Leading Vendor Warns Consumers: 'Be Selective' on Overdraft Programs; 'Room for Improvement Exists,' John M. Floyd Tells Consumer Federation Attendees

Business Wire, Dec 4, 2003

Business Editors

WASHINGTON, D.C.--(BUSINESS WIRE)--Dec. 4, 2003

"Not all checking account overdraft protection programs are created equal," a leading vendor of such bounce protection programs warned attendees today at the Consumer Federation of America's Financial Issues Conference. "The Federal Reserve System may well issue new regulatory policies in 2004," he predicted.

John M. Floyd, CEO of John M. Floyd & Associates, Inc. (JMFA) of Houston, a profitability-consulting firm to financial institutions, joined A. William Schenck, III, Secretary of Banking, Pennsylvania Dept. of Banking, and Jean Ann Fox, Director of Consumer Protection for the CFA, on a panel addressing leaders of consumer advocacy groups. The topic was: "New Bank Overdraft Policies: How can they better serve the consumer interest?"

The CFA, founded in 1968 to advance the consumer interest through advocacy and education, is comprised of 285 pro-consumer groups nationwide with a combined membership exceeding 50 million persons.

The Federal Reserve System, at the urging of consumer advocate groups, including the National Consumer Law Center, has been reviewing compliance issues concerning share draft and check overdraft programs. Some critics contend the programs need stricter controls under the Truth in Lending Act. On March 28, the Fed decided to make no regulatory changes at that time, but to continue gathering information on the programs.

Of the nation's nearly 18,000 financial institutions, an estimated 2,000 offer a variety of formal and communicated overdraft programs, Floyd estimated. "The current economy is motivating many more to adopt the service to supplement falling interest income from lending activities and to bolster service fee revenues.

"The public is demanding value-added services like overdraft privilege, and industry surveys show a high level of satisfaction," Floyd emphasized. "This discreet service avoids the humiliation of members 'making good' on a check with a valued retailer. Neither the customer nor the merchant loses time or productivity in straightening out an NSF (nonsufficient funds) mess," Floyd says.

"Members don't wind up on retailers' bad check lists. They avoid multiple NSF charges from a merchant, or larger late payment penalties on house notes, car loans and tuition payments. They also can prevent negative entries on their credit record or potential visits from law enforcement for inadvertent -- but repeat -- bad checks or share drafts," he added.

Overdraft programs cover checks that would otherwise go unpaid due to nonsufficient funds (NSF) in an account holder or credit union member's account. The privilege also may extend to customers' ATM. and debit cards. The account holders are allowed to overdraw their transaction accounts, subject to pre-established limits. The overdrawn account must return to a positive balance every 30 days.

"The fees charged on NSF checks, $17 to $35 (average $22.50), should not be viewed as short-term loans at exorbitant rates any more than a $20 parking ticket is viewed as a punitive, inflated rental rate when a driver overstays the meter by a few minutes," he argued. "The service is a valid, beneficial safety net for many income earners who live from paycheck to paycheck, and who recognize the multiple benefits of a fairly run program."

Programs Vary...Abuses Exist

JMFA, founded in 1973, is a leading provider of noninterest income products to financial institutions. The company has installed profit improvement programs in 1,650-plus financial institutions, adding more than $5 billion in increased pre-tax earnings for its clients. The company also has successfully implemented variations of its overdraft privilege program in more than 550 credit unions, banks and thrifts.

Just this year, banking Associations in Arizona and Wyoming and credit union leagues in Alabama, Florida, Michigan, Mississippi, New Jersey, New Mexico, Texas and Vermont, as well as the Credit Union League of the West (CA, NV, WA, OR) and CUNA Strategic Services, Inc., have teamed with the firm to offer its product, JMFA'S OVERDRAFT PRIVILEGE(SM) program to their customers and members. (www.jmfa.com).

"JMFA's overdraft privilege program is nondiscriminatory and 100% compliant with federal and state regulations, as well as with recently suggested changes," Floyd stated. "But unfair practices -- endemic to the implementation, marketing and management of some overdraft programs - definitely exist.

"Some bounce or overdraft protection programs are discriminatory, over-promote the service, under-educate consumers on its use, and base overdraft limits on a 'mystery matrix,'" he confirmed. "Some make a practice of paying the largest checks first so that multiple NSF fees will accumulate on smaller checks. Some banks even disguise the overdraft amount as part of the person's available cash in account, surprising customers when they overdraw.

"Financial institutions must adhere to a philosophy of focusing on the accountholder's and the member's well being by implementing consumer-friendly programs," Floyd contended. "Such programs, if not corrected by the offending institutions will trigger consumer anger and rightfully result in regulatory actions."