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Bankers’ associations endorse overdraft privilege programs


Outsourcing of overdraft protection services has become big business in the banking industry, and two major Texas players are eyeing the Iowa market for expansion.

Both the Iowa Bankers Association and the Iowa Association of Community Bankers have recently endorsed Texas-based companies that specialize in providing so-called overdraft privilege programs for their depositors. The services are billed as a way for banks to increase their customer satisfaction while increasing their profits from fees from overdrafts and non-sufficient-funds checks.

Though the companies say the programs will save customers money in overdraft charges from merchants, consumer watchdog groups warn that the practice, in which customers accrue daily fees until the overdraft is corrected, amounts to “payday lending by banks.”

The Iowa Bankers Association has selected Strunk & Associates L.P. The Houston-based company provides overdraft privilege programs to more than 900 banks in 42 states. The Iowa Community Bankers Association last week similarly endorsed John M. Floyd & Associates of Houston, which provides those programs to more than 650 banks, credit unions and other financial institutions.

“It seemed as if this is kind of a hot issue in the banking community,” said Dick Goodson, the ICBA’s president. “We took a look at the larger programs out there, and thought it would make sense if we endorsed one of them. This one rose to the top of the list. I like the way they’re handling the oversight program; that whatever you’re doing is meeting the requirements of regulators.”

Overdraft privilege programs provide an opportunity for banks to “enhance member satisfaction while also incresing their non-interest fee income,” Goodson said. “Fee income has become more important to our bottom lines in an era of declining income from lending.”

Some Central Iowa banks have considered the programs and decided against using them.

“We basically make those decisions ourselves,” said Ed Mears, a vice president with Iowa State Bank. “We had looked at a couple of them and decided they’re not for us.

We have options for the customer internally here, including lines of credit and transfers from savings accounts.”

The Federal Reserve System’s Financial Institutions Examinations Council recently issued a guidance letter that gives banks recommendations on how they should disclose the costs of these programs to customers.

“It’s a relatively new phenomenon that banks have been offering overdrafts as a convenience and product rather than something that would be discouraged by the bank,” said Tom Gronstal, Iowa’s superintendent of banking. “I think that change is what’s creating the issue, and I don’t think anyone really knows what to do about it.”

Neither state nor industry officials said they have figures on how many Iowa banks use these types of outsourced programs.

Under the guidance, federal regulators have determined that overdraft protection is not a loan, so the amount provided by an institution or third-party program is not subject to the Truth in Lending Act, which requires disclosure of fees and annual percentage rates on the amount loaned.

Federal regulators appear to be waiting to see whether banks will monitor themselves adequately before deciding whether to issue formal rules, Gronstal said. “At this point, I don’t believe there’s any one that’s been threatened with any enforcement action because of what they’ve done,” he said.

The National Consumer Law Center, a non-profit organization that works closely with the Consumer Federation of America on consumer finance issues, still has concerns about the practice, said Chi Chi Wu, a staff attorney with the NCLC.

“Essentially, even with the proposed guidance and regulations, our main concern is that these programs that promote the use of overdrafts as credit are not covered by the Truth in Lending Act,” she said. “When you use overdrafts as a form of credit, it’s really expensive. The bankers may love them, but they’re not good for consumers. These programs bring in a lot of money for banks.”

In some instances, banks that use the programs add the allowed overdraft limit to customers’ balances, which makes it easier for an accountholder to inadvertently withdraw too much and begin incurring overdraft penalties, Wu said.

“For these types of programs, there should be APR disclosures,” she said, “and banking regulations should prohibit allowing you to overdraft where you normally wouldn’t be able to (with a debit card or when using an automated teller machine), because the whole rationale of the program, to save you from embarrassment, doesn’t fly when it’s just you and the ATM. Imagine if you overdraw your account by paying for your $2 hamburger with your debit card at McDonald’s. You get that $20 fee, and all of a sudden, you’re eating a $22 hamburger.”

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