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Letter from Superintendent Taylor to Federal Banking Regulators
 Regarding the Proposed Guidance on Overdraft Protection Programs

August 6, 2004


Docket No. OP-1198
Jennifer J. Johnson
Secretary of the Board
Board of Governors of the Federal Reserve System
20th Street & Constitution Avenue, NW
Washington, DC 20551                                                                    

RE:  Proposed Guidance on Overdraft Protection Programs 

Dear Ms. Johnson: 

The New York State Banking Department is pleased to have the opportunity to comment on the interagency proposed guidance (“Proposal”) to assist financial institutions in the responsible disclosure and administration of overdraft protection services.  The Proposal was issued by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision (collectively referred to as the “FFIEC”).  The Proposal highlights potential safety and soundness considerations to ensure that financial institutions adopt adequate policies and procedures to address credit, operational, and other risks associated with these programs.  Furthermore, it alerts financial institutions to the need to comply with various state and federal laws and sets forth examples of best practices that are currently observed in, or recommended by, the industry.   

We appreciate the FFIEC's effort to provide guidance to financial institutions which elect to offer overdraft protection programs. We concur with the FFIEC that, as part of their due diligence, financial institutions should carefully consider the significant safety and soundness, compliance, legal and reputational risks that are associated with overdraft protection programs. At the same time, we believe that this guidance should go farther and that compliance should be mandatory. 

As we have learned from consumer complaints and anecdotal evidence, the total amount of the fees quickly increases when such fees are levied on a daily basis until they bear no rational relationship to the service offered.  In some instances, the total amount of the fees charged resembles payday lending at its worst.  Furthermore, the question must be addressed as to whether an overdraft protection service is a product for which a fee is imposed or is an extension of credit for which interest should be charged. 

Our suggestions to expand the Proposal are few in number, but we believe that they will protect consumers from abusive practices.  They are as follows:

  1. If there is an overdraft protection limit for a particular account or for accounts in general, it should be disclosed to the account holder.  Despite the fact that under this program paying a check or other transaction is not guaranteed, human nature is such that some, perhaps many, customers will begin to count on the protection, but be doing so without complete knowledge as to what is and is not available to them;
  2. If the banking institution is willing to offer bounce protection up to a given dollar amount to a particular account holder, it should also be willing to offer a line of credit to that customer in the same amount.  Otherwise, it is impossible to escape the conclusion that this protection is merely an income generator for the banking institution without any true benefit to the customer;
  3. Disclosures provided to the account holder should clearly differentiate between a one time fee and a daily fee;
  4. The banking institution should either offer the program on an “opt-in” basis or alternatively should provide a toll free telephone number for customers to “opt-out” of the program.  In this regard, a customer who wishes to “opt-out” of the program must be allowed to do so. No account holder should incur these fees if he or she has told the banking institution that he or she does not want this service;
  5. The bank must offer a grace period during which time an account holder can return the account to a positive balance before a daily fee, as opposed to a one time fee, can be imposed.  Otherwise, before the customer is even notified of the overdraft, a very significant fee may already have been imposed on the account holder;
  6. The overdraft protection service should not be offered for non-check transactions.  Electronic notification at non-proprietary ATMs and point-of sale terminals may not be feasible.  At a proprietary ATM, where the electronic notification is feasible, or in a transaction with a human teller where verbal notification is feasible, a decision by a banking institution to allow an account holder to overdraw his or her account is the equivalent of an extension of credit.  As such, it should not be allowed without compliance with state usury laws and the federal Truth in Lending Act.   

Thank you for this opportunity to comment and for your consideration of our views.  Please contact me at your convenience should you wish to discuss this further. 

Very truly yours, 

Diana L. Taylor

Department of Financial Services


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