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How to Interpret the Latest FDIC Proposed Overdraft Program Guidance

WP 08.23.2010

By: Mark Groves, Director Consulting Analytics

Late last week the FDIC came out with their FIL-47-2010, which detailed its latest supervisory expectations, and asked for comment on them.

In general, these would appear to be a wholly reasonable set of suggestions, and in fact, are largely a subset of what was published in the 2005 Inter Agency Guidance. Four of the key points are:

  1. Ensuring management oversight of the overdraft program being used.
  2. Making sure disclosures are clear and that staff explain them appropriately.
  3. Making sure the requirements of both Regulation E and Regulation DD are being complied with.
  4. Allowing customers to completely opt out of the overdraft service, not just the POS/ATM piece that is required by Regulation E.

However, three of the suggestions revisit previous guidance and in some cases add more stringent rules. These three may raise some eyebrows with respect to their impact on banks and their customers’ needs:

  1. Applying some kind of daily limit on NSF/OD fees.
  2. Monitoring of customers who have more than six occurrences in the last rolling 12 months where they received a fee.
  3. Not processing transactions in a manner that is designed to maximize cost to the consumer.

Daily Fee Caps

I have always been a proponent of daily fee caps because they can work to the advantage of both the financial institution and the customer. Applied correctly, caps can be used to drive up the fee collection rate, hence, benefiting the financial institution but also limiting the maximum fees that a customer can sustain on any given day. They also help appease the regulators, which is not a small task in this day and age. The prime concern would be if the FDIC decides to set an arbitrary limit.

Monitoring Excess Use

On the monitoring of excessive use, again, this seems to be a good general idea since the financial institution benefits from not losing income producing accounts, and clearly the customer can benefit from being assisted. Of course, what level and kind of assistance is open to question. However, my question comes down to is six the right number? Indeed, the FDIC does not seem to know if it is either because it asks for specific comment on this number.

While there is some ambiguity in the release around six occasions and six transaction fees, let us work on the principle that it is six occasions. So if I had an ice cream once every month from May to October, bearing in mind I live in Texas, would that be seen as excessive? Somehow I don’t think so. I think it is critical for financial institutions to respond to the FDIC request for comment on this and suggest that a minimum of 12 fees in a rolling 12- month period is a much better standard. Customers seem to budget in a monthly cycle and one budgeting mistake per budgeting cycle seems to be more than reasonable for the average banking customer. At Sheshunoff Consulting + solutions (SCS), we signify a heavy user as someone who has 25 or more fees in the last 12-month period, meaning at least two every month or about one every other week, which seems much more like a perpetual/habitual user. SCS has found that this typically accounts for 4-6% of the customer base.

Should it be High to Low, Low to High?

Last, let’s look at the most problematic area, the subject of not posting in a manner that maximizes the fees to the customer. This of course came from the FDIC at the same time as the Wells Fargo lawsuit in California examined high to low posting, and we know what the judge thought about that!

Why is this not being looked at differently? Isn’t the fact that the customer is overdrawn, regardless of how we post, the key point? It doesn’t matter how all the items are posted, if the customer is overdrawn by $50, they will always have been overdrawn by $50, regardless of whether we post high to low, low to high, random, time sequenced or any other combination that can be used.

If we work on the principle that NSF/OD fees are meant to be punitive to stop the behavior and that is why they are as high as they are, surely posting high to low and maximizing the charges fits within that realm, we are just saying to the customer, if you overdraw, it will cost more than just that one transaction.

If how we post is fully disclosed and we state, as some do, that we post in high to low order and that will result in more charges than other posting sequences, and the CSR opening the account clearly informs the customer of this, would that also not fulfill the point that the FDIC and the lawsuit is trying to make, which is the customer is fully informed, leaving the bank and the customer to decide what they want to do?

Protecting banking customers’ right to make an informed decision through the use of effective disclosures should be the goal of the FDIC action and fully supported by the banking industry. However, the FDIC is overstepping this laudable mission when they dictate what products and services may be transparently offered by a bank and accepted by informed banking customers.