Outdoing Fed, FDIC Targets Checks, ACH Overdrafts

WASHINGTON — The Federal Deposit Insurance Corp. ramped up pressure Wednesday on the banking industry to curb overdraft fees, releasing proposed guidelines that would go beyond recent Federal Reserve Board rules.

The proposal, which would only apply to banks supervised by the agency, said institutions should give customers the chance to opt out of overdraft programs for their checking accounts and any automated clearing house transfers, as well as monitor overdraft usage to avoid unfair consumer fees.

It expands on the central bank's rules, which required banks to get customers permission before allowing them overdraft protection on automated teller machine and debit transactions.

Industry representatives immediately called the proposal too prescriptive.

"As a conceptual matter we think risk management is an appropriate area to focus on. What we have concerns about is how precisely the FDIC proposes that it be administered," said Richard Riese, the director of the American Bankers Association's Center for Regulatory Compliance.

The FDIC guidance comes a little over a month after the Fed rules went into effect on July 1, which many bankers already had complained would cut into profits.

But the agency signaled that the central bank's restrictions did not go far enough. Customers should have the chance to opt out of overdraft coverage for normal checking accounts, the agency said. The proposed guidance, which focuses mainly on automated overdraft programs and not those covering overdrafts on a case-by-case basis, would also compel banks to alert customers about alternatives to certain overdraft programs if they are charged fees six times in a year.

While the Fed "did not address the payment of overdrafts resulting from nonelectronic transactions, such as paper checks or ACH transfers, the FDIC believes institutions should allow customers to decline overdraft coverage … for these transactions and honor an opt-out request," the agency said.

Sandra Thompson, the head of the FDIC's division of supervision and consumer protection, pointed to a 2008 FDIC study on overdraft usage, which said such programs were being abused.

"We wanted people to know that there are alternatives because these overdraft fees can be excessive and quite costly," Thompson said in an interview.

The guidance would require regular board oversight — including an annual review — of automated overdraft programs and steps to minimize the potential for customer confusion in the marketing of overdraft programs.

In addition, the FDIC would expect institutions to set daily limits on customer overdraft costs, such as capping the amount of transactions carrying a fee, or putting a dollar limit on total fees charged in one day.

Institutions would also need to monitor automated programs to cut down on "excessive or chronic customer use."

The agency said institutions should take action in cases where a customer's account is overdrawn and a fee is charged at least six times over a one-year period. Such action could include contacting the customer to discuss less costly account options and giving customers a "reasonable opportunity" to decide whether to keep their fee-based protection.

The agency said it was particularly interested in comment on whether a bank should begin having that conversation after the sixth transaction fee. Ultimately, the agency said, customers should then have the choice if they want to stay in the overdraft program, or not. (The proposal's comment period lasts 45 days.)

"The bank would explain, for example, that it also offers linked savings accounts, overdraft lines of credit or small-dollar loans, each of which may be less expensive than the automated overdraft program," the agency said.

Thompson said it was important for banks "to be proactive in reaching out to excessive users."

But Riese said many banks already offer opt-outs, and "have promoted the notion of keeping customers informed about the range of options they have."

He expressed concern about the six-transaction trigger, arguing examiners may use the standard too heavily in scrutinizing banks.

"It's always tough to use a bright line in guidance because what ends up happening is examiners look at that suggested standard and that is the standard that they use," Riese said.

He said that the expressed mention of nonelectronic transactions for the purpose of allowing an opt-out may not be necessary.

"We have a rule by the Fed that addressed the areas that research … showed had the greatest exposure for consumers. That was the one-time debit and ATM transactions," he said. "We acknowledge that's an area that should appropriately receive greater scrutiny. That same research showed that the vast majority of customers want checks and ACH and recurring debit paid, and by implication that's not where the problem is. That is where the programs are working and are providing undisputed value for customers."

Thompson agreed that "many banks already do a lot of what is in the guidance," but she said it was important to seek input to improve the process further.

"We are seeking comment on every aspect of this guidance because this is very important to institutions and consumers," she said. "We want the benefit of the expertise of those in the industry so that we can make informed decisions."

Some observers had other concerns. Cary Whaley, a vice president for payments and technology policy at the Independent Community Bankers of America, said even though the proposed guidance appears to target automated overdraft programs, it is not entirely clear whether case-by-case programs — known as "ad hoc" overdrafts — will also be impacted. He said ad hoc programs used by community banks have not elicited concerns.

"For community banks this is the way we have done business, strong customer service and calling the customer when there is an overdraft," Whaley said. "What they haven't done in the past is track it. That's going to involve software, and a lot of procedural compliance to prove that they're doing what they've traditionally done."

Whaley said that while ad hoc is "not the target" of the proposed guidance, "it's not specifically exempted from this." "That could burden community banks with unnecessary compliance for providing a service that's essential to their business model," he said.

Other groups were more supportive of the proposal.

"Consumers who are sold the product in a less-than-transparent manner will only feel harmed and ultimately distrustful of the institution which sold the product and the banking industry in general," said Neil Milner, the president and chief executive of the Conference of State Bank Supervisors.