I would like some feedback from the BOL public on Overdraft Privilege programs. We are considering implementing one of these types of programs and have spoken with two seperate vendors. My questions for you are: 1) Does your institution offer this product? 2) Did it actually live up to the expectation for additional non-interest income? 3) What are the pros and cons your bank has faced after implementation? 4) Overall has your institution been happy with the decision to implement the program?

We often have to fight the "old school" mentality that offering such a product goes against the nature of what bankers have always tried to instill in their customers, which is monetary responsibility. This has been the view of our upper management for some time now, has anyone faced this adversity when proposing this product to management? How was it overcome?

Thanks for all input.

I'll keep it simple, this is not a program that I would support. Also our state "frowns" on these type programs.

If you'll do a search on this topic, you will find a lot of "friendly" discussuion on this issue.

I've chosen to log off from my real login name because it identifies who I work for and am not speaking for them.

We have been examined by both the FDIC and OCC (we changed charters) and neither one of them had any problems with our overdraft program or our advertising of it. Has it lived up to our expectations, YES!! Is it worth it, YES!!

I've read articles here claiming that bankers are just asking for "additional regulations" if they use this program. If you want to take that approach, then just sit back and let your competitors reap the benefits. We have had customers on both sides of the issue: more are grateful to have this feature than those who oppose it. Has our chargeoffs gone up, yes, but we knew that and have adjusted our llr accordingly.

The fact of the matter is that this program, when administered properly is legal.

I did do a search and did not come across the amount of information I was looking for.

We have such a program. I have mixed feelings about the program - used correctly, it may help some people who can't seem to bal a check book. (saves them from embarrassment )

I've also listened to the criticism of OD protection.

Then there is the competitive part - keeping up with the rest of the financial community. The trouble with keeping up with the rat race - especially at a profit - is that you're sure to be a rat in many people's opinion!"

My search only turned up discussions of pro & cons also without the info you're looking for. I thought your question had been discussed before, but apparently I was mistaken.

My bank implemented this program last December and it has exceeded our expectation - revenues are higher and chargeoffs are lower than expected.

OK - you guys didn't think this one would get by me did you, since I am one of the ones that think we are juggling with knives!

To answer some of your questions though, you will find that this program if administered correctly is a cash-cow! The amount of non-interest income that it can generate is unbelievable, but you also have to lower your standards for opening accounts, tie it with some sort of free checking product, and change your mindset about the amount of checking account charge-offs that you are going to see, and have a solid collection plan for charge-offs in place. The other word of caution: If this process ever does draw the wrath of the congress/state agencies/regulators be prepared for the hit to non-interest income it might present.

Surprised some of you didn't I?

Implementing a new program like this should entail a risk vs reward analysis.

Does the reward of increased (potentially) fee income surpass the risk(s) of customer acceptance, public perception, greater chargeoffs, and possible regulatory scrutiny?

It must have for those banks that have the OD program. Has anyone out there had this program and later decided to discontinue it? If so, please chime in.

Others, whether for fear of "big brother" coming down on them , feeling this borders on unscrupulous business behavior, or something else have decided to pass.

I know of a bank in Oklahoma City that has the program and their regulator (FDIC) didn't find anything wrong with the program. The examiners focused heavily on their promotional material.

An interesting read on this can be found at the Kirchman Home Page , Executive Alerts, Overdraft Protection Programs. You may also want to follow up with reading the OCC Interpretive Letter #914 referenced in the article.

After the negatives you find there, let me say that our organization did implement the program. Although we did experience some problems, the fee income being generated seemed to make management very happy. I reserve judgement personally on the moral aspects of such a program.

Opinions are my own and not those of my employer.

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The other word of caution: If this process ever does draw the wrath of the congress/state agencies/regulators be prepared for the hit to non-interest income it might present.

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That is a good point and I wonder how many banks have a contingency for that? As a whole, what do bank's customers feel about this? Excited, insulted, confused, appreciated? What is the consesus?

When I presented a copy of OCC 914 to our management - they decided that the big, splashy, 'cash cow' program wasn't something they were interested in. That doesn't mean we don't want to maximize non-interest income, just that we want to do it ethically, and with a much lower risk.

One of our local competitors, however, posted an ad in the Sunday paper announcing their new program. The limits were something like $1,000, $750 and $500.

We implemtended an ODP program about 2 years ago and it has been a source of income that seems to have met up to its proposed numbers. You do need to be careful to monitor the process as a whole and our regulators (FDIC) had no problem with our particular program. Good fee income, lower than expected charge offs, etc.

We call it Authorized Overdraft Privelege. The results will stun you. One thing we did that we regret is give it to everyone immediatley. We could have saved some C/O's if we made them wait 30 days then automatically put it on their account. Another problem we had is that a lot of people did not understand that you still get charged a NSF Fee for every item and the entire amount is paid back immediatley. They thought it was like a loan that they could pay back over time.

Good luck.

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Another problem we had is that a lot of people did not understand that you still get charged a NSF Fee for every item and the entire amount is paid back immediatley. They thought it was like a loan that they could pay back over time.

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I think this is the point that Randy (and maybe I shouldn't be using his name here) and I have been trying to point out. These "misunderstandings" are going to cause complaints to the OCC, FDIC, OTS, etc. and here comes a new reg, or the reserve spot of 226.34 (I think that's the one that's reserved without looking) is going to come off the reserve list and rear it's ugly head.

Enough said about this on my part.

If you guys thought that I was off base regarding the possibility of bringing down the wrath of the regulators on this issue - see the latest annual Regulation Z commentary update released yesterday.

You will find a section requesting comment on how "bounce protection" programs should be treated under Regulation Z. It's the first salvo being fired saying - be warned - this is on our radar screens. The scaring part is that they are also requesting comment on how these programs may tie into fair lending issues! Here's an excerpt:

Fees imposed in connection with “bounce protection” services may or may not meet the definition of a finance charge. See § 226.4. Information and comment are solicited on how “bounce protection” services are designed and operated and how these services should be treated for purposes of TILA in order to assist the Board in determining whether and how to provide guidance on potential coverage under Regulation Z or to address possible concerns under fair lending or other laws.

For the full version see here:

Proposed Reg Z Commentary

I thank everyone for all these good comments. I have watched over the past couple of years to see which side of the fence the regulators would fall on this...actually I am surprised that they did not take a firm stance long ago.

Could you outline the elements of this program? I may be missing something in that we have Overdraft Protection accounts, but there is no fee income, just interest income when it's used.

Grist

Here's a bank that offers this on the web. See their site to see how it is described to protential customers:

Bounce Protection - Metropolitan National Bank

The concept is that this is a overdraft product offered through New Accounts and not the Lending Dept. Each customer gets $300.00 Overdraft Privilege tied to their account, when they write checks that overdraws the account the bank charges the customer $20.00 and pays the check. The customer can write as many checks as they want to overdraw their account to amount allowed, but each check will be charged the $20.00 fee (this is where the increased income comes from). The customer has a predetermined time frame in which they must bring the account to a positive status. I have seen anywhere from 15 days to 35 days. And so the cycle continues from there. Supposedly this is a real "cash cow" but a lot of bankers have a moral problem with it which is what we are internally debating right now. Also, it is strictly designed NOT to be considered a Line of Credit. The terms and conditions are carefully written to avoid this product being considered a loan product which of course is then subject to usury limits and regulations, this is why the regulators are keeping such a close eye on it.

I am surprised that the OCC did not have a problem with this program. They issued a very strong letter with concerns in July. I think that the program is a fee generator that everyone wants because we need the income. But I also believe that eventually it will come back to bite us. Someone is going to complain that we made them overdraw their account by offering the program, it damaged their credit/reputation, etc. Look at McDonalds!!

Sorry guys, I must have vacation on the brain. The two links I posted above are now working correctly.

I have been involved in two types of overdraft protection programs, both increase income in one form or another, one is an advancing line of credit attached to the DDA. A specific loc amount is established, loan agreements signed, and advances occur when funds are unavailable, without NSF fees occuring. Obviously interest income is gained, and regulatory issues minimal.

The second one, and obviously the subject of much debate, is the agreement to pay checks up to a certain amount for customers, releiving their fear of return. Therefore, non-int income increases (theoretically) through additional NSF fees.

Both products can be beneficial to the customer..however, regarding the second form of OD protection, some minimal qualifications/guidelines are met before allowing use and continued use of the service, such as an account established more than 30 days, OD must cleared within 30 days, etc. If OD is not cleared in 30 days, priviledge is revoked, and charge off is taken automatically in 90 days. Additional reserves are established based on the length/duration of the OD.

My point/opinion...customers that meet these requirements, for the most part, are customers we would probably pay items for anyway..therefore the mindset of encouraging more nsf activity is the goal. And that is where the ethical issue comes in to play. In the past, we (bankers) have generally not consider customers who have excessive/continued nsf activity as preferred customers, even if they cover it and start over again. Even Reg CC considers customers with repeated overdrafts "risky". Therefore contradictions could occur when evaluating or making decisions, other than pay/return, if consideration is not given to the fact that this type of activity is being encouraged.

Further, although nsf fees are increased, establishing additional reserves for the program is only prudent, so when determining the actual increase if fees, the reserve expense should also be factored in. You may find that the net increase, although larger, is not as large as you think.

We also had customers who would come in and withdrawl cash (one transaction, one fee) up to the agreed limit including the fee, cover the OD with the 30 days, and then do it again, defeating the intent of the program.

Last point, if offering this type of program, would it be available to employees? You should make this very clear. If this is not communicated to employees and they use the program, can you enforce your policy of requiring employees to maintain financial responsibility? And going back to contradiction....can you call this financially irresponsible if you are encouraging the practice?

One final thought. IMO 1) The day is coming when we will not be able to charge the same for paying an NSF item as we do for returning it and 2) the Overdraft Programs will be gone because of bad publicity. For the customers, they are easy to get into but hard to get out of.

We went with the STRUNK & ASSOCIATES overdraft privilege program last December. We choose $700 for most accounts, and $400 for our free checking product. We increased our overdraft income all months except (March 2002 negative $88). The average monthly increase after netting out refunds, charge-off's, and recoveries on 4200 accounts was $14,629. (TOTAL IMPROVEMENT FOR 11 MONTHS $160,919.) We pay Strunk 30% of the improvement the 1st. year and 20% the 2nd. year and after the 2nd year zero. Therefore the net improvement for the first 11 months was $112,616.