Deposit Account and Overdraft Services

Position

  • ICBA strongly supports a legal and regulatory framework for deposit account services, including various overdraft payment services, which allows community banks flexibility to provide a variety of services to meet consumers’ financial needs.
  • ICBA opposes any requirements that would dictate a community bank’s deposit account screening and/or closing procedures.
  • ICBA supports a consistent legal and regulatory framework for deposit and deposit-alternative accounts, such as prepaid accounts, for banks and non-bank providers. Consumers opting for deposit and deposit-alternative products offered by non-banks are entitled to the same transparency and protections as they would receive from banks.
  • ICBA adamantly opposes any new overdraft rule, guidance or legislation, that would:
    • Fail to distinguish between discretionary or ad hoc overdraft payment and automated overdraft payment programs;
    • Fail to recognize the community banks’ customer-focused relationship model;
    • Impose fee restrictions, caps or price controls;
    • Impede on community banks’ ability to offer overdraft services to meet their customers’ needs;
    • Dictate unreasonable and burdensome customer contact requirements beyond initial, annual, or change-in-terms disclosures/notices;
    • Impose underwriting requirements and regulate the service as a credit product; or
    • Result in unintended consequences such as an increase in the number of returned check and/or ACH debit transactions for consumers.
  • ICBA adamantly opposes using Regulation Z protections for regulating overdraft services for prepaid accounts.

Background

Community banks offer many deposit account services to best address consumer needs. In particular, community banks offer a variety of overdraft payment programs, in which the bank analyzes an overdrawn account for payment, and alternative services, in which customers can choose to transfer funds from a designated account or line of credit or to advance funds from a short-term, small-dollar loan to avoid an overdraft. Most community banks leverage their knowledge and relationship with the customer in making overdraft payment decisions and operating their overdraft programs.

Increased and ongoing regulatory scrutiny of consumer overdraft payment programs has affected many aspects of how community banks offer these services to consumers, as well as how they monitor and manage these services.

In June 2012, ICBA released the ICBA Overdraft Payment Services Study (Study) which surveyed 575 community banks and 3,000 consumers. Among that survey’s notable findings are that community banks are transparent in their disclosures and inform customers of alternative services. Furthermore, community banks have policies and practices in place to manage their risk and ensure safety and soundness. The study also reveals that most consumers understand the potential consequences of returned payments and want important transactions paid by their financial institution (all fees being equal) even if those transactions result in an overdraft.

Overly burdensome legislation and regulation of deposit account services, such as overdraft protection, will hurt consumers. Discretionary or ad hoc programs – in which bank staff evaluates overdrafts on a case-by-case basis – are services that customers expect from their local bank and should not be subject to the same rules and limitations as automated programs, which are often developed and operated by third- parties. In addition, attempts to impose price controls or caps on the number of overdraft fees a bank may assess on a consumer would cause banks to reject more transactions that would create a negative balance in an account – doing a disservice to the consumer and placing new burdens on check processors and payment systems that would have to handle returned checks. This alternative for a consumer – merchant returned check fees, possible credit report and check verification system blemishes, collections hassle, embarrassment, and the potential reliance on payday lenders – is far worse than incurring an overdraft fee.

Regulation Z requirements should not apply to checking or prepaid account overdraft services. Regulation Z is not the appropriate regulatory scheme with which to address these services as overdraft services are not a normal extension of credit, and Regulation Z disclosures would not be meaningful to the consumer.

Staff Contact: Cary Whaley and Rhonda Thomas-Whitley