(Lake Bluff, IL) August 13, 2010 – With less than 30 days after President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Federal Deposit Insurance Corporation (FDIC) has staked out its roll in financial reform.  On Wednesday, August 11, 2010 the FDIC issued proposed guidelines on how the banking institutions it supervises should deal with overdrawn checking accounts  Since almost all of the banks supervised by the FDIC are under $10 Billion in assets, these banks are not governed by the new Consumer Financial Protection Bureau created by the Dodd-Frank Act . 

What is the FDIC Proposing
Specifically the FDIC is seeking public comment to potentially do the following:
- Establish frequent overdrafts, define as 6 or more in a year, as loans,
- Banks to closely monitor overuse of overdrafts for those with more than 6 in a year,
- Banks to communicate less costly alternatives to overdrafts to the consumer,
- Limit the use of overdrafts as short-term, high priced loans,
- Institute daily limits on overdraft fees,
- Eliminate processes that maximize bank revenue at consumers expense,
- Tie CRA to overdraft programs going to low and moderate income consumers,
- Take supervisory action when overdraft programs do not meet the guidelines.

Uncertainties and Unintended Consequences
The proposed new FDIC rules create uncertainty on the bank or institutional side, and unintended consequences for consumers:
- Reduced or restricted consumer access to much needed short term cash
- Increased cost of small loans for consumers
- Conflicting overlap of federal regulation over banks
- Risk of further bank closures due to loss revenue and depleted capital

The FDIC’s guidelines are based on its 2008 Study of Bank Overdraft Programs which is a non- statistical study of 462 institutions developed from questionnaires done by its own examiners in 2007 instead of directly from bankers and much of the study used only 39 banks, and complaints received from consumers in 2008.  Its authority to do this rests on the possible reputational risks on banks’ safety and soundness brought on by the unnecessary costs of consumers who rely on overdraft protection as a source of credit. 

Neither the FDIC’s press release nor the Financial Institution Letter stated how protecting banks from these unnecessary costs, fit within the law governing FDIC’s mission. The FDIC is able to enforce its position on consumer financial protection by making its examiners review processes imposed by the overdraft guidance, thus increasing a bank’s costs of examination appreciably and ultimately its ratings.

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