WASHINGTON — It is hard to say which part of a regulatory proposal to ban unfair and deceptive acts bankers hate more — the restrictions on card practices or a plan to rein in overdraft charges.
The overdraft restrictions were a surprise when the Federal Reserve Board and two other regulators unveiled the proposal May 1. Much of the industry's ire is focused on the card portion, but bankers are not mincing words in opposing the overdraft section, calling it unjustified, illegal, confusing, costly, and unfeasible.
The proposal would ban institutions from charging an overdraft fee unless the customer has had the chance to opt out. In comment letters, several bankers said that was simply unworkable.
That restriction "is not only an overly burdensome and unnecessary solution to the issues this proposal is attempting to address, but will also entangle the board in product design and pricing issues which are beyond what is appropriate for regulatory action in this case," wrote Daniel Morton, senior vice president and senior counsel for Huntington National Bank in Columbus, Ohio.
The overdraft restrictions would apply to all transactions, including automated teller machine withdrawals, check and debit purchases, and recurring payments.
Bankers also would be required to provide consumers notice of the opt-out option. If a consumer who did not opt out later incurred an overdraft fee, the bank would have to send another notice providing an opportunity to opt out during the billing cycle in which the fee was assessed.
In addition, regulators want to ban banks from collecting overdraft fees if the overdraft was caused by a hold placed by the bank on the customer's funds.
Bankers argued that overdraft fees are not unfair or deceptive, and that the benefits to consumers outweigh their costs. To illustrate this, the American Bankers Association released a survey in which 20% of consumers said they had paid an overdraft fee in the last 12 months. Of those consumers, 85% said they were glad the payment was covered, and 14% said they wished the bank had refused the payment.
"Customers value banks' practices of paying overdrafts," Ed Yingling, the ABA's president and chief executive, wrote in a comment letter. "Indeed, they expect it. They value the ability to avoid the embarrassment, hassle, costs, and other adverse consequences of having a check bounce or transaction denied."
But consumer groups contended that overdraft fees are unfair because they are excessively high, and that they have been the industry's most profitable product behind residential mortgages. A survey of the 10 largest banks by the Consumer Federation of America found consumers pay at least $17.5 billion in overdraft charges a year. The groups said that the plan does not go far enough, and that bankers should be required to get customers' permission before enrolling them in an overdraft program.
"The agencies must prescribe a different solution to the problem if they hope to cure it," according to the Center for Responsible Lending. "They must require institutions to obtain opt-in up front.
But bankers said that the Fed had already overstepped its bounds and failed to demonstrate how overdraft programs were unfair or deceptive, as required by the Federal Trade Commission Act.
The Consumer Bankers Association "does not believe that the agencies have met the standard they have set for purposes of finding industry's overdraft practices to be unfair," Marcia Z. Sullivan, the CBA's director of government relations, and Steven Zeisel, senior counsel for the group, wrote in a letter. "We do not believe that citing the existence of a fee is sufficient to declare substantial consumer injury."
Bankers also said that it is the responsibility of the customer, not the bank, to know an account's balance, and that shifting responsibility to the financial institution would remove any incentive for customers to manage their accounts.
"The agencies' proposal … undermines the fundamental premise on which the business of deposit taking has been based since its inception: the concept that the customer is responsible for the money that is deposited into and withdrawn from the customer's account," wrote Susan Faulkner, consumer deposits executive for Bank of America Corp., and Lance Weaver, card services executive for the Charlotte company.
Bankers also said the plan would be hard to implement, arguing that their computer systems could not predict overdrafts, and that changing systems would be costly. B of A estimated that at least 60 different systems in their infrastructure would need to be altered to comply, costing $50 million.
Attempts by regulators to soften the proposal in certain circumstances have fallen flat. The proposal would require only a partial opt-out notice for point-of-sale transactions and withdrawals from an ATM. Minh-Duc T. Le, assistant general counsel of policy analysis for Capital One Financial Corp., questioned the rationale and basis for the partial opt-out.
"Banks have a legal right, as well as a safety-and-soundness obligation, to reject transactions when there are insufficient funds in customers' accounts," Ms. Le wrote. "The partial opt-out right has the effect of overriding these legal and safety-and-soundness concerns and presenting customers with a misleading impression of their right to direct banks to pay certain overdrafts."
