Don’t get cute and don’t get caught in a blunder.
Experts tell banks to proceed carefully
[This report was posted on June 17, 2010, with minor updates on July 1, on the website of ABA Banking Journal, www.bankingexchange.com, and is copyright 2010 by the American Bankers Association.]
There are times when creativity, originality, and innovation make a bank stand out. When it comes to handling the Federal Reserve’s impending debit-card overdraft compliance rules, a bank might want to rethink any ideas about standing out.
ABA’s Nessa Feddis, one of a team of regulatory analysts and other experts that the association has had working on this issue, has long been bluntly warning bankers dealing with the regulation: “Don’t get cute.” At ABA’s Regulatory Compliance Conference, Feddis stressed this warning again as institutions strive to get all their compliance tasks handled by the July 1 effective date. [This article was originally posted prior to that date; much of the advice in it remains useful even though the July 1 date has passed.]
Compliance officers packed a concurrent session where Feddis, vice-president and senior counsel in ABA’s Compliance Center, and bank marketing consultant Ann Lee of Houston’s Lee Group, presented ideas, gave warnings, and answered questions. The two based their advice on a combination of the original Fed documents as well as later updates and clarifications, including those issued just before Memorial Day Weekend.
Not a time for originality!
Feddis advised bankers to stick with the model disclosures contained in the Fed’s rules, no matter how tempting the thought of improving on them might be.
“Any time you vary from the script of the model notice, you’re taking a chance,” Feddis said. “I strongly urge that you use the regulatory language. Why risk getting the examiners upset?”
A bank doesn’t want to do anything “tricky,” said consultant Ann Lee. While something may not be wrong, per se, any practice that goes against consumer education and program transparency must be evaluated carefully before it gets the green light, she said.
Further, banks must pay close attention to their decisions regarding customer communications. Lee warned that banks need to be careful how they select those customer groups that will be contacted regarding opting in.
“Are you going to contact all customers? Are you going to contact all customers in your program? Are you only going to contact the frequent users?” asked Lee. “If you are only going to contact those frequent users, you need to build a case for why you are only going to contact them, so it doesn’t look like you are singling those folks out or preying on them, if you will.”
Not a time for toasters and t-shirts
Some banks have expressed interest in offering gifts to customers to encourage them to opt-in for debit-card overdraft coverage for their transaction accounts. Feddis noted that technically, the Federal Reserve does permit such incentives. However, she strongly urged banks not to use that technique to persuade customers to opt-in.
Feddis suggested that such programs could backfire, leading to new iterations of the kinds of headlines that helped usher in the debit-card overdraft rules in the first place.
“The headline will be something like this,” predicted Feddis, who frequently speaks to the press and electronic media about consumer banking issues. “‘Get a free t-shirt and pay $35 for a cup of coffee’.”
“Do you want to be the one with that headline?” she asked the audience rhetorically.
Lee said that she counsels her customers to tread carefully in incenting opt-ins.
“We encourage our customers to not do anything that would be so far on the side of trying to force the decision,” she explained. She favors explaining the benefits of the program and clearly leaving the decision to the customer, without undue influence.
Getting into specifics
Looming in the background of all discussions at the conference, and especially ones on such controversial matters as overdraft, is the expected creation of the Consumer Financial Protection Bureau under the pending federal financial reform legislation.
Apropos of that, Feddis urged caution in followup marketing and communications dealing with overdraft service even after the July 1 deadline the industry is pushing towards. The appearance of anything dreamt up by marketing that doesn’t come across as entirely kosher to the staff of the new agency must be considered, Feddis warned.
Some specific points from Feddis in response to banker questions and concerns:
• Regulation E only applies to consumer accounts and hence the debit-card rules, part of Regulation E, do not apply to business accounts. Further, the new debit-card overdraft rules do not apply to alternatives to fee-based overdraft services, such as line of credit or automated transfer service.
• Banks can offer accounts which require opt-in in order to obtain that type of account.
• Opt-ins can be oral. Feddis said that consent to have overdraft service need not be in writing. She said opt-ins can be in any form that the bank permits.
“Record retention rules only apply to disclosures,” said Feddis. “And consents are not disclosures.”
• The issue of “retail” opt-ins arose. Such opt-ins are those that become necessary when the customer needs to have overdraft service to avoid inability to use their card, and which therefore must be on the spot.
Point-of-sale opt-ins would not be practical, from a merchant’s point of view, said Feddis, so the issue really is, can they be done at ATMs? She said that it is clear that would only be doable at a proprietary ATM.
And she added that many banks she’s spoken with don’t appear to intend to offer this capability straight away, though some may offer it later on. Importantly, she added, if a bank did offer ATM opt-in, it would have to offer the ability to revoke an opt-in through the same mechanism, under the rules.
Regarding such opt-outs, Feddis said regulators recognized that they could not be mandated to be instant, as an opt-in would. She said it is recognized that some customers would use any such requirement for instant opt-out to “game” the overdraft protection program. She explained some might try to opt-in to get a transaction through, and then opt-out almost immediately afterward in an attempt to duck an overdraft program fee.
The OTS supplemental guidance’s influence
Speculation has been heard over the status of an Office of Thrift Supervision proposal of late April concerning overdrafts. The proposal, was released April 23 in conjunction with an overdraft-related enforcement action concerning Woodforest Bank, a Texas community thrift institution.
While Feddis acknowledged that the OTS is most likely going to go out of existence under the pending financial legislation, she suggested it would be instructive for all depository institutions to review the proposed supplemental guidance. She said she suspects that the issues and reasoning seen in the proposal will surface in the future in some federal regulatory context.
Red flag: Handling excessive usage
Both Lee and Feddis noted that regulators have made it clear for years that they are concerned about customers who use overdraft protection programs excessively. (Lee quoted figures indicating that the heavy users of overdraft programs represent about 5% of the typical bank customer base.)
Lee pointed out that the horror stories that give overdraft programs a bad name tend to come from the ranks of excessive users. This emphasizes the importance of monitoring usage so heavy users can be counseled regarding usage.
“People don’t call the press and say, ‘Boy, did my bank help me!’,” she said. In regard to counseling, Feddis said that the bank must be ready to demonstrate that action was taken as a result of the effort.
“You want to be in the position of showing that you tried to identify the best product for that person,” said Feddis.
A final warning
Bankers have been so focused on compliance with the new rules, and handling mailings and other promotions, they may not be focusing on materials promoting their programs that have been out in their branches for some time. Lee suggested having branch staffs check customer literature racks to be sure the materials on hand are current with regulations as they now stand.
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