Recently issued Interagency Guidance on best practices for checking and ATM overdraft programs is “warranted and worthwhile to curtail abusive programs that hurt accountholders,” says a leading attorney on regulations affecting retail financial services.

Oliver Ireland, a partner in the Financial Services Practice Group of Morrison & Foerster, LLP, Washington, D.C., addressed separate sessions of banking and credit union executives during the 2005 Floyd Forum Leadership in Austin earlier this month. His message to both was emphatic: “Protect yourselves. Understand regulatory issues affecting overdraft programs.” PHOTO URL: http://www.mofo.com/attorney/individual.asp?Ireland8708

Ireland’s practice focuses primarily on retail financial services including electronic commerce, compliance with Federal Reserve regulations, the Fair Credit Reporting Act, E-SIGN, the U.S. Patriot Act, and telemarketing rules. His practice also encompasses all types of payment transactions, including compliance with NACHA rules and bank regulatory issues.

He defined Regs B, E, Z, DD and the Fair Trade Commission Act and walked the audience through the finer points of the Interagency Guidance on overdraft (courtesy pay, bounce protection) programs, issued in February by the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency. Guidance applies to most, but not all financial institutions. “The Office of Thrift Supervision issued its own guidelines, not as rigorous as the other agencies.

“An overdraft program may be deemed credit covered by the general prohibition of Regulation B,” he noted, and Reg B implements the Equal Credit Opportunity Act, which prohibits creditors from discriminating.

Ireland previously served as Associate General Counsel (AGC) of the Board of Governors of the Federal Reserve System; as V.P and AGC of the Federal Reserve Bank of Chicago and as Attorney for the Federal Reserve Bank of Boston. He was responsible for drafting or interpreting numerous Fed regulations including the Gramm-Leach-Bliley privacy rules, rules implementing the Expedited Funds Availability Act, rules on money laundering, capital requirements, reserves and interest on deposits.

The speaker outlined a veritable “alphabet soup” of federal laws, regulations and organizations (FTC, TILA, ECOA, TISA, EFTA) applicable to the fast-growing programs popular with financial institutions (FIs), which view the non-interest income as a stabilizing factor in their revenue projections. “States laws may also be applicable, including usury and criminal laws, and UDAP,” he warned.

Ireland said authorities and consumer groups have multiple concerns about poorly managed overdraft programs. Among them: “FIs may have promoted the service so that consumers believe it is a line of credit. Marketing practices may encourage consumers to overdraft their accounts—leading consumers to believe overdrafts always will be paid, when FIs reserve the right not to pay some overdrafts.”

Additionally, “Free account” statements may lead consumers to believe the service has no fee. Some FIs may not clearly disclose that the program may cover instances where the account may be overdrawn other than by check, such as an ATM or point-of-sale transaction. Some FIs may include overdraft protection amounts in a disclosure of the “account balance” without identifying it as such.

Another concern is when “the FI knows that the transaction will trigger an overdraft fee, such as at a proprietary ATM, and the FI chooses not to alert the consumer prior to completion of the transaction of the fee and allow the consumer to cancel the transaction,” he said.

High on his list of admonitions to those institutions with defined and communicated overdraft programs were:

• Alert consumers before a transaction triggers fees.
• Prominently distinguish balances from overdraft funds availability.
• Provide election or opt-out service to accountholders.
• Promptly notify consumers of overdraft program usage each time.
• Consider daily limits on the consumer’s costs.
• Monitor overdraft protection program usage.
• Fairly report usage.

The attorney carefully covered the nuances in the Truth in Lending and Truth in Savings (DD) acts that apply or could apply to programs covering insufficient funds (NSF) items. He reminded the audiences that Changes to Reg DD have not been published, but are forthcoming from the Fed.

John M. Floyd & Associates (www.JMFA.com) of Baytown (Houston), Texas, sponsored the week-long Floyd Forum, held at the Barton Creek Resort & Spa in Austin in May. The performance improvement firm, founded in 1972, is nationally known for its creation of the automated overdraft privilege program. It has implemented nearly 1,000 variations of its JMFA OVERDRAFT PRIVILEGESM program.

FOR MORE INFORMATION OR INTERVIEWS:
Steve Swanston, EVP-Sales, John M. Floyd & Associates, Baytown, TX, 800-809-2307; www.JMFA.com
Preston F. Kirk, APR, Kirk Public Relations, Austin, TX, 830-693-4447.