Regulators Offer Bounce Protection Plan Guidelines

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Responding to pleas by consumer groups, NCUA and other federal regulators approved new guidelines last week on bounce protection programs, also known as overdraft protection.

The guidelines call on credit unions and banks to fully and prominently disclose all fees and charges associated with bounce protection, which are growing in popularity among credit unions, and to follow strict internal financial guidelines to monitor the programs for their own safety and soundness. For example, the charge-off period for overdraft items has been extended to 60 days, from the current 30 days, under the guidelines.

The guidelines also include examples of best practices for lenders to follow: avoid encouraging consumers from overdrawing their accounts in order to increase overdraft fee revenues; clearly and prominently disclose all fees and charges; offer a clear and concise explanation of the voluntary nature of overdraft protection; explain the effect of transaction clearing policies, such as check-hold periods, on the overdraft fees consumers may incur; and closely monitor usage by individual consumers. The regulators also advise credit unions and banks to distinguish overdraft protection services from free account services, to prominently display balances from overdraft protection funds availability, and to alert consumers before a transaction triggers any fees.

But almost as soon as the guidelines were issued a leading consumer advocacy group, the Washington-based Center for Responsible Lending, which was founded by Self-Help Credit Union, criticized the guidelines as toothless because of their voluntary nature, and called on the regulators to pass meaningful regulations to cover some of the perceived abuses in overdraft protection programs, which hundreds of credit unions have adopted over the past two years.

The lending advocacy's main target is the overdraft fees being charged, which CSL assert sare tantamount to interest, and so should be regulated as loans. "Now it is up to the Federal Reserve Board to provide at least one important protection to borrowers by requiring banks and other financial institutions to disclose the annual percentage rate on these loans," said the center.

The center noted that some lenders put their checking account-holders into overdraft protection programs without even telling them. Then, when the customers overdraw their accounts, they learn that the lender has charged them a fee, usually $20 to $35. Those fees, coming on top of a typical $80 overdraft, can amount to annual percentage rates of 1,400% when a customer takes seven days to repay.

The non-profit CSL notes that many of the people paying these fees are low- and moderate-income consumers who are being targeted because of their propensity to overdraft.

"Banks used to offer lines of credit to customers to help them avoid overdraft fees," said Mark Pearce, president of the CSL. "Now, some are taking a cue from 'payday' lenders and structuring a small loan product designed to encourage repeated, high fee transactions."

The center and other consumer groups has asked the Fed and the other financial regulators to regulate overdraft fees as loans, with calculation and prominent display of APR as other consumer loans are under the Truth In Lending Act.

The voluntary guidelines were approved by the Fed, the FDIC, and the Office of the Comptroller of the Currency, as well as NCUA.

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