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 nation’s nearly 9,400 state and federal credit unions. The following comments were developed by CUNA with input from credit unions, credit union leagues, and CUNA’s Consumer Protection Subcommittee.

Summary of CUNA's Position

Discussion

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 union’s 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.

Best Practices

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:

Legal Risks

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.

Sincerely,

Jeffrey Bloch
Assistant General Counsel