Bounced Check Fees - Community Development Banking Listserv Archive

#1 01-26-2003, 11:29 AM

>The Fed is looking at this b/c these advances purport to protect
>borrowers from bouncing checks but in fact are so exhorbitantly
>priced that they amount to payday-like loans. The fact that they are
>marketed as a way to maximize fees I think underlines the intent, in
>many cases. That is not to say that borrowers are not culpable or
>that lenders shouldn't continue to charge borrowers some
>reasonable amount for a program that covers borrowers with
>insufficient funds. But what we're trying to address is far beyond the
>pale of charging a reasonable fee for a reasonable service, in my
>view. Dave Beck

Evidently, your impression is that these folks would not write overdrafts
if not for the bounced check protection. Our experience shows this is not
the case.

Without this courtesy pay service, many of these member/customers would
have had their checking account closed and also charged nsf fee's by both
the company to whom the check is written as well as the bank/credit union.

I am all for education and helping customers/members operate within a
budget and anything else that could help them better manage their money.

But I think you are being very short sighted to think disclosing reg z
calculations would change the way people manage their money.

We serve a lot of fringe customers, many who live way below the poverty
level. We employe a full time consumer credit counsleor at our expense.
We do offer bounced check protection to people with a direct deposit or
payroll source. The truth is it is an education problem, it is not a
legislative problem.

Bob Larison, President
Atlantic Coast Federal
Waycross, Georgia
rjljr@almatel.net

David --
City First would appreciate some constructive thoughts on how
development banks can offer a deposit/checking product,
cost-effectively, to consumers who we know from experience will
occasionally overdraw this account. The industry needs to offer is an
alternative to payday lenders and pawnbrokers that brings these
consumers into the banking mainstream.

Although current practice is unacceptable, with better disclosures and
more financial education than currently provided, this kind of product
is the most promising we've yet seen. City First does not offer this
product, but we have looked at it enough to want to be part of an
informed conversation. We'd prefer to sign on to a "model code" or
"model product type" as a first step in this area.

Most "First Account" initiatives targeted to serve the unbanked adopt
the case management model. That is, a limited number of consumers are
reached with intense (and expensive) education. Usually, it's through
seminars or by piggy-backing on other case-management relationships,
e.g., immigrant aid groups, special needs housing, etc. The model
assumes that with enough education, any consumer will want to be in the
banking system. Not true and not affordable, in my view.

A better model is to design a useful, cost-effective product, and then
mass market it. Some customers will take it, some will not. I believe
this is the only way to reach a large number of customers
cost-effectively.

We would welcome robust conversation on this.

Cliff
"Clifton Kellogg" <CKellogg@cityfirstbank.com>

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#2 01-31-2003, 07:14 AM

From: "David Beck" <davidb@self-help.org>

Bob: I think regulatory action by the Fed can reduce the amount of
ripoff going on - or at least allow better public scrutiny of the
programs. I hope we can all agree there is a difference between
reasonable overdraft protection and outrageous "bounced check
prevention" fees designed to milk consumers who in all likelihood
think they have some sort of reasonable protection plan. And if
you think consumer education is the key then wouldn't better
disclosure of the amount charged under these programs be a
primary education tool? Isn't that just basic fairness? And is that
really too much to ask?

David Beck

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Bob and Cliff:

I read the NY Times article about these products last week. The key
point made in that article was that several financial institutions were
actively marketing the overdrafts, making statements such as, "Short on
funds for an emergency? Go ahead, you're protected!" The same
institutions did not extend the usual overdraft protection to these
customers, which is generally a low-interest (or no interest) loan.
Instead, the account holders paid a $30-$40 fee for each overdraft.

Since the bank customers WERE NOT allowed to take advantage of the
institutions' true overdraft protection, but were steered to the
fee-based product and not expressly told that there is a $35 fee for each
transaction, it does suggest a certain level of exploitation of the
affected customers. One might argue that the financial institutions are
creating their own paycheck loan products, similar to those offered by
the check-cashing services from which we try to wean our clients.

Bob, advertising IS educating, and the education given was that customers
can overdraw their accounts and the bank would protect their reputation
by covering the overdrafts. The missing disclosures are that the fee for
each overdraft is a punishing $30-$40, and that there is another way to
protect against overdrafts.

Keith Ferrell
Technical Assistants
1500 Market Street, 12th Floor
Philadelphia, PA 19102
(215) 546-4530

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From: "M. Hayden" <emmyhayden@yahoo.com>

ACORN members think bounce fees are too high, and that they do not
correlate with the costs incurred by the bank for bounced checks in any
way. In fact, we charge that the bank makes a profit from those fees, and
that to allow a bounced check to be resubmitted doubles these profits.
Since rich people don't bounce checks, this profit is obtained from those
who need their money the most. One member recently sent out eight checks to
pay all of her bills, but made a math error and all eight bounced twice.
They took her whole social security check, and now none of her bills are
paid. Before this, she had great credit, so this is doubly painful for her.

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#3 01-31-2003, 11:47 AM

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From: Jean Ann Fox <jafox@erols.com>

On Monday, Consumer Federation of America, National Consumer Law Center,
Consumers Union, US Public Interest Research Group and others filed
comments with the Federal Reserve on bounce protection issues per the Fed's
request for information about this banking issue. The comments and an
attached report by CFA and NCLC are posted at the CFA web
site. www.consumerfed.org under Financial issues, Banking Fees.

Jean Ann Fox
CFA

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From: rjljr@almatel.net

I still don't agree. In the state of Georgia, legislation with respect
to predatory lending has effectively driven banks from granting marginal
credit mortgage loans. The risk is just too great. The loans can't be
sold because the investor has to assume the predatory lending risk. What
has this accomplished? It has driven marginal credit customers to
finance companies.

Similarly, kill bounce check programs and marginal customers will have
their accounts closed and be forced to use check cashing services.

Disclosures do not help the undereducated and the poor. They need the
service and will sign anything.

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From: Oceans351@aol.com

One of the problems with legislation to "correct" the ills of the world is
that one size is expected to fit all. I would like to outline our procedure
for your edification.

We offer overdraft protection in the form of an over-draft loan. We do not
charge for the transfer but do charge interest on the loan nor do we charge
an overdraft fee.

We also offer overdraft protection through automatic transfers from
multiple other accounts in our institution.We do not charge for the
transfer nor do we charge an overdraft fee.

If a non-sufficient funds check is presented for payment at CORE CU and it
can't be covered by either of the above programs, we have these procedures
in place:

1. We call the individual that owns the checking account
2. We give the person until twelve o'clock (noon)to deposit funds to cover
it, and
3. If they do not make the deposit, we charge $25.00 to discourage future
overdarfts.

NOTE: We prefer to call these items what they are, BAD CHECKS.

We do not believe that $25 is excessive for the search and efforts we
expend to avoid the overdrafts. When last we checked, it is against the law
to write bad checks and some folks go to jail for doing it.

Paul F. Simkins, President
CORE Credit Union

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There is no doubt that encouraging overdrafting is not responsible
banking. But can we draw a regulatory line between unconscionable
practices, a simple bad deal, and the responsible charging of punitive
overdraft fees? Can we use regulation to resolve the tension between
profitability and service? Regulation is never narrow enough to have no
side effects, never nuanced enough to stop predation.

Bill Myers
WMyers@alternatives.org

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#4 02-02-2003, 10:48 AM

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From: "David Beck" <davidb@self-help.org>

Rita - that sounds exactly like the sort of overdraft protection that we
all support. It's the extremely high-cost abusive overdraft plans that
need to be addressed.

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From: Jay Hack <jhack@s-zlaw.com>

Let's get real on this issue of bounced check charges. If a bank
advertises that overdraft protection can be used as a loan, then it's a
loan and Truth in Lending should apply. But the following message posted
on CDB needs a reality check:

"One [ACORN] member recently sent out eight checks to pay all of her
bills, but made a math error and all eight bounced twice. They took her
whole social security check, and now none of her bills are paid. Before
this, she had great credit, so this is doubly painful for her."

It must have been quite a math error! If this story is the truth, the
whole truth, and nothing but the truth, as they say, then give me the
name of the person and the bank and I'll personally - at no cost - apply
26+ years of legal experience handling regulatory matters for banks to
try to convince the bank to change its mind. But this sounds more like
an urban legend than truth.

People have to learn to be responsible when they handle their accounts.
Statistics show that more than 90% of bounced check fees are incurred by
habitual check bouncers who either pay no attention to their accounts or
don't care. Community groups should spend their time teaching people how
to use bank accounts wisely, not complaining to the banks when people
don't. The old joke "How can I be overdrawn? I still have checks left."
isn't funny when people really act that way. And while we're at it,
let's all try to teach people that they can't cover checking account
overdrafts by writing a new check.

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Consumer Groups Urge Fed to Stop 'Abusive' Bank Overdraft Charges

WASHINGTON -- Describing overdraft protection products as "a deliberate,
systemic attempt to hook consumers onto overdrafts as a form of high cost
credit," the staff attorney for the National Consumer Law Center, along
with the Consumer Federation of America and other national organizations
sent the Federal Reserve Board a comment letter calling on the agency to
"immediately implement a number of reforms to prevent banks from marketing
bounce protection without receiving consumers' consent or spelling out the
product's true costs."

The groups sent a report along with their letter they said described how
banks "aggressively and deceptively market bounce protection as credit."
The groups also noted that banks typically target low and moderate-income
consumers almost exclusively when they market bounce protection

The consumer groups made several recommendations to the Fed to address the
issue.

Credit Union Times

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Overdraft Charges Should Not Be Covered by Reg Z, NAFCU Says

ARLINGTON, Va.--NAFCU objected to some provisions in a recent Federal
Reserve Board proposed revision to the official staff commentary of
Regulation Z, implementing the Truth in Lending Act.

In its official comment letter, NAFCU argued that Reg Z should not cover
overdraft protection, as proposed. "Consumers ultimately benefit from
bounce protection services because they can avoid additional charges by
payees for returned checks and possible late payments...Subjecting bounce
protection service programs to Regulation Z disclosure requirements will
effectively eliminate such programs because financial institutions will
find compliance burdensome and impractical," the letter signed by NAFCU
President and CEO Fred Becker read.

Additionally, in the letter, NAFCU did not support the proposal that an
expedited payment fee be disclosed because it is more closely related to
checking than a credit account and the elimination of actual auction
results and mandate statistical data to compare APRs. The association did
back recommendations that Reg Z not require disclosure of expedited
delivery fees and not change in terms notice is required, to permit credit
card issuers to replace a card with more than one, and providing additional
guidance on mortgage insurance premium disclosure.

Credit Union Times.

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CDCUs Urge New Limits On Bounce Protection Programs

WASHINGTON (01/29/03) -- A broad group of community development lenders,
including several credit unions, called on the Federal Reserve Tuesday to
help reign in the proliferation of fee-based overdraft programs. The group
called on the Fed to revise its Reg Z to require greater disclosure of such
programs, commonly called bounce protection programs, and to amend its Reg
DD to exclude those accounts that include such charges form the definition
of "free checking." Hundreds of financial institutions, including many
credit unions, have taken to charging thinly disclosed or hidden fees, for
allowing overdrafts on everything from regular savings accounts to ATM
withdrawals. A $21 overdraft fee on a $20 overdraft, repaid within two
weeks, amounts of an annualized percentage loan rate of 5,475%, the group
states. "Paydays lenders never dreamed of such returns," the letter says.
Signees to the letter include the North Carolina Minority Support Group,
representing 12 CDCUs, representatives of Kau FCU, Latino Community CU, and
Self-Help CU, along with more than 50 community groups.

Credit union Journal

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#5 02-03-2003, 03:59 PM

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We also wished to add some comments here regarding the recent publicity
surrounding overdraft protection.* We are confident that institutions will
make comment to the Fed according to their experience and sense of what is
best for the underserved markets development banking institutions were
created to serve.* We think this area is very difficult and that long-term
solutions may include adaptation and modification by mission-driven
institutions (and eventually the mainstream) of products that may be abused
as predatory by other providers.

Without knowing of the impending publicity on this issue, NCIF had invited
Ken Johnson, now affiliated with Strunk & Associates, LP to be a speaker on
overdraft protection at its upcoming Conference.* In responding to us, he
providing the following comments:

"As you are probably aware, the whole issue of discretionary overdraft
services seems to be generating considerable buzz lately.*** You probably
know about the recent Fed request for comments.**** BankNews magazine
recently asked me to do an article for them.** It appeared in their current
(January, 2003) issue.** Just last week there was a nation-wide conference
call organized specifically for several state banking departments to discuss
discretionary overdraft services.***** Yesterday morning, there were articles
in the NY Times and the Houston Chronicle.* We understand that CNN and
other news services and/or newspapers may be picking up the story and/or doing
follow-ups.

For your group, this topic is especially timely.*** There are undoubtedly
many NCIF/CDFI banks who view discretionary overdraft services as morally
wrong and "taking advantage of the financially unsophisticated and
economically disadvantaged".**** Others view it as a significant improvement
in customer service that can, at the same time, improve non-interest income
for the bank.** Actually, in my opinion, both sides have some good arguments
and I believe there is middle ground as long as the service is implemented
properly.*** It's an issue that both sides have strong feelings about.*** It
should be a very interesting exchange of ideas.**** I look forward to it."

We are pleased that Ken has agreed to speak on this subject.* Other speakers
on this panel will be a senior manager from ASI Federal Credit Union (which
has continued to manage a very successful alternative payday loan program)
and David Reiling, president of University Bank, a certified CDFI bank in St.
Paul that has extremely innovative and proactive products and services to
reach the underbanked.

More broadly speaking, NCIF's Retail Financial Services Initiative, in which
12 banks and credit unions are engaged in an intensive two to three year R&D
effort to develop sustainable products and services to attract and promote
asset building among the underbanked, is seeking market driven alternatives
to existing predatory practices.**

These issues are persistent and difficult.* We appreciate all effort to
improve the conditions under which the underbanked (and potentially abusively
banked) can be better served.* We believe that market driven solutions must
complement regulatory approaches, as the failure of CRA to prevent a
burgeoning of predatory lending since 1990 (the exact period during which CRA
has been most fruitful from a product innovation standpoint) demonstrates
that regulation in and of itself will not prevent the development of abusive
practices and rapid penetration of target markets who are not otherwise
properly served.

We wish to continue all aspects of the dialogue on these issues with you.*
Clearly, concerted effort is needed by our segment of the market to develop
solutions and bring them to scale.* We thank you for your dedication to this
objective.

Lisa Richter
Fund Advisor
National Community Investment Fund
773-420-4910

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I have to put in my two cents worth, I don't think this is a need for more regulations (we have enough) to add cost to our operations.
*
I have to raise my automatic NSF and overdraw fee to 1/2 of local bank plans.* As someone said 90% of all NSF checks are by consumers that use it as regular daily dealing?? Odd but true.* We had to raise our fee rate to slow down the number of such accounts.* We monitor and close accounts that don't make regular deposits that more than cover NSF fee's.
*
I think education is a help but some just use rubber checks to increase their cash flow.
*
I look @ this fee like all other fee's.* No service should cost the non user member, i.e. the user should pay a break even fee for service.* I still believe in a supply and demand process, in our case owners should get service at very near cost, just enough profit to fund capital and my big salary.
*
Max Stoll, President/CEO
Central Oklahoma Federal Credit Union
Post Office Box 310 - 900 Broadway
Davenport, Oklahoma* 74026
(91

377-2341 Cell 405-258-3811
mstoll@brightok.net (mstoll@brightok.net) - cofcu@brightok.net (cofcu@brightok.net)

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From: Jerry Lee <jlee@cvfcuonline.org>

The GFLA legislation was a great example of the legislature not
understanding what they were doing.* It was horrible legislation from the
start.* Not even the Banking Department attorneys could decipher how to
enforce the law.* The end result, unless corrected, will be to basically
shut down the housing market in Georgia with all of the collateral damage
that entails.

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"Bounce Protection" Services

In addition to the proposed changes to the official staff commentary, the Fed has requested comment and more information about "bounce protection" services and whether fees for such services should be considered "finance charges," as defined by Regulation Z.* Although credit unions support disclosing such fees, and indeed are disclosing them, as required under the Truth in Savings Act, we strongly oppose requiring that these fees be disclosed as "finance charges" and included in the calculation of the APR, as it would be nearly impossible for credit unions to comply with such a requirement.* Under such a scenario, credit unions and other financial institutions would likely discontinue such services, forcing consumers to seek such services from pawnshops, title lenders, and payday lenders at a much higher cost.*

There are a number of compliance difficulties associated with requiring that these fees be considered "finance charges."* The most significant problems would be how to disclose such fees and how they are to be incorporated for purposes of calculating the APR.*

For example, it would be nearly impossible to provide initial disclosures before a check is paid under a bounce protection program, since the amount of the check and the resulting overdraft would be unknown until the check is paid.* It would also be impractical to calculate the APR because one fee is charged for a virtually unlimited array of possible amounts that may be paid for all the overdrafts that would be covered under a bounce protection service.* This problem would be compounded, as there would be no "repayment schedule."* For example, an amount on an overdraft could be repaid in one day or it could be paid in 29 days, at the discretion of the member.* It would be impractical to calculate an APR based on a time schedule that can vary to this extent.

We have heard from a number of credit unions on this issue and it is our understanding that in many situations, the fee that is charged under the bounce protection services is usually the same fee that is charged when a check* bounces, which may range from $18 - $25.* Therefore, the fee here would be the same in both a "credit" situation with a bounce protection service and a "non-credit" situation in which a fee is charged when the check bounces.* Since a member will pay one set fee when he or she writes a check that exceeds the account balance, regardless of whether it is to cover the overdraft or whether it is a fee that is charged when the check bounces, it makes little sense that this fee should be treated differently and more onerously from a compliance perspective if it is a fee that results from the use of a bounce protection service.

Federal credit unions also have a unique issue in this area because under the Federal Credit Union Act, they are not permitted to offer loans with interest rates that exceed 18 percent.* Some states impose similar limitations for their state-chartered credit unions.* If fees for bounced protection services are considered "finance charges" and have to be included in the APR, then the APR will exceed these loan limitations by a substantial amount, thus preventing at least the federal credit unions and some state-chartered credit unions from offering bounce protection services.* Charging a lower fee in order to meet the 18 percent threshold would not be an option because such a fee would only recoup a fraction of the cost of providing this service.*******

As mentioned above, bounce protection services offer significant benefits because they provide convenience and real cost savings for consumers.* One example of such a program illustrates these benefits and demonstrates the measures that the credit union takes to ensure that these programs are offered in a responsible manner.* Here, the credit union sets a $300 overdraft limit and only provides the bounce protection service after the account has been opened for at least sixty days and after at least twenty checks have cleared the account.* This credit union will also not allow the account to be overdrawn as a result of using the ATM card or through a transaction with a teller.* The overdraw on the account will only be permitted when a member writes a check to a third party for an amount that exceeds the account balance.* The fee charged for this service is $18, the same amount that this credit union charges when a member's check bounces.

This program, which the credit union clearly operates in a responsible manner, has saved the members a significant amount of money because the use of this service allows the members to avoid additional charges that would be imposed by merchants and others if these checks were allowed to bounce.* This credit union alone estimates that its members have saved about $4 million in such fees for the one-year period from December 2001 through December 2002.* This represents a tremendous cost savings for all consumers if this estimate is* extrapolated to cover all financial institutions that offer similar overdraft protections.* This is in addition to the intangible benefit to the consumer of avoiding the embarrassment and inconvenience that results when a check bounces and the arrangements that have to be made to ensure that sufficient funds are available to cover the check.**
*
For this credit union, which has a field of membership that includes military personnel and their families, this service was especially helpful shortly after the September 11, 2001 terrorist attacks.* Shortly after that time, military personnel were immediately activated for service, creating confusion for them and their families.* However, the financial pressures were alleviated to some extent because the spouses were able to use the bounce protection service to pay the bills that were due during this time period, again saving these members a significant amount of money and inconvenience during this extremely stressful time period.

Again, these services would likely not be available, at least for credit union members, if the fees charged for bounce protection services are considered "finance charges" under Regulation Z.* The beneficiaries under this scenario would be certain types of lenders, such as title lenders and payday lenders, many of whom have been associated with the problem of predatory lending.* Bounce protection services provide real opportunities for credit unions to facilitate* the government's goal of eradicating predatory lending by preventing such an outcome, and this would be thwarted if the Fed revises Regulation Z or the official staff commentary in a manner that would further regulate these services.
*
Jeff Bloch, Assistant General Counsel
Credit Union National Association
jbloch@cuna.com

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#6 02-06-2003, 09:34 AM

Esteemed Colleagues:

I must say, this topic has generated some of the liveliest discussion I
have seen on this list in months! It has been instructive to read the
differing viewpoints on the subject, but I wonder if all of the
respondents have been on the same page.

The Philadelphia Inquirer printed an article on the subject Sunday, and
interviewed a local financial institution, which features "Bounce
Protection." The writer also cited the following excerpt from a brochure
from an unnamed institution:

"Have you ever been shopping on the weekend and find [sic] a must-have
item, but don't have the money in your checking account to cover your
check? Have you ever had unplanned expenses between paydays?"

Now, I admit to being ignorant of the details of the pending legislation.
I concede that there may be covenants and restrictions which would
impede the ability of lenders to offer legitimate overdraft protection.
But can we at least agree that the aforementioned marketing piece does
encourage overdrawing an account? Let's not blame the customers, whom
we, being better informed, should protect. And for those institutions
which offer overdraft protection, do you also offer all customers
low-interest loans for that purpose? Do you, the financial institution,
feel that those institutions employing such methods as that described
should be enjoined in some way, to reduce what appear to be predatory
practices (I didn't say, "lending")?

If we, the practitioners and associates, can agree on the topic of the
discussion, I hope that we can expand the understanding of all the list
readers. Thank you.

Keith Ferrell
Technical Assistants
1500 Market Street, 12th Floor
Philadelphia, PA 19102
(215) 546-4530

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#7 02-08-2003, 09:51 AM

From: "Ginger, Paul" <Paul.Ginger@occ.treas.gov>

Subscribers to this listserve may be interested in "Interpretive Letter" #
914 that the Office of the Comptroller of the Currency (OCC) issued in
September 2001 discussing concerns the OCC had with an overdraft protection
program that a bank contemplated implementing at that time. The bank asked
the OCC to review the proposed program.

OCC's letter, published in September 2001, is available on the internet at
http://www.occ.treas.gov/interp/sep01/intsep01.htm.

The letter discusses 8 concerns the OCC has with the proposed program. The
concerns had to do with the following portions of law, regulation and
policy:
-- Truth in Lending / Regulation Z (which governs disclosures banks must
make when making loans)
-- Truth in Savings / Regulation DD (which governs the disclosure of fees on
deposit accounts)\
-- Electronic Fund Transfer Act / Regulation E (governing preauthorized
transfers of funds)
-- Federal Trade Commission Act (which prohibits deceptive acts or
practices)
-- Regulation O (governing extensions of credit to bank insiders)
-- A variety of supervisory concerns (i.e., safety and soundness concerns)
-- Policy issues (e.g., the program may promote poor fiscal responsibility
among the bank's customers)

"Interpretive Letters" reflect the opinions of OCC staff concerning the
application of banking law to contemplated activities or transactions. They
are not laws or regulations themselves, but they are likely to have an
influence on the opinions and actions of bankers.

Letter # 914 appeared in the September 2001 issue of "Interpretations and
Actions," an official publication of the OCC that makes public a variety of
supervisory, licensing, policy and other decisions and opinions of the OCC.

The Office of the Comptroller of the Currency is a federal agency, housed in
the Treasury Department, that licenses and regulates national banks.

Paul Ginger
Community Affairs Officer
Office of the Comptroller of the Currency
440 S. LaSalle Street, 27th Floor
Chicago, IL 60605
312-360-8876 phone
312-435-0951 fax
www.occ.treas.gov

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