Here is an interesting article.
OCC Overdraft Guidance: Deposit Service or Credit Extension?
The OCC’s proposed overdraft guidance creates a disturbing precedent by turning what has always been considered a discretionary deposit service into a credit product.
BYCHRISTOPHER LEONARD
Jul 29, 2011 | 1 Comments
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Most who have reviewed it agree that the OCC’s recent proposed Guidance on Deposit-Related Consumer Credit Products generates a number of questions and requires several significant changes to bank procedures. However, it is easy to immediately jump to figuring out which processes you will have to change while missing the fundamental shift about overdraft services taking place in the OCC’s thinking.
The title of the guidance is not focused on overdraft, like the FDIC’s “Final Overdraft Payment Supervisory Guidance.” Instead, it is entitled, “Guidance on Deposit-Related Consumer Credit Products.” Read that again: “Consumer Credit Products.” While it is tempting to think of a bank’s overdraft service as the extension of credit, fundamentally it is not. A checking account overdraft service is just what it says – adeposit service, and a discretionary one at that.
Turning the overdraft service into a credit activity instead of a deposit activity creates issues for both consumers and financial institutions. Extending credit means that the consumer can count on the bank making funds available. An overdraft program is a discretionary service, meaning that the bank will strive to pay those items, not commit to pay them. Also, if this is a move toward requiring creditworthiness to open a checking account, even more consumers will be moving to the realm of the un-banked or under-banked.
(The thought also has occurred to us that moving overdraft programs under the umbrella of “consumer credit products” makes it more likely that the Consumer Financial Protection Bureau could exercise a greater supervisory role here.)
Appropriate Degree of Analysis
Not only is the OCC now calling it credit, it is requiring steps traditionally associated with the extension of credit. The guidance says, “Before approving the customer for the product, the bank should have sufficient information about the customer to evaluate that the customer meets the bank’s eligibility standards …” The guidance also tells the bank to conduct an “appropriate degree of analysis” before allowing a customer into the overdraft program “to determine whether the customer will be able to manage and repay the credit obligations arising from the product appropriately.”
Most bankers would assume from this that the guidance is suggesting a credit report now has to be run as part of the account-opening process whenever the provision of overdraft services is involved. Based on the actions of consumer groups decrying insurance companies’ use of credit reports where they were not previously used, this appears to be an anti-consumer act. Whether a consumer manages traditional credit well has proven to be an unreliable indicator of whether a consumer will make good on an overdrawn checking account and it is yet another cost and administrative burden during the account-opening process.
Running a credit report also creates a real risk of a consumer’s misunderstanding the overdraft service. If you’re running my credit report, I will assume it is for the purpose of extending me credit and making a commitment to me that funds will be available. Overdraft is not committed credit because the bank can refuse to pay an item at its discretion at any time. Also, now I have a reason to be dissatisfied with you because pulling my credit report may affect my credit score and you aren’t guaranteeing you’ll pay my items anyway.
Part of the concern here also is that, if this is considered an extension of credit, then do usury laws apply? This is a slippery slope. Consumer advocates already show sensational APRs of thousands of percentage points on the relationship between an overdraft fee and the money advanced to cover overdrafts for a short time. However, such analysis ignores the reality that overdraft programs provide a deposit service, not a traditional extension of credit, and these APRs are therefore incredibly misleading. The overdraft fee is no more relevant to the dollar amount of the overdraft than the $10 cost of a movie ticket is to the value of the movie seat’s 5-square-foot parcel of real estate for two hours. Both are a service, and one that can be declined by the consumer at his or her choice. The Regulation E opt-in exercise showed that a vast majority of users of overdraft services value those services, even enough to go to the trouble of affirmatively opting-in after being fully informed of the costs.
So, not only do you now have different standards for opening an account, you also will have to more closely monitor all account holders after opening the account. The guidance imposes new monitoring and risk-assessment responsibilities and indicates that the bank may have to take actions for heavy users of overdraft services, including “reassessing a customer’s creditworthiness.” While our firm has always been in favor of closely monitoring deposit activity and being knowledgeable about when account holders clear their overdrafts, “reassessing a customer’s creditworthiness” may not mean the same thing.
We also believe this change in thinking toward “credit” is going to mean that banks will have to be quicker to react in running overdraft programs. This will require tools that you probably don’t currently have to allow you to immediately change overdraft limits based on account activity. For example, the guidance expects you to “detect … potential changes to repayment capacity with respect to the overdraft product.” If Fred usually gets a direct deposit of $700 every Friday and this Friday he didn’t get one, either Fred has gotten fired or he has fired you as his bank. Either way, this indicates a change to his “repayment capacity,” so allowing $500 of his items that show up on Monday to be paid into overdraft probably doesn’t comply with the OCC’s “appropriate action” requirements such as “suspending or terminating the credit feature” – and presumably, doing so quickly.
If you agree that transforming the overdraft service into a “credit product” is a dangerous idea, you still have the ability to submit your comments before the OCC’s August 8 comment deadline (extended from July 8, 2011). Email your comments toregs.comments@occ.treas.gov, referencing “Guidance on Deposit-Related Consumer Credit Products.”
Ultimately, changing the checking account overdraft service from a discretionary deposit service based on account activity into a credit product is bad for both financial institutions and consumers. Calling a discretionary overdraft program something it is not invents a mythical creature that no one, including regulators in the field, will be able to really examine. Merriam-Webster’s definition of “chimera” is “an imaginary monster compounded of incongruous parts.” Sounds about right to me.
Mr. Leonard is chief operating officer and general counsel for Wilmington, N.C.-based Velocity Solutions, Inc., a provider of fee income enhancement strategies and overdraft management tools to community and regional banks and credit unions. He can be reached at christopher@myvelocity.com.
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