LEADING CONSULTANT ON CHECK OVERDRAFT PROGRAMS CONCERNED WITH PROPOSED INTERAGENCY GUIDANCE JMFA: Guidance ‘too specific’; could reduce consumer options on account shortfalls

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The top consulting firm on Check (Share Draft) Overdraft Programs files comments with the Federal Reserve Board (The Fed) taking exception to Interagency Guidance proposing changes in the marketing and management of the programs. John M. Floyd & Associates of Houston contends that some proposed changes, if implemented, will be technologically not feasible, a costly hardship on the banks and credit unions, and may result in unwarranted lawsuit by consumers as well as reduce options to accountholders who inadvertently overdraw their accounts

HOUSTON, TX – July 31, 2004 – The Federal government’s proposed Interagency Guidance on the disclosure and administration of overdraft protection programs will “impose significant costs and burdens” on depository institutions seeking to “comply,” says Cheryl Lawson, EVP-Operations of John M. Floyd & Associates (JMFA) of Houston.

JMFA, the originator and top tier consultant on automated overdraft privilege programs, raised significant concerns in its comment letter on Overdraft Protection Guidance (Docket Nos. OP-1198, 04-14, 2004-30), filed this week ahead of the Aug. 6 deadline for comments.

“We are concerned that the guidance is so detailed that it will restrict institutions’ flexibility in offering overdraft programs and actually could result in consumers being provided with fewer alternatives to address inadvertent overdrafts,” wrote CEO John M. Floyd.

The notice of proposed guidance and request for public comment by the Federal Reserve Board (FRB), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Office of Thrift Supervision (OTS) and National Credit Union Administration (NCUA) was published in the Federal Register on June 7.

The consulting firm (http://www.JMFA.com), a leading provider of noninterest or fee income products, has established nearly 700 overdraft programs at banks, thrifts and credit unions nationwide. It has installed profit improvement programs in 1,750-plus institutions, adding more than $10 billion in increased pre-tax earnings for its clients in 49 states and Central America.

‘Legal Risks…Best Practices’

“We believe a number of sweeping statements in the Proposed Guidance, particularly with respect to the sections on “Legal Risks” and “Best Practices,” contain “sweeping statements” that “will create significant legal risks for institutions as private parties and others refer to the guidance to support legal claims,” Lawson emphasized.

“For these reasons, we are encouraging the Agencies to withdraw the Proposed Guidance or, alternatively, to publish a revised proposal for additional public comment,” she confirmed.

The company, which estimates more than 2,000 U.S. financial institutions now have defined and communicated overdraft programs, has waged an intense campaign coast-to-coast to end abusive practices endemic to some programs as implemented, marketed and managed.

“Some programs discriminate against accountholders,” she said. “Others over-promote the service or under-educate accountholders on its appropriate use or fail to disclose the customer or member’s overdraft limit. The Agencies’ efforts to prevent these abuses are appreciated, but the proposed guidance threatens to put a veritable straight-jacket on a highly desirable, value-added service.”

Floyd & Associates expressly took exception to:

• Safety & Soundness Considerations that would require charge-offs of overdraft balances within 30 days, arguing that a 45-day period would result in enhanced collection of overdrafts and improve risk management practices. Overdraft balances should not be treated as loans and not reported as “unused commitments” in regulatory reports.

• The Guidance statement that when “overdrafts are paid, credit is extended,” since the courts have generally concluded that an overdraft is not a credit under the Truth in Lending Act. JMFA noted that overdrafts are not covered by Regulation Z because the fees are not considered finance charges.

• Applying the Equal Credit Opportunity Act against discrimination to overdraft programs. Such action “will likely lead to significant litigation by individuals” because overdraft programs are part of deposit accounts. As the FRB’s recent amendments to Regulation DD provide, these programs also cannot be deemed credit.”

• Best Practices suggestions that may be viewed by Agency examiners and the courts as compliance requirements. “Several are helpful and appropriate, but a number, if adopted, would require costly and significant changes to the institution’s programs.” Some suggestions are “technologically not feasible.”

• Expanded Marketing and Communications with consumers as needless micromanagement.

JMFA’s complete response to the Board of Governors of the Federal Reserve System can be accessed at http://www.jmfa.com/news/news.html#Opinions. Photos of Floyd and Lawson are at: http://www.jmfa.com/aboutus/aboutus.html

The company is encouraging its clients to contact the FRB before the Aug. 6 deadline with their comments on the proposed changes. Letters can be e-mailed to regs.comments@federalreserve.gov to avoid delay.     


Cheryl Lawson, EVP-Operations, John M. Floyd & Associates, Houston, 800-809-2307 or 281-424-3800; Web site: http://www.JMFA.com; e-mail: Cheryl.Lawson@JMFA.com

Preston F. Kirk, APR, Kirk Public Relations, Austin TX, 830-693-4447; kirk@281.com

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