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Comment letter in response to Docket No. R-1197; proposed amendments to Regulation DD

Docket No. R-1197; proposed amendments to Regulation DD

August 6, 2004

Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551

via e-mail to: regs.comments@federalreserve.gov
via fax to: (202) 452-3819

Re: Docket No. R-1197; proposed amendments to Regulation DD

Dear Ms. Johnson:

On behalf of the Community Bankers Association of Illinois (hereinafter, “CBAI”), I am submitting this comment letter in response to the Federal Reserve’s proposed amendments to Regulation DD. Notice of the proposed amendments was published in the Federal Register on June 7, 2004 (Volume 69, Number 109).

With more than 500 member financial institutions and more than 140 associate members, CBAI is the largest state-organized trade association in Illinois representing the interests of financial institutions and is the third largest such association in the United States. CBAI is the leading advocate for community banks in Illinois, the state with more active bank charters than any other state in the nation. Our members include state-chartered and federally-chartered banks, savings banks and savings and loan associations that can be found in every one of Illinois’ 102 counties.

Among our roles on behalf of community banks in Illinois are the review of products and services in the marketplace that may be of interest to our members as well as the review of legislative and regulatory proposals that might affect the ability of our members to offer those products and services or the efficiency with which they can be offered. Given those roles, we appreciate this opportunity to comment on the proposed amendments to Regulation DD.

As you are aware, the federal regulatory agencies (including the Board of Governors of the Federal Reserve System) have also proposed an “Interagency Guidance on Overdraft Protection Programs” (hereinafter, “Proposed Interagency Guidance”). The Proposed Interagency Guidance acknowledges an increase in “customer acceptance” of overdraft protection programs but states that certain aspects of such programs “have raised concerns....” Later, the Proposed Interagency Guidance refers to “existing and potential concerns surrounding the offering and administration of such overdraft protection services.” CBAI would prefer that federal regulations or guidelines addressing a currently available banking product or service should be rooted in evidence or data rather than concerns, whether those concerns are existing or potential. Neither the Proposed Interagency Guidance nor the proposed amendments to Regulation DD include persuasive evidence that overdraft protection programs are generally anti-consumer in concept or in application. By comparison, in recent years there were numerous instances of predatory lending practices by mortgage brokers and other non-bank mortgage lenders. Regulators at both the state and federal levels responded to real and demonstrable abuses that cost unsophisticated mortgagors substantial financial losses and often resulted in foreclosure actions. If there have been abuses on a similar scale with respect to overdraft protection services, or if there is data indicating such an abusive trend, such evidence or data is lacking in the Proposed Interagency Guidance and the proposed amendments to Regulation DD.

When reading the proposed amendments to Regulation DD, one might conclude that overdraft protection programs foster predatory or abusive practices by banks or imprudent financial management by bank customers. There is little or no consideration given to the reasons for which these programs are experiencing increasing “customer acceptance,” as acknowledged in the Proposed Interagency Guidance. Could it be that customers stand to benefit from checks being paid, thereby saving the customer money, humiliation and possible adverse credit history reports that might have resulted from a check that was returned unpaid to a merchant, for example? Of course the Federal Reserve is aware of these benefits, but CBAI hopes that any proposed regulation in the area of overdraft protection will only proceed after careful consideration of all factors. Relevant factors include benefits that may be suppressed or lost if burdensome regulations discourage banks from providing, or from informing their customers about, a legal and commonly available product or service.

CBAI does not assume that overdraft protection services are inherently quasi-abusive and therefore should be reigned in by regulations or guidelines. Rather, CBAI takes the position that legitimate, reputable overdraft protection services are a modern extension of a service that has long been offered by banks. It was not necessarily safer for a bank to permit overdrafts on an ad hoc basis without the disclosures and policies that usually accompany today’s programs. The fact that today’s programs are more systematic and usually more automated may raise certain operational issues that should be addressed through prudent bank policies, but CBAI urges the Federal Reserve to be deliberate and not to act prematurely or unnecessarily unless there is data showing that the overdraft protection service is increasingly being utilized in an abusive or predatory manner.

Regulation DD has a stated purpose of requiring depository institutions “to provide disclosures so that consumers can make meaningful comparisons among depository institutions.” 12 C.F.R. 230.1(b). This echoes the purpose stated in the federal Truth in Savings Act (“...so that consumers can make a meaningful comparison between the competing claims of depository institutions with regard to deposit accounts”). 12 U.S.C. 4301(b). After reviewing the proposed amendments to Regulation DD, CBAI has concluded that some of the proposals stray from the purpose of the Truth in Savings Act.

For example, the proposed amendment to Section 230.6(a)(3) regarding periodic statements would require banks to disclose overdraft fees and returned item fees not only for the period covered by the statement but also for the calendar year-to-date. This requirement has no bearing on a customer’s ability to “comparison shop” prior to deciding the financial institution with which he or she chooses to do business. The calendar year total represents a new, unnecessary regulatory burden that will increase the cost of doing business with no demonstrable benefit to the customer and with no proven regulatory purpose. What purpose would be served by showing an increasing year-to-date balance of such fees in the November and December monthly statements, only to have the January statement appear with a “clean slate”? How does the disclosure of such aggregate fees provide actionable information to the customer unless it is also accompanied by a running tab of cost savings that have resulted (to the benefit of the customer) due to checks that were paid as opposed to returned? Those returned checks might have resulted in significant returned check fees, vendor fees, collection action against the customer, adverse credit information reported to credit bureaus, etc. There is little or no net benefit to the customer from the reporting of the calendar year-to-date totals, and there is certain to be additional costs and regulatory burdens to be incurred by banks.

In any event, these year-to-date totals do not serve the expressed purpose of the Truth in Savings Act to allow a prospective customer to compare fees, terms and conditions of accounts at competing financial institutions before the prospective customer decides where he or she wants to open an account.

Again, CBAI urges the Board of Governors to reconsider: (1) whether the proposed amendments are reasonably related to the purpose of the Truth in Savings Act; (2) whether there is a sufficient showing of abusive practices among financial institutions that offer overdraft protection services such that additional regulatory burdens are justified; (3) whether benefits and cost savings (both financial and reputational) to customers might be lost or diminished if increased regulatory

burdens discourage banks from offering overdraft protection and result in more checks being returned unpaid; and (4) whether the proposed amendments to Regulation DD are crafted as narrowly as possible in order to avoid imposing unnecessary regulatory burdens on a financial institution that is providing a legal and commonly available banking product or service that is useful to its customers.

The community banks that are members of CBAI have outstanding records of customer service. We understand that many regulations and guidelines are designed to target the “bad apples” within our profession rather than to unnecessarily burden the vast majority of financial institutions that would not be inclined to engage in deceptive or unethical practices. CBAI urges the Board of Governors of the Federal Reserve to adopt only those regulations that are reasonably necessary and that will allow financial institutions, and particularly community banks, to operate as efficiently as possible in the delivery of legal products and services to their customers.

Thank you for your consideration of these comments.

Sincerely,

Jerry D. Cavanaugh
General Counsel
Community Bankers Association of Illinois

Legal Link is a free benefit of CBAI membership. To pose a banking-related legal question to CBAI General Counsel Jerry Cavanaugh, e-mail him at jerryc@cbai.com.