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Letters to Regulators

Consumer Advisory Council Meeting

June 10, 2004

Ann Bistay
Secretary of the Consumer Advisory Council
Division of Consumer and Community Affairs
Board of Governors of the Federal Reserve System
1709 New York Avenue, NW
Washington, DC 20551

Re: Consumer Advisory Council Meeting, June 2004

Dear Ms. Bistay:

The Independent Community Bankers of America (ICBA)1 welcomes the opportunity to submit our comments on the issues that the Consumer Advisory Council (CAC) will be discussing later this month. Many of these comments have already been submitted to the Federal Reserve Board, but also should be taken into account by the members of the CAC during their meetings.

Courtesy Overdraft Protection

The ICBA is in the process of preparing comments on the recently released Proposed Interagency Guidance on Overdraft Protection Programs and the Federal Reserve's proposed revisions to Regulation DD, Truth-in-Savings, to address courtesy overdraft protection programs. The ICBA believes the agencies are taking an appropriate approach to courtesy overdraft programs, but will have more detailed comments when they are due. However, we applaud the Federal Reserve for addressing courtesy overdraft programs through the Truth-in-Savings rules and not classifying the programs as loans subject to the normal disclosures under Truth-in-Lending, Regulation Z. Following are more detailed comments we offered when the Federal Reserve initially examined courtesy overdraft protection in late 2002.

Generally, courtesy overdraft or "bounce protection" programs are established to allow a customer to overdraw their account up to a specific amount, with the understanding that the customer will cover the overdraft in a set period of time, e.g., three or four days. The programs are available for customers that do not have an overdraft line of protection but are otherwise are good customers. Customers that use the programs are allowed the privilege to overdraw their accounts up to a pre-established limit (e.g., between $300 and $500). Typically, customers can elect to opt out of the program or the bank can determine that the customer should not be allowed to have overdrafts and the bank's system is coded to reflect that overdrafts are not allowed.

Consumer Benefits. The fee may be less than would be assessed by the bank for a check returned for insufficient funds (NSF), saving the customer money. But even if the fee is the same as a normal NSF fee, a courtesy overdraft program allows the customer to avoid the merchant charge for a returned check, lets the customer avoid being listed in databases as having bounced a check and allows the customer to avoid the embarrassment, inconvenience and headaches of having a check returned and having to make arrangements for alternate payment. Establishing an overdraft protection program also takes the guesswork out of covering overdrafts and ensures consistency of treatment while providing a safety net for consumers who inadvertently overdraw their account. And, there are protections against abuse since the bank can deny the privilege to customers that might be tempted to overuse overdrafts as a financial management tool.

Overdrafts Are Not Loans. The ICBA does not believe that overdrafts should be classified as extensions of credit. The bank does not undertake an underwriting analysis to determine the account-holder's creditworthiness and there is no credit application. There is no amortization or collateral. The service can be cancelled if the customer abuses the privilege. Overdraft fees are not interest but designed to offset the costs of handling a check that would otherwise create a negative account balance and therefore cannot be processed in the ordinary course.

As often noted by the Federal Reserve, the purpose of the Truth in Lending Act "is to promote the informed use of consumer credit by providing for disclosures about its terms and cost," and uniform disclosures are "intended to assist consumers in comparison shopping for credit." However, consumers do not "shop" for overdrafts. Moreover, providing disclosures in advance would be impractical. In fact, the only practical way to provide the notice would be an after-the-fact notice mailed to the consumer, since the decision to accept or reject a check must be made within the time limits established by other requirements, such as the Federal Reserve's Regulation CC (Availability of Funds and Collection of Checks) and the Uniform Commercial Code. An APR calculation cannot be given in advance since the amount of the negative balance in the account is unknown until the check is processed.

Best Practices. As noted above, the ICBA is preparing comments on the proposed guidelines issued by the banking agencies. However, many of the recommended best practices included in those guidelines would address many of the concerns that have been raised. The guidelines would ensure that fees are clearly and conspicuously disclosed, would ban misleading advertising, and would generally provide consumers with information about the operation of the programs.

Creating excessive regulatory costs and burdens for courtesy overdraft programs is likely to discourage many banks from offering the service. As a result, any check that cannot be covered by the balance in the account or access to a pre-established line of credit will, by necessity, be rejected. The check will be returned through the normal collection channels, with the consumer incurring both any fees assessed by the bank and the initial payee as well as suffering the embarrassment and inconvenience of a bounced check.

Ultimately, "bounce protection" is a customer service, and anecdotal evidence suggests that these programs are very popular with consumers. The programs provide an innovative means for handling checks that would otherwise overdraw an account in a consistent, efficient and customer-oriented manner. And, they provide customers with peace-of-mind and convenience for the occasional lapse or mistake.

Bank Remittances

Another item on the CAC agenda are the increasing use of bank remittance programs to send funds overseas. As demand has grown, banks are increasingly offering these services. In 2002, the ICBA entered into an agreement with Travelex to provide money transfer and remittance services for ICBA members to offer their customers and community members.

Recently, Representative Barney Frank (D-MA), the ranking minority member of the House Financial Services Committee and several other Democratic members of the committee applauded an agreement by the federal banking regulators to allow banks credit under the Community Reinvestment Act (CRA) for remittance services.

During a recent meeting of the FDIC Advisory Board, it was suggested that competition among banks to offer these services would help reduce costs. More important, this is a service that could encourage those without bank accounts to open bank accounts and avoid some of the higher fees incurred by similar services provided by non-depository institutions. As pointed out by Representative Ruben Hinojosa (D-TX), this will "help bring down some of the barriers to bringing more individuals into the mainstream financial system."

Therefore, it is important regulators do not impose barriers, restrictions or requirements that unnecessarily drive up the costs for remittances or discourage banks from offering these services.

Economic Growth and Regulatory Paperwork Reduction Act of 1996

A third item on the CAC agenda is regulatory burden. At the outset, it is important to recognize that regulatory and paperwork requirements impose a disproportionate burden on community banks with their limited human, financial and other resources. This diminishes their ability to serve their communities, attract capital and support the credit needs of their customers.

The ICBA strongly supports the comprehensive review of regulations by the federal banking regulators under the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA) and is working closely with the agencies and member banks to identify regulations for elimination, streamlining or revision. The ICBA also strongly urges the agencies to constantly assess regulatory burden, incorporating careful and accurate cost-benefit analysis into all facets of the regulatory process, in addition to the current review. Earlier this year, the ICBA offered comments on the agencies' review of consumer lending rules (see attached).

Since 1989, the federal banking agencies have issued over 800 final rules and regulations that affect bank operations. This staggering burden is causing increasing numbers of community banks to sell to their larger counterparts because they can no longer shoulder the burden, while community banks that continue to operate under the increasing burden of all these rules incur increasing operating costs that drives up the cost of banking services for all consumers.

Absent serious change to the direction of public policy, regulatory burden is likely to be a key factor driving consolidation among community banks. As FDIC Vice Chairman John Reich recently pointed out in Congressional testimony, "in looking to the future, regulatory burden will play an increasingly significant role in shaping the industry and the number and viability of community banks… if we do not do something to stem the tide of ever increasing regulation, America's community banks will disappear from many of the communities that need them most." The loss of diversity and loss of local financial institutions, which has been a primary support for the economic growth of the United States since its founding, would indeed be a grave loss.

Community Reinvestment Act

Finally, the CAC will be considering the agencies' proposed increase to the size of banks eligible for the small-bank streamlined CRA examination. As long as community banks are subject to the Community Reinvestment Act, the ICBA strongly supports a tiered CRA regulatory system with a streamlined examination for community banks to minimize regulatory and paperwork burden. To further reduce unnecessary regulatory burden, the ICBA strongly applauds the bank regulatory agencies' proposal to increase the asset size limit-currently $250 million-for eligibility for the streamlined examination to $500 million, and to eliminate the holding company size qualification as an unnecessary complication, although the ICBA has long advocated an increase in the asset limit to $2 billion.

Attached are two letters. The first comments on the agency proposal while the second responds to a letter sent to the banking agencies from 31 Democratic Senators opposing the proposal. However, in the second letter, the ICBA makes five key points that the CAC should seriously consider:

  1. To succeed and prosper, community banks must meet the credit needs of their communities.

  2. Even under the streamlined exam, banks are subject to CRA requirements and examiners thoroughly review each bank's CRA performance.

  3. The agencies' proposal reflects changes in the banking industry. In 1995, 17% of bank assets were in banks under $250 million; now, just over 10% of assets are in banks under the proposed $500 million threshold.

  4. CRA compliance costs can double when a bank crosses the current $250 million threshold.

  5. Community banks need relief to offset compliance costs under new privacy, anti-money laundering/terrorist financing, corporate governance reforms, as well as consumer credit and home mortgage reporting requirements.

Thank you for the opportunity to comment. If you have any questions or would like additional information, please feel free to comment me at 202-659-8111 or by e-mail at robert.rowe@icba.org.


Robert G. Rowe, III
Regulatory Counsel

1 ICBA is the nation's leading voice for community banks and the only national trade association dedicated exclusively to protecting the interests of the community banking industry. ICBA has nearly 4,600 members with branches in more than 17,000 locations nationwide. Our members hold more than $526 billion in insured deposits, $728 billion in assets and more than $405 billion in loans for consumers, small businesses, and farms. They employ more than 231,000 people in the communities they serve.

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