Overdrafts, Regulation Changes and FDIC Overdraft Study

1. 1 Overdrafts, Regulation Changesand FDIC Overdraft Study FDIC Minority Depository Institutions Industry Conference Call May 26, 2010 Patricia I. Cashman Senior Examination Specialist FDIC

2. 2 Agenda Background & History 2005 Joint Agency Guidance FDIC Overdraft Study Reg E Changes Reg DD Changes

3. 3 NSF and Overdrafts History Historically, Bankers thought: NSF = BAD!!! Banks used to only pay NSFs for their most important customers. Local Banks would call you and give you until 2pm to make a deposit or transfer funds. NSF Fees were HIGH for two reasons: Banks spent tremendous time and effort deciding which NSF items to pay or return. Ad Hoc decisions. Banks wanted to discourage this activity. Returned check customers used to pay NSF fees at least twice – once to the bank and once to the payee. While Credit Card Annual Fees and Monthly Service Charges were declining, OD/NSF fees were increasing.

4. 4 Late 20th Century Computerization!!! Enter the Linked Account and the OD LOC. Banks then automated the NSF pay/return decision. Usually still returned many items. Cost to make decision now negligible for most NSFs. Fees income increased.

5. 5 The 21st Century Banks realized that less and less income was being generated from deposit accounts through monthly service charges due to the “Free Checking” that most offered. Banks also realized that more and more income was being generated from NSF items. Why? Float has disappeared. Check 21; POS; remote transmit; etc. Deposits – still take days to clear.

6. 6 The 21st Century Emergence of Promoted ODP Programs Some actually encouraged you to overdraw your account – go out and spend even if you don’t have the money. Consumer groups are now up in arms. UDAP issues. Encouraging people to write bad checks without guaranteeing that they would cover them. The $30 cup of coffee. Regulation DD revised for these programs in 2005.

7. 7 Automated Programs Banks now changing the “return all” decision to a “pay all” decision. Could overdraw at ATM & POS! Fees and income increasing.

8. 8 Regulatory Concerns Banks are over-reliant on ODP fees as a source of income. Pay Day Lending without an APR. Low-Income consumers bearing the brunt of the cost. Misleading/Confusing Advertising and Disclosures results in Uninformed Consumers who misuse these programs.

9. 9 2005 Joint Agency GuidanceFIL 11-2005 1 – Safety and Soundness Issues 2 – Regulations Covered 3 – Best Practices FIL and guidance in your handouts. FIL and guidance in your handouts.

10. 10 Safety and Soundness Issues Addressed by the Guidance board and management responsibility for oversight parameters for honoring overdrafts circumstances that warrant suspension of services adequate allowance for loan losses charge off parameters unfunded loan commitments reported Charge off parameters: 30 days after fail to repay; but asking for comment on timeframe. Significant because no underwriting.Charge off parameters: 30 days after fail to repay; but asking for comment on timeframe. Significant because no underwriting.

11. 11 Consumer Protection Laws Addressed by the Guidance Truth in Lending/ Regulation Z FTC Act prohibition against unfair or deceptive practices (UDAP) Truth in Savings/ Regulation DD Equal Credit Opportunity Act / Regulation B Electronic Fund Transfer Act/Regulation E Guidance addresses how these laws apply to bounce protection. Guidance addresses how these laws apply to bounce protection.

12. 12 Best Practices Guidance Did Not Impose New Regulatory Burdens Offers “Best Practices” to help banks responsibly oversee programs and lessen the risk of customer confusion. It focuses on: Marketing and communication with consumers Program features and operation

13. 13 Top Issues Still a Concern Unclear or deceptive information Excessive usage Lack of alternate programs CRA credit for small dollar programs! Maximizing income through processing choices

14. 14 FDIC Overdraft Study Purpose of the Study Study Design Key Findings

15. 15 Study purpose Study was initiated in 2006. Designed to collect empirical data on the types, characteristics, and use of overdraft programs. Covered FDIC-supervised institutions only. Study was initiated in 2006 in recognition of: Rapid growth in the use of automated overdraft programs at banks, and The lack of information on these programs, their features, how they are managed, fees, and usage. Study was initiated in 2006 in recognition of: Rapid growth in the use of automated overdraft programs at banks, and The lack of information on these programs, their features, how they are managed, fees, and usage.

16. 16 Study design Conducted as a two-part study. Survey of FDIC-supervised institutions. (Information from 462 institutions) Collection of customer account and transaction-level data from a subset (up to 100) of surveyed banks. Transaction records collected from 39 institutions with assets of $332 billion. Reflects transactions on 6.5 million customer accounts over a one year time period when the accounts were collectively overdrawn 22.5 million times.

17. 17 Automated overdraft program adoption As of 2006, about 41 percent of the banks and 77% of large banks (assets>1bn) had automated overdraft programs. Large banks (assets > $1bn) were early adopters. Since 2001, growth in use of the programs has been rapid among banks of all sizes.

18. 18 Overdraft fees The median automated overdraft fee in 2006 was $27 versus $5 for linked accounts. For linked accounts, the fee listed is the fee to transfer or advance funds. This fee is charged by nearly half (49.2 percent) of banks with linked account programs and is the most common type of fee associated with these programs. Small percentages of banks with linked account programs charge initiation fees (3.7 percent) and maintenance fees (1.2 percent).For linked accounts, the fee listed is the fee to transfer or advance funds. This fee is charged by nearly half (49.2 percent) of banks with linked account programs and is the most common type of fee associated with these programs. Small percentages of banks with linked account programs charge initiation fees (3.7 percent) and maintenance fees (1.2 percent).

19. 19 ATM and POS Overdrafts Most banks, regardless of size, permitted customers to overdraw their accounts at ATM and POS/debit terminals. Coverage of ATM and POS/Debit transactions does not vary substantially among banks of different sizes or with different types of overdraft programs.Coverage of ATM and POS/Debit transactions does not vary substantially among banks of different sizes or with different types of overdraft programs.

20. 20 Transaction processing order Banks relied on a variety of processing orders with over half of large banks processing large transactions first. Note that the large banks that process large transactions first earn higher fees and end up with more uncollectable debt. Transaction processing also varies with the types of programs offered; more than one-third (34.5 percent) of banks with automated programs process the largest transactions first, compared to 18 percent of banks with only linked accounts and/or lines of credit. In contrast, 58.9 percent of banks with linked accounts and/or lines of credit only process transactions smallest to largest, but only 30.2 percent of banks with automated programs process the smallest transactions first. Median fees charged differ by type of transaction processing used. Banks that process largest to smallest charge a median fee of $29 dollars for automated overdrafts, compared to median fees of $25 and $27.50 charged by banks whose processing method is smallest to largest or not size related, respectively. Note that the large banks that process large transactions first earn higher fees and end up with more uncollectable debt. Transaction processing also varies with the types of programs offered; more than one-third (34.5 percent) of banks with automated programs process the largest transactions first, compared to 18 percent of banks with only linked accounts and/or lines of credit. In contrast, 58.9 percent of banks with linked accounts and/or lines of credit only process transactions smallest to largest, but only 30.2 percent of banks with automated programs process the smallest transactions first. Median fees charged differ by type of transaction processing used. Banks that process largest to smallest charge a median fee of $29 dollars for automated overdrafts, compared to median fees of $25 and $27.50 charged by banks whose processing method is smallest to largest or not size related, respectively.

21. 21 Types of overdraft transactions POS/debit card transactions are the most common triggers of overdraft fees, followed by checks and ATM transactions.

22. 22 Sizes of overdraft transactions

23. 23 Incidence of overdraft fees Most NSF fees were paid by repeat overdrafters.

24. 24 Cost of overdraft fees

25. 25 Overdraft activity by income Accounts held by people living in lower income areas were more likely than others to have repeat overdraft activity.

26. 26 Overdraft activity by age Accounts held by young adults were more likely than others to have repeat overdraft activity.

27. 27 Volume of Overdrafts and Fees Paid

28. 28 Small Swipe – Large APR * Based on the average $27 per item Fee and a two-week repayment cycle.

29. 29 Regulation E Changes Reg. E implements the Electronic Fund Transfer Act (“EFTA”) Reg. E/EFTA set forth rights, liabilities, and responsibilities for electronic transfers Brief Overview of Rule Change

30. 30 Regulation E Section 205.17(a) – Defines Overdraft Service as follows: A service under which a fee or charge on a consumer’s account held by the institution paying a transaction when the consumer has insufficient or unavailable funds in the account. Covers automated & non-automated or ad hoc programs Excludes Overdraft Lines of Credit under Regulation Z & transfer funds from another account at the institution

31. 31 Regulation E Section 205.17 – requires banks to provide consumers with the right to “opt-in” or “affirmatively consent” to overdraft services at ATM or one-time (1X) Debit Card transactions

32. 32 Regulation E Section 205.17(b)(1) No overdraft fees for ATM or 1X Debit Cards UNLESS consumer given notice & consumer opts in Institution provides written confirmation of consumer’s consent to “opt-in”

33. 33 Regulation E Section 205.17(b)(1)(iv) Confirmation of consumer’s selection – double check on consumer’s choice: Institution MUST provide: Confirmation of consumer’s request; and Confirmation must be in writing or electronic if consumer agrees.

34. 34 Regulation E Section 205.17(b)(1)(iv) Confirmation of consumer’s selection What can institutions do? Provide a photocopy of signed opt-in form; Mail a separate letter advising of opt-in; Above can be done electronically if consumer agrees

35. 35 Regulation E Section 205.17(b)(2) Conditioning payment of OD on opt-in Cannot condition payment of overdrafts for checks; ACH; bill pay; etc. on opting in for ATM & 1X Debit card overdraft services; Cannot apply different criteria to payment of overdrafts for those who opt in and those who do not

36. 36 Regulation E Section 205.17(b)(3) Same acct. terms, conditions, & features: Cannot steer consumers not opting in to accts with more limited features;

37. 37 Regulation E Section 205.17(b)(4) Exception to Notice & Opt-In Requirement: Banks having a policy & practice of declining to authorize & pay ATM or 1X Debit Card transactions when at time of authorization reasonable belief consumer does not have sufficient funds to cover the transaction.

38. 38 Regulation E Section 205.17(c) Timing: New Accts: 7/1/2010 – Notice & consent MUST be provided/received PRIOR to any fee being imposed; Existing Accts: 8/15/2010 – cannot assess ATM/1X Debit OD fees on or after 8/15/2010 UNLESS comply with Notice & Consent requirements

39. 39 Regulation E Section 205.17(d) Content & Form: Notice cannot contain any information not specified or permitted Use Model Form A-9 or substantially similar form

40. 40 Regulation E Section 205.17(f) Continuing Right Can opt-in at any time Can revoke opt-in at any time

41. 41 Regulation DD Changes Final Rule – effective 1/1/2010 addresses overdrafts Expands requirement to disclose overdraft fees on periodic statements to ALL institutions.

42. 42 Regulation DD Final Rule: Adds format requirements to make aggregate fee info more effective & noticeable Requires account balances disclosed via ATM, internet, telephone exclude additional amts to cover overdrafts to minimize customer confusion Rule effective with first periodic statement after 1/1/2010

43. 43 Regulation DD Section 230.11(a) Periodic statement must: $ amount of overdraft fees $ amount of returned item fees Broken down by: Statement period & Calendar year-to-date

44. 44 Regulation DD Format & Proximity Requirements: FRB provides Sample Form B-10 – a table form Banks MUST USE format “substantially similar” to Sample Form B-10

45. 45 Regulation DD Section 230.11(c) Disclosure of Account Balances – thru automated systems Disclosed Balance MAY NOT include any funds bank will provide to cover an overdraft or overdraft line of credit or funds transferred from another account

46. 46 Regulation DD Section 230.11(c) Disclosure of Account Balances Second Balance – OK to include overdraft service; overdraft line of credit; balance from another acct. PROVIDED PROMINATELY state balance includes these items

47. 47 Questions?