WASHINGTON — Community bankers are up in arms about a Federal Deposit Insurance Corp. plan that would require banks to give customers a chance to opt out of overdraft programs for checks and other transactions, arguing it is burdensome, restrictive and would put them at a competitive disadvantage to the largest institutions.
The agency's August proposal goes further than the new rules put in place in July, which required customers' permission before charging overdraft fees on debit cards and automated teller transactions. Instead, the FDIC plan would additionally restrict checks and automated clearing house transactions, and urge banks to help consumers with more than six overdrafts a year to find less costly alternatives.
But dozens of bankers objected to the plan, saying it went too far.
"Banks used to be considered 'For Profit' businesses but we are starting to wonder," said Clark A. Hervert, a vice president at First National Bank in Ord, an $85 million-asset institution in Ord, Neb., in a comment letter to the agency.
J. Eric T. Sandberg Jr., the president and chief executive officer of the Texas Bankers Association, said overdraft fees are not meant to "willfully and deliberately" take "advantage of their customers."
"I am very concerned with the notion that a bank, a for-profit enterprise with whom its customers have a contractual relationship, must limit the amount of fees that a customer could incur as a result of violating their depository contract — i.e. the depository agreement setting out the customer's duty with regard to maintaining a positive account balance," Sandberg said in a Sept. 15 comment letter.
But the proposal was supported by at least one senior Democratic lawmaker and many individual consumers.
Sen. Carl Levin, D-Mich., said in a Sept. 27 comment letter that the guidelines would provide "welcome new consumer protections aimed at ending abusive practices related to overdrafts.
"The guidance would also prevent less-scrupulous banks from gaining an unfair competitive advantage over banks that treat consumers fairly," Levin said.
But the lawmaker suggested the FDIC guidance could go even further by expressly requiring customers to give their permission before entering overdraft programs for normal checking accounts.
"The proposed guidance should require banks to institute opt-in procedures for all types of overdraft protection programs to ensure consumers consent to the fees that will be charged to them," Levin wrote.
He was backed by individual commenters who supported the FDIC proposal, saying overdraft programs trap consumers into higher costs when they think they are being protected. The letters included 154 submissions based on a form letter backing the plan.
"I prefer for any credit/debit card purchases, checks or withdrawals to be denied if I do not have the funds," said Caralene McClain, who commented on Aug. 18. "I don't even remember when this so-called 'service' began with the banks paying if there is no money and then charging a huge fee."
Valerie Jones, an individual commenter from Virginia Beach, Va., wrote that the FDIC should "please hold the bank's feet to the fire on these and other predatory practices."
In a statement, an FDIC spokesman said the agency is still reviewing the letters.
"Staff is analyzing all of the comments submitted and the FDIC will issue final guidance once we have had a chance to appropriately weigh all of the key issues," the spokesman said. "The FDIC remains committed to ensuring that banks monitor their overdraft programs to protect consumers from excessive fees as well as protect their own reputations as stewards of customer trust."
But community banks protest that the plan is unfair. For one, it would only target FDIC-supervised banks, leaving such institutions at a competitive disadvantage to larger banks supervised by other regulators.
"The FDIC should avoid issuing any independent guidelines that would create a bifurcated regulatory framework for overdraft services — one for FDIC-regulated banks and one for everyone else," said Cary Whaley, the vice president of payments and technology policy for the Independent Community Bankers of America.
The proposed guidance said customers should be able to decline overdrafts on their normal checking accounts and ACH transfers. It also would require institutions to flag a customer who overdraws an account six times a year, encouraging banks to discuss more prudent alternatives such as small-dollar loans. Institutions would also need to establish some type of daily cap on customer costs tied to overdraft protection.
But institutions said the requirement to help customers avoid the fallout from their own poor account management was not consistent with the banking business.
"Should not the customer bear responsibility to him or herself to recognize his or her own habits and to monitor his or her own account by checking bank account statements?" said executives of the Kansas Bankers Association in a Sept. 2 comment letter.
Others said while instituting the system to alert customers after six overdrafts would be costly, it is unproven that it will change customer behavior.
"My experience … has shown me that the majority of the overdraft customers will continue to be overdrawn, regardless of counseling or being given helpful cash flow advice," said Warren T. Biggs, the chief executive officer and vice chairman of the $120 million-asset Panola National Bank in Carthage, Texas. "I do not believe that monitoring these accounts for a rolling 12-month period will be effective for those customers who habitually abuse the overdraft convenience."
Several bankers said overdraft protection is offered as a service to customers and has its benefits.
"It is important to differentiate between the banks which have processed transactions to increase costs to the consumer and those like our bank that have not because we don't believe that it is an ethical approach or good customer service," said Adam Courter, the executive vice president of the $76 million-asset Bank of Thayer in Thayer, Mo., in a Sept. 11 letter.
Courter said the alternative for not providing customers with overdraft protection could be that they still face potentially high costs when a merchant finds insufficient funds to cover a purchase.
"Why would a customer opt out when if they overdraw their account by check they will receive an [insufficient-funds] fee equal to an overdraft fee in addition to merchant returned check fees, embarrassment and potential legal action?" he said.
Sandberg said the idea that banks prey on their customers is overblown, saying most small banks want to retain their business. "This is a competitive market and I would hazard to say there are few banks that willingly drive their customers away," he said.