules, but 30 days is an insufficient time period for a number of other reasons. Depending on the credit unions policy, the overdraft may be a relatively large amount, which would justify allowing the member more than 30 days to cover the overdraft. A time period of more than 30 days would also provide more flexibility for those members who may have irregular income streams or who are paid on a monthly or less frequent basis. Also, many individuals monitor their account activity on a monthly basis when they receive their account statements. These individuals may not be aware that they have overdrawn their accounts until they reconcile their account activity with their statements, which may be 30 days or more after the overdraft occurs.
For these reasons, imposing a 30-day time period will have an adverse impact on members, who will suffer consequences if the charge-off is reported to the credit bureaus. Allowing a longer time period should decrease the likelihood and frequency of the charge-offs and the need to report them to the credit bureaus.
Credit unions believe it is not necessary to impose or suggest any specific time period, especially in those situations in which the credit union is diligent in contacting the member and the member is being responsive to requests to resolve these overdraft issues. Being patient under these circumstances will provide significant benefits for the members, without compromising safety and soundness concerns.
If the federal financial institution regulators decide to include a charge-off time period, we urge the regulators to clarify that financial institutions may make exceptions if they make reasonable judgments that additional time periods would be justified, especially under circumstances in which institutions are working with consumers to cover overdrafts in a timely manner. Although we recognize that amounts received after a charge-off may be reported as a recovery, it would be preferable for both credit unions and their members, as described above, if the charge-off period was extended beyond the 30-day period that is described in the proposed guidance.
The guidance also suggests that overdraft balances should be reported as loans on the Call Report, that losses should be charged off against the allowance for loan and lease losses, and that the amount of overdraft protection should be reported as unused commitments. We do not believe overdraft balances should be treated as loans, with the losses being charged off against the allowance for loan and lease losses. The significant features of an overdraft protection program are that a financial institution has the discretion to pay an overdraft, there is no contractual agreement between the member and the credit union, and there is no underwriting when the overdraft is accessed. This differs from similar products that are loans, such as overdraft lines of credit in which there is an agreement and an underwriting process.
It is also inappropriate to consider an overdraft balance as a loan loss since there generally is a relatively short time period that the account is overdrawn prior to the charge-off, as compared to other types of loans. It would be an unnecessary burden to estimate the loss of the overdraft that is then written off within a short period of time.
We also disagree that the amount of overdraft protection should be considered an unused commitment, which would impact the net worth calculations required under the prompt corrective action rules. Again, providing overdraft protection is discretionary on the part of the credit union. Although we recognize that some overdraft protection programs may be more automated than others regarding the criteria used to determine whether to provide the protection, the credit union always has the discretion as to whether to provide the service when a member overdraws their account.
This discretionary feature means that providing the service is not a commitment on behalf of the credit union and, therefore, should not be considered an unused commitment. Overall, we believe it would be preferable to consider amounts advanced under the overdraft protection program as receivables and any write-offs of these amounts should be considered operational expenses that are expensed on a monthly basis.
CUNA supports the concept of best practices, which provides examples of practices currently observed in the industry that are beneficial to both financial institutions and consumers. Also, the issuance of best practices will allow financial institutions to select and adhere to the practices that fit their programs, without imposing additional regulatory burden.
We also believe these best practices will encourage financial institutions offering overdraft protection services to clearly disclose the nature of their services. Specifically, we support the inclusion of the recommendation for financial institutions to permit consumers to opt-out of overdraft programs and clearly explain the available opt-out methods. We also support the inclusion of the recommendation to inform consumers of other available overdraft services or credit products the institution offers. Such disclosure and clear explanation should minimize both consumer confusion associated with overdraft services and financial institution reputational risk.
However, we would appreciate clarification that it would not be expected that all overdraft protection programs should include all of the best practices. It is unlikely any existing program includes all of these practices, and it would simply not be feasible to establish a program that would include all of them. Although these practices are included in the guidance, which should not be considered regulatory requirements, we request this clarification because of concerns that examiners and others may interpret the best practices as regulatory requirements and expect that all credit union programs would include all of the practices. We also believe credit unions should retain the ability to deviate from these practices under specific, individual circumstances and these deviations should be permitted when there are rational reasons that are properly documented.
We also have concerns with some of the specific best practices. These practices, and our concerns, are outlined below:
- Explaining the discretionary nature of the program This suggests that the institution describe the circumstances in which it would refuse to pay an overdraft or suspend the program. We are concerned that if a credit union provided a specific list of such circumstances, then there would be an implication that an overdraft will be paid under all other circumstances. However, this would not be appropriate because credit unions always retain the discretion to pay or not pay an overdraft under their overdraft protection programs. Because of the discretionary aspect of these programs, requiring a credit union to provide such a specific list of circumstances of when it will pay an overdraft will actually confuse and mislead members, contrary to the goal of the guidance.
- Distinguishing overdraft protection services from free account features This refers to avoiding the promotion of free accounts and overdraft protection services in the same advertisement in a manner suggesting that the overdraft service is free of charges. Financial institutions currently are permitted to promote an account as free even though there is the potential for fees if the consumer voluntarily chooses to utilize a product or service in connection with that account in which a fee is charged. The advertisement of a free account with overdraft protection is a similar situation in which the consumer may incur an overdraft that would be subject to a fee. For this reason, we do not agree that this best practice should be incorporated within the guidance.
- Alerting consumers before a non-check transaction triggers fees The description of this practice acknowledges that for non-check transactions, prior notice that a specific transaction will result in a fee may not be feasible and that a notice should be posted instead, such as on an automated teller machine (ATM). For credit unions, posting notices on ATMs will not be effective since members often use ATMs that are not owned by the credit union, and the guidance acknowledges that notices can only be placed on proprietary ATMs. Even posting notices on proprietary ATMs should not be necessary because the fees have already been disclosed to the member prior to the transaction, and there would be no benefit to disclosing it again on the ATM. A number of disclosures are already required on ATMs, and members may be confused by these additional disclosures. There are other situations in which it may not be feasible to provide notice, such as with preauthorized debits. Although the guidance suggests that overdraft protection could be limited to check transactions, we believe members may want to have non-check transactions covered under their overdraft program, and this option should not be precluded for all programs simply because it is not feasible to provide notice for each transaction.
- Promptly notify consumers each time the overdraft protection is used This practice includes a suggestion that institutions should reiterate the terms of the overdraft protection service when the consumer accesses the service for the first time. We believe this imposes a burden without a corresponding benefit for consumers, since they will have already received a copy of these terms. A less burdensome approach would be to provide a clear reference to the information previously provided and offer to provide another copy upon request.
- Limiting the number of overdrafts or the amount of fees that will be charged against an account each day Although certain credit unions may limit the fees that may be charged each day, we also recognize that members receive benefits each time they need to access their overdraft protection, which includes avoiding merchant fees for bounced check, the embarrassment associated with bouncing a check, and the risk that negative information will appear on a credit report. Therefore, we do not believe the guidance should suggest that there be a widespread practice to prevent members from receiving these benefits after exceeding a specific number of overdrafts on any given day. Each credit union should determine for itself whether to impose a daily limit on the number of overdrafts.
CUNA supports the substance and format of the information presented in the Legal Risks section of the proposed guidance. We appreciate the efforts to compile this comprehensive discussion of laws and regulations applicable to overdraft protection programs, and believe it will be a helpful resource for credit unions offering such programs. We especially appreciate the clarification that the Regulation B rules for adverse action notices do not apply to overdraft protection programs if they meet the definition of incidental credit.
Thank you for the opportunity to comment on the proposal regarding the overdraft protection guidance. If Board members or agency staff have questions about our comments, please contact Associate General Counsel Mary Dunn or me at (202) 638-5777.
Assistant General Counsel