Pub. 1 2010 Issue 4

winter 2010 7 Overdraft Programs The Next Chapter By Mike Potter, Senior Vice President, Strunk & Associates, L.P. B ased on my conversations with bankers, association executives, and the content of some recent examina- tions, I’d like to offer a few comments on the post-Reg E environment for your consideration. For the last five years at least, the regulatory community has promulgated multiple rounds of guide- lines and descriptions of best practices that largely focused on more and more disclosure of the nature of overdraft programs so that customers were better prepared to understand them. The un- derlying premise seemed to be (personal opinion) that customers in general were under-informed, and that if they had better information, such as the Reg DD additions to monthly statements, they would use overdraft services less often. The Reg E amendments took that idea to a new level by requiring that customers specifically opt-in to having their debit and ATM transactions covered before the bank could charge a fee for providing overdraft services on those transactions … yet more disclosure. The simple fact is, however, that none of the enhanced disclosures have resulted in any discernable change in customer behavior. Similarly, my conversations with bankers who have successfully completed their Reg E efforts in recent months suggest that the Reg E amend- ments are having relatively little impact on customer acceptance of well designed overdraft programs other than to make everyone’s life a bit more complicated. All of this suggests that customers do not behave the way they do because they lack information, despite the desire of some industry observers to believe that. Cus- tomers behave the way they do because they find strong value in the overdraft services offered by the vast majority of community financial institutions. The focus of the regulatory community seems now to be moving beyond how much information the customer has about their overdraft program to assess- ing how much information the financial institution has about their overdraft pro- gram. Further, additional focus is being placed on determining if the program is risk managed appropriately, and if the manner in which the program is being offered is potentially in violation of the Federal Trade Commission’s definitions of Unfair or Deceptive Acts or Practices (UDAP). This article cannot hope to fully discuss these issues, but all bankers should be aware of some basics, includ- ing the recently proposed guidance from the FDIC and OTS. The recent publication by the OTS of their proposed Supplemental Guid- ance on Overdraft Protection Programs is something that all bankers should consider. An excerpt from this proposed guidance is instructive: “Although OTS believes that many insti- tutions provide overdraft protection in a responsible manner, the proposed guidance, if adopted, would conclude that institutions that engage in certain overdraft practices violate the prohibition on unfair or deceptive acts or practices in section 5 of the Federal Trade Commission Act (FTC Act). 8 OTS has recently articulated the standards that it ap- plies to determine whether an act or practice is unfair or deceptive under the FTC Act.” Q Overdraft Programs — continued on page 8