COMMENTS
of the
CENTER FOR RESPONSIBLE LENDING
CONSUMER FEDERATION OF AMERICA
NATIONAL CONSUMER LAW CENTER (on behalf of its low-income clients)
and
CONSUMERS UNION
NATIONAL ASSOCIATION OF CONSUMER ADVOCATES
on
Regulation E
pursuant to
12 CFR Part 205
Docket No. R-1343
and
Regulation DD
pursuant to
12 CFR Part 230
Docket No. R-1315
March 30, 2010
INTRODUCTION
We first commend the Board for adopting the stronger of the alternatives it considered under its Regulation E proposed rule – the opt-in proposal – and for applying the rule to both new and existing customers. We further commend the Board for prohibiting conditioning overdraft coverage of checks and ACH transactions on a customer’s opting into coverage for ATM and one-time debit card transactions and for requiring that customers who do not opt in receive the same account terms as those who do. This rule has already impacted some overdraft practices, with Bank of America announcing that it will cease to allow overdraft fees to be charged on debit card transactions at the point of sale this summer. (1)
We also appreciate the Board’s commitment in the final rule to “continu[e] to assess whether additional regulatory action relating to overdraft services is needed.”(2) There is no doubt that further action is needed. The Board’s rule, while the stronger of the alternatives it proposed, solely addresses customer consent to a product that remains abusive. The rule addresses neither the high cost of the overdraft fee relative to the overdraft amount nor the frequency with which overdraft fees may be charged. It also does not address manipulation of posting order to maximize overdraft fees. We urge the Board to move swiftly to propose rules, pursuant to its authority to address unfair and deceptive practices under the FTC Act, that would—
• require that overdraft fees be reasonable and proportional to the cost to the institution of covering the overdraft; and
• limit overdraft fees to six per year, at which time an institution must offer the consumer a lower cost overdraft alternative in order to continue covering overdrafts for a charge.
The Board’s failure to address cost and frequency, while problematic unto itself, also heightens concerns about implementation of the Regulation E final rule. Since institutions may continue to charge high, unlimited fees to customers who opt in, institutions have overwhelming incentive to ensure that customers opt in. The Board must play an active role in ensuring that deceptive tactics aimed at obtaining customers’ opt-in are identified and promptly prohibited.
Summary of key recommendations:
• Take swift action to stop deceptive practices by financial institutions attempting to scare consumers into opting in with misleading statements.
• Prohibit deceptive statements in materials soliciting the consumer’s opt-in.
• Require a “Schumer-box”-like disclosure of the comparative costs of opting in to fee-based overdraft, other overdraft alternatives, and declining to opt-in.
• Closely monitor institutions’ opt-in efforts for deception and disparate impact.
• Finalize the following provisions as proposed:
• For customers who have not opted in, prohibit overdraft fees on ATM and one-time debit card transactions regardless of the institution’s policy and practice with respect to such transactions;
• For customers who have not opted in, require that, to the extent tiered fees are based on the amount of a customer’s outstanding negative balance, the fee or charge be based on the amount of the negative balance attributable solely to checks, ACH, or other transactions not subject to the fee prohibition;
• Prohibit overdraft fees on ATM and one-time debit card transactions until five business days following the day the institution sends written confirmation of a customer’s opt-in;
• For customers who have not opted in, prohibit overdraft fees when the account would not have become overdrawn but for ATM or one-time debit card transactions posted to the account that day;
• For customers who have not opted in, prohibit sustained overdraft fees when the account would not have become or remained overdrawn but for ATM or one-time debit card transactions posted to the account beginning on the day the account first became negative.
We emphasize that the Board’s failure to address deceptive opt-in tactics or to prohibit overdraft fees on overdrafts that would not have occurred but for approved ATM and one-time debit card transactions threatens to significantly undermine the intent and effectiveness of the Board’s final rule.
_______________________
(1) Press Release, Bank of America Will Help Customers Avoid Overdrawing Accounts (Mar. 10, 2010), at http://newsroom.bankofamerica.com/index.php?s=43&item=8651.
(2) 74 Fed. Reg. 59050.
(3) A six loan per year cap finds precedent in the FDIC’s 2005 guidance addressing excessive refinancing of payday loans. The FDIC limited excessive refinancings by prohibiting the entities it regulates from making payday loans to anyone who has had payday loans outstanding for three months in any 12-month period. FDIC Financial Institution Letters, Guidelines for Payday Lending, FIL 14-2005, February 2005. The FDIC guidance encourages lenders to offer borrowers an alternative longer term product at that point but notes that even if such alternative is not available, “an extension of a payday loan is not appropriate under such circumstances.” Id. Assuming a 14-day pay period, this standard limits the number of loans any borrower can have to six per year, alleviating the debt trap while continuing to allow loans to occasional users.