New Rules Favor Fair Overdraft Protection for Consumers
LAKE BLUFF, IL— After conducting extensive joint hearings, federal banking and credit union agencies on February 18th released the “Joint Guidance on Overdraft Protection Programs”. The regulators’ issued directives for financial institutions in the administration and marketing to consumers of overdraft check programs, commonly referred to as “bounced-check protection. The guidelines are expected to play a significant role in shaping impending overdraft regulations from the Federal Reserve. As a result, industry experts across the nation are assessing what the future holds for this popular—but controversial—service.
Bounced-check protection programs allow accountholders to temporarily go negative in their checking accounts. Instead of bouncing a check that is presented with insufficient funds in the depositor’s account, the bank or credit union will cover the check “on faith” until the next deposit is received. The bank charges the consumer a fee for this, typically $20 - $25. These programs can provide a valuable service for consumers, especially those who do not have access to other forms of overdraft protection, such as fund transfer or using a line of credit. However, some consumer advocacy groups over the past several years have expressed concern that bounced check protection programs are not good for consumers and are predatory or thinly disguised payday lending schemes. The groups had hoped such overdraft programs would be banned or severely curtailed.
With the announcement of the joint guidelines, the regulatory agencies have granted their acceptance of the programs, but have set forth explicit instructions for financial institutions as to the administration and marketing of the programs. For some banks and credit unions, the new guidance will be perceived as burdensome. For others, it will be welcomed as a long overdue set of mandates on which they can establish a bounce-protection service for their consumers.
According to economist Michael Moebs, chairman of Moebs $ervices and the only independent financial services consultant invited to testify during the agencies’ joint deliberations on overdrafts, the new guidelines step in to curb abuses while leaving the valuable parts of bounced check protection in place.
“Up to now there was nothing that defined the way overdraft programs should be structured or regulated. Actually, many of these programs have actually been based on having no agreement whatsoever with the consumer. By setting rules for critical issues such as non-discriminatory eligibility and fair advertising practices, the federal regulators will make it more difficult for banks and credit unions to play between the lines on this.”
A significant distinction made in the guidance is the basic definition of overdraft protection. “The guidelines make it clear that overdraft protection is not a loan, but it is an extension of credit,” said Mr. Moebs. “While this may seem like splitting hairs, it dictates how banks and credit unions can characterize and administer their overdraft services.”
According to the guidelines, overdraft protection is intended as a secure safeguard for consumers against the hardship of an unintentional bounced check. It is not to be used as a short-term loan or promoted as an “allowance” above and beyond an accountholder’s balance. The guidelines also recommend penalties for disclosing or marketing overdraft dollar limits in a way that leads consumers to believe they have a line of credit, which encourages intentional use.
Mandating that institutions underwrite their overdraft protection programs is a key point in the guidance. It calls for the establishment of individual, non-discriminatory eligibility standards and selection processes that are neither arbitrary nor irresponsible. Moebs $ervices, for example, offers No-Bounce overdraft service featuring an empirically-based Debit-Scoring™ (patent pending) selection process that reflects the type of underwriting the federal regulators are mandating with the new guidelines.
Though the new guidance has received mixed reviews from consumer groups and some industry members, it does appear to be a vindication for companies like Moebs $ervices who have staunchly maintained that it is reckless to simply give bounce-protection to every direct depositor and irresponsible to target intentional users as a way to boost revenues.
“With overdrafts under the examiners’ microscope,” Mr. Moebs concluded, “depositories will need to implement OD programs that provide a winning outcome for both consumers and their bottom line.”
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For more information on this topic, or to schedule an interview with Mike Moebs, please contact him at 800-237-3317, ext. 17 or e-mail firstname.lastname@example.org. For complete text of the final regulatory guidance, go to the web address http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20050218/default.htm