We are trying to get our "ducks" in a row. In one section of our overdraft protection agreement, we are charging $3.00 for each $100 advance with a maximum fee amount of $21.00. We further state that this fee may be adjusted without prior notification. Management and I are disagreeing. I say it is a finance charge, and management is hoping it is not.......

HELP! ANYONE? ANYONE? :Confused:

I think you are right, and management is guilty of wishful thinking!

Take a look in Regulation Z's definition of Finance Charge. In the examples of FCs, we see that the definition includes

quote:

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Service, transaction, activity, and carrying charges, including any charge imposed on a checking or other transaction account to the extent that the charge exceeds the charge for a similar account without a credit feature.

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In the examples of fees that are not finance charges, we see

quote:

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Charges imposed by a financial institution for paying items that overdraw an account, unless the payment of such items and the imposition of the charge were previously agreed upon in writing.

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I don't think you can wring an exception to the definition of finance charge out of either wording.

You are justifiably uncomfortable with assessing a fee in this way, because these transaction fees have a way of making the statement disclosure of APR quite unsettling (how's that for understatement, Andy Z?). I messed around with a $5 transfer fee and a one-day $10 overdraft balance and came up with an APR (without the finance charge from a periodic rate) of over 18,000.00%

If we take a hypothetical $100 advance and a $3 fee, and assume the customer pays the advance back in five calendar days, I figure an APR of 219.00% in addition to whatever interest you're charging. How would management like to see that on a customer statement?

If you're subject to state usury laws, you also might check to see what they do to your ability to charge the fee.

[This message has been edited by John Burnett (edited 05-24-2001).]

John's example is certainly eye-opening.

I agree that it is a finance charge and under Texas law I believe it would be. But you need to examine your state law to be clear on how interest is defined and if that amount could even be charged.

In a nutshell (and possibly an over simplification), when the fee is charged as an item handling fee, it doesn't matter what the amount is. If the fee is charged based on the amount of the item, it is usually interest. You are basing your fee on the amount paid. That is what our books would call a "time price differential".

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

As usual, John and Andy are giving excellent advice. So let me add in my two cents (but no APR on that!)

When there is a contract for the bank to pay an overdraft, there is a contract to extend credit. That makes the fee to which the parties agreed a finance charge. When there is not a contract to pay an overdraft, but the bank does so anyway, there is no credit agreement and the fee therefore falls into the exception John noted.

The only open-end fee that is not a finance charge is the annual member fee for participation in the program. The reason why that was exempted was that chaos could result if it was included. If the fee was imposed during a period when the consumer had a $0 balance, ..., well, if you think John's APR looked bad, try infinity!

If you charge a fee to cover an overdraft pursuant to a written agreement with the customer, would the actual APR only show on a periodic statement?

Currently, we have a normal overdraft line of credit with an annual fee - no other charges. Our disclosed APR on the agreement is the same as the interest rate. Some here, however, would like to switch our product to a product that basically covers the checks up to "X" dollars (like overdraft insurance) but still charges the NSF fee to the customer. From this discusssion, I'm assuming those fees would be PPFC and calculated into the APR and it would be huge!

The company pushing this product of course is talking "fee income" which has management excited.

I prefer the "carrot and stick" approach - i.e. - If the customer has no written agreement about paying overdrafts, the bank charges an NSF/OD fee for each check. We also have a daily fee that kicks in if the Overdraft is more than $500.

However, if the customer gets an Overdraft Credit Line, then the credit line advances money into the account so there are no NSF or OD fees that can accrue. The customer pays the interest rate and annual fee for this protection.

But I don't think you can have your cake and eat it too. If your customer signs up ahead of time for the credit line protection, I can't see how you can justify penalizing them for using it. Either you want the INTEREST INCOME from the Overdraft Line, or you want FEE INCOME because no Overdraft Line exists.

Fee income may be good - but stupid fee income can be a fiasco!

OK Guys....Thanks for the information on Overdraft Protection. Now, take a look at this.

We do not charge interest on this $3.00 fee. The interest is charged only on the principal amount drawn on the line.

In section 226.4 (b) (2), the extent of the charge does not exceed our NSF charge. In other words, we are charging $3.00 per $100 advance, with a max of $21.00. This $21.00 is a max per day. NSF charges are $20.00 per item.

Does this shed a different light on your previous opinions?????

John B; Andy Z; Lucy G; Bonnie M;
Sheila S???.

By the way, I have spoken to our State Examiners and they claim that the Banking Code and Consumer Credit Laws issue no specific authority in this scenario.

Thanks again!

I think you still have to go back to the definiation of a finance charge under Reg Z. Is it a charge that was incurred because of the credit? If so, then it is a finance charge.

It sounds like the charge is assessed when the Overdraft line is utilized and I think that would be considered a finance charge.

I know of banks that charge when the account actually becomes overdrawn, but I don't think you can take too much comfort in that position. Since you have an available line of credit ready and waiting, the customer is not actually overdrawn because the line will advance. Again, charging a fee for advancing the line is a finance charge.

You have some difficulty in the APR calculatoin since the fee is a set amount based on a tier rather than a straight percentage. The credit card companies usually charge a straight percentage that is capped at a certain amount. Look at a credit card statement where someone has taken a cash advance and see what the disclosure shows.

Your $3 fee is a Finance Charge in my book because it is a fee for paying an overdraft item under an agreement to do so.

For the customer without overdraft protection, a $3 fee assessed for paying an overdraft would not be a finance charge, because there is no commitment (agreement) to pay the item.

While it's sometimes dangerous to consider why a regulation splits hairs like this, in this case it's not rocket science -- My guess is the FRB realized that overdrafts are actual extensions of credit but carved out the "no commitment to pay" exception so that banks would not be forced to calculate APRs for each overdraft fee they imposed.