FDIC Softens Its Position on Overdraft Program Guidance

WASHINGTON — Cynthia Blankenship was likely not the first banker to discuss the Federal Deposit Insurance Corp.'s overdraft guidance — a significant cause of worry for industry executives — with FDIC Chairman Sheila Bair.

But their exchange during the recent Independent Community Bankers of America convention in San Diego may have helped allay industry fears about it.

Blankenship recommended that, rather than requiring in-person or telephone contact to try to reach customers that repeatedly incur overdraft charges, why not let banks take the less costly route of communicating with them through periodic statements.

"I was very pleased that she said, 'I think that could work,' " said Blankenship, the vice chairman and chief operating officer of the $290 million-asset Bank of the West in Grapevine, Texas.

Since then, the FDIC has validated the approach in a banker conference call — with more than 4,000 attendees — and a "frequently asked questions" release on the guidance, and many industry insiders appear to be warming to the idea.

"To my mind, it was a dramatic liberalization of the FDIC's attitudes on overdraft," said Jeremy Rosenblum, a partner at Ballard Spahr.

To be sure, the guidelines are still strict, and FDIC officials say efforts to contact customers with high overdraft usage cannot be halfhearted. But bankers had raised objections with the suggestion in the original guidance, issued in November, that they must directly contact customers through face-to-face meetings or telephone calls.

"Originally, it was so undefined that it was creating an ominous challenge for us that would be both costly and cumbersome," Blankenship said. "Honestly, a lot of banks just didn't have cellphone numbers or email addresses, and as I explained to [Bair], a lot of customers aren't going to come into the bank just because you called them and said, 'You need to come in for counseling.' "

The guidance only applies to institutions supervised by the FDIC, and is focused on automated — rather than "ad hoc" — overdraft programs. It requires banks to take "meaningful" steps in advising customers — those with more than six overdrafts in a 12-month period — about less costly alternatives to overdraft protection.

In addition, the guidance calls on institutions to develop strong board oversight of overdraft programs, establish daily fee limits and waive fees for particularly small — or "de minimis" — overdrafts. It also urges institutions to provide customers with a chance to "opt out" of overdraft coverage for nonelectronic transactions.

While the original guidance only mentioned telephone or in-person contact as examples of reaching out to chronic overdraft users, the FDIC clarified in the conference call and the FAQ that banks have other options. One approach would be "targeted outreach," the agency said in the FAQ, involving a telephone call or in-person meeting. But under a second "enhanced periodic statement" approach, a bank could simply expand on information it is already required to include in a customer's normal statement.

Blankenship, who is a former ICBA chairman, said taking the approach of more direct contact with a customer would have involved reprogramming data processing systems for many banks.

"I'm not sure that the FDIC initially realized how many challenges that the initial guidance created," she said.

"Generally, what we find is when we do have that opportunity to sit down face to face and say, 'This doesn't work because,' or 'We already do this, so why are we having to issue another notice' … that there's a true willingness to be flexible.

"I don't think the intention ever was to create more burden. … In the FDIC's defense, they're just looking for a spirit of communication with the customer so that abusive practices don't exist. But, as I explained to the chairman, I'm from a small community, my bank sits on Main Street. If I abuse my customers, I'm not going to have customers."

Currently, Truth in Savings Act regulations compel institutions to disclose on a customer's statement the overdraft fees accumulated in the statement cycle and in the previous 12 months. But under the guidance, the FDIC said, that section could also include a message for repeated overdraft users advising them on how to find alternatives. It would include the name and phone number of a bank employee with whom to discuss other credit options.

"For example, the following statement could be used: 'You have been paying multiple overdraft fees and there may be cheaper alternative products that may be better suited for your needs. Please call [name of employee] at xxx-xxx-xxxx to discuss other options with a customer service representative or visit us at your local branch,' " the FDIC said in its FAQ.

Paul Nash, Bair's deputy for external affairs, acknowledged the original guidance had sparked a strong reaction, but he said the further clarification resulted from constructive feedback from the industry.

"To hear, 'This is terrible and is going to end banking as we know it,' that's not helpful," Nash said. "But when we talk about, 'What exactly concerns you?' 'How can we do it differently?' and 'What ideas do you have?' this idea came out of one of those types of meetings.

"We want banks to understand what we're trying to accomplish here, and take some of the heat and the passion out of it and come together in a constructive way. This is not an effort to undermine overdraft, which is an important function that banks offer. On the other hand, there are a relatively small percentage of customers that are hit very hard by this."

The FDIC has also addressed concerns the guidance would make banks feel like they had to force customers with high overdraft usage to stop utilizing the coverage. Instead, the agency now says that decision falls to the customer.

"The big news out of the [conference] call too was they said if the customer tells you, 'Look, this is none of your business, this is the way I manage my accounts, so leave me alone,' you can leave the customer alone," said Christopher Leonard, the chief operating officer of Velocity Solutions Inc., a Wilmington, N.C., company providing account services to mostly community banks.

While the original guidance had prompted concerns that the agency was "overreaching," Leonard said, the conference "call was definitely coming down from that." The FDIC "was trying to be more accommodating," he said.

Industry representatives said although they still consider the guidance strict, the clarifications have helped.

"To a great extent, banks will find" using periodic statements "to be a more realistic way of contacting" customers, "but it is still a fairly prescriptive process where six fees in 12 months trigger the contact," said Richard Riese, the director of the American Bankers Association's Center for Regulatory Compliance.

Elizabeth Eurgubian, a vice president and regulatory counsel for the ICBA, agreed, saying the conference "call and subsequent FAQs … were a step in the right direction."

Rosenblum said that while "the guidelines still impose substantial burdens on the industry … under the Q and A consumers are allowed to make informed choices.

"It's much less paternalistic than the apparent attitude the FDIC previously took," he said.

Rosenblum said that most banks will choose the periodic-statement option.

"Most banks will end up doing that," he said. "It is less burdensome, assuming that you have the program that can accomplish it. It's less offensive to consumers."

Still, not everyone was won over, and most agree the guidance still prompts concern, including over fears examiners will perceive the guidance as formal law, the waiver for de minimis overdrafts — which the agency recommended be used for transactions below $10 — and that the guidance only applies to banks regulated by the FDIC.

"There is a thought among community banks that we should all be on the same regulatory playing field," said Bill Grant, the chief executive of the $1.7 billion-asset First United Bank and Trust in Oakland, Md. "It's not quite the same rules for everybody."

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