WASHINGTON — Despite ardent opposition from community banks, the Federal Deposit Insurance Corp. followed through Wednesday on a new set of guidelines aimed at curbing abuse of automated overdraft programs.
The new guidance, first issued in an August proposal that was essentially unchanged, says FDIC-supervised institutions should closely monitor their automated programs, actively inform chronic overdraft users of alternatives and allow opt-outs from nonelectronic overdraft programs. The guidelines, which exempt so-called ad hoc programs, follow earlier Federal Reserve Board restrictions on overdrafts stemming from ATM and point of sale transactions.
"While many community banks already prudently manage their overdraft programs, some banks operate automated programs that lead to excessive use of these high-cost, short-term credit products," FDIC Chairman Sheila Bair said in a press release. "When banks spot a pattern of excessive use of an automated overdraft program, they should contact their customers about a more appropriate and lower-cost alternative that better suits their needs."
The FDIC, which said the guidelines are meant to reaffirm existing policy, expects institutions to have new efforts in place by July 1 for dealing with risks posed by overdraft.
Yet the final rules come after heavy criticism from bankers about the August proposal. Among hundreds of comment letters, bank executives said the plan would be too costly, prompt institutions to intervene in what they said was a customer choice, and puts the thousands of community banks supervised by the FDIC on a higher regulatory bar than others.
Reacting to the final guidance, industry representatives said they hoped the FDIC would entertain further discussions about how examiners will apply the new policy.
"It throws the realm of automated overdraft programs into total chaos," said Viveca Ware, senior vice president of regulatory policy for the Independent Community Bankers of America. "We will certainly reach out to the agency to have additional dialogue."
Richard Riese, the director of the American Bankers Association's center for regulatory compliance, suggested the guidelines go beyond what has been accepted federal policy on overdraft restrictions.
"While it invokes some acceptable general principles, its tone and specifics threaten to heighten supervisory risks by setting expectations that overreach the authorized regulatory standards for these programs," he said. "It creates an expectation of intensive monitoring with personal customer intervention on what could be a recurring schedule, when customers clearly understand that they've elected a program and are willingly incurring the fees. On top of this, the expectation is that people will be harassed in person or by telephone about whether they really understand that they're paying overdraft fees."
Despite the criticism in the comment letters, the FDIC said it "continues to believe that there are significant reputational and safety and soundness risks associated with many overdraft programs." The final guidance, the agency added, "incorporates suggestions from commenters to refine and clarify expectations."
The core of the guidance is an understanding that banks will keep tabs on their customers' overdraft use, and specifically work with those who overdraw an account more than six times in a year. Steps could include telephone or personal contact to discuss alternatives to overdrafts, such as small-dollar loans. Institutions could also give such chronic users "a reasonable opportunity" to reconsider whether they want to stay in fee-based overdraft protection.
An institution's board would also need to review its overdraft program once a year. Banks should also limit customer costs that result from daily overdraft use, such as with a ceiling on the amount of transactions that get charged a fee, or with a dollar-amount cap.
Under the Fed's rules, which took effect in July, banks had to get customers to sign off on receiving overdraft protection from ATM and point of sale transactions. The FDIC takes those rules a step further, by telling institutions to give customers an opt-out opportunity with transactions involving paper checks and automated clearing house transactions.
The FDIC stressed its concerns were focused on automatic overdraft protection programs. In the August proposal the agency said it was not as worried about ad hoc programs in which bankers let customers overdraw their accounts on a case-by-case basis. The final guidelines said those transactions "typically involve irregular and infrequent occasions on which a bank employee exercises discretion in a specific instance." The agency said it was also not concerned about linked lines of credit.
While some in the industry had feared the FDIC guidance could ultimately affect ad hoc programs, Ware sounded pleased with the exemption in the final guidance.
Ad hoc programs, she said, have "never been a product. It's really a service, and it's crucial to relationship banking.”