ADVANCE/John M. Floyd Tells Attorneys: Banks Must `Act Responsibly' In Marketing, Managing Check Overdraft Programs.

Business Editors

ADVANCE...for release: 4 p.m. Pacific, Saturday, April 5

(ADVANCE) LOS ANGELES--(BUSINESS WIRE)--April 5, 2003

Industry "Only Dodged the Bullet" in Fed's March 29 Ruling,

Says Leading Consultant

Banks, thrifts and credit unions "must act responsibly in marketing and managing 'bounce protection' and account overdraft programs or endure the wrath of customers and members, as well as potential federal intervention," John M. Floyd, CEO of John M. Floyd & Associates of Houston, warned on Saturday (April 5).

Floyd, whose 30-year-old, profitability-consulting firm has implemented variations of its Overdraft Privilege (www.overdraftprivilege.com) program in more than 400 financial institutions since 1988, addressed attorneys attending the Spring Meeting of the American Bar Association's Business Law Section.

Two other panelists offered viewpoints to the ABA's Deposit Accounts/Consumer Financial Services Committee, noting that overdraft programs are raising the ire of consumer advocacy groups and drawing the attention of regulators. They include:

-- Adrienne Hurt, recently appointed an Associate Director in the

Division of Consumer and Community Affairs of the Board of

Governors of the Federal Reserve System. Hurt, who joined the

Division in 1983 as a staff attorney, has been directly

involved in Board rule making and revisions of Regulations B,

C and Z, which deal with consumer affairs and fair lending

laws.

-- Kathleen Keest, Assistant Attorney General in Iowa, where she

serves as Deputy Administrator of the Iowa Consumer Credit

Code. She was a staff attorney at the National Consumer Law

Center for 11 years, and a member of the Fed's Consumer

Advisory Council (1990-92). Keest, a charter member of the

American College of Consumer Financial Services Lawyers, is a

Fellow of the Consumer Financial Services Committee of the

ABA's Business Law Section.

Of the nation's nearly 18,000 financial institutions, an estimated 1,500 plus offer a variety of overdraft programs, Floyd told the attorneys. "The current economy is motivating many more to adopt the service to supplement falling non-interest income and to bolster service fee revenues."

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. A fee of $17 to $35 (average $22.50) is charged for each NSF check.

The Federal Reserve System received about 350 comment letters following its proposed changes to Regulation Z on Dec. 6. Reg Z addresses the Truth in Lending Act and "bounce protection" programs. About 300 of the letters were on overdraft services, with 280 comments from financial institutions, other creditors and their representatives, and the balance from consumer groups, including the National Consumer Law Center, individuals and one state agency.

On March 28, the Fed, noting that the programs "vary from vendor to vendor and...in their implementation from institution to institution," announced that its "staff is continuing to gather information on these services which are not addressed in the final rule."

"Some consumer complaints are warranted," Floyd told the attorneys. "In the long run, I believe many financial institutions have only 'dodged the bullet' for now. And now is the time to be responsive and to improve the management, marketing and consumer education on these programs.

"Institutions, which can boost their profits with a valuable and viable service to customers, have no reason to remain on the sidelines," he insisted. "Millions of dollars are at stake."

Not All Overdraft Programs Created Equal

""Not all Overdraft Programs are created equal," Floyd emphasized. "Some NSF checks are covered at the discretion of a bank executive, and some are a line of credit requiring a credit application, credit check and advance fee. Some banks cover checks by transferring funds from the customer's other accounts or getting advances from a credit card.

"Unfortunately, some institutions set the overdraft limit with a computer matrix based on the customer's account size and activity. Neither the criteria nor the overdraft limit, which varies from month to month, are disclosed to the customer. Such 'mystery programs' create surprise fees and charges," he explained.

"In a consumer-acceptable, well-run program, account holders at all income levels enjoy the program's benefits -- not just 'premium' and 'platinum-type' customers," he contended. "Institutions must not force overdraft privilege on their account holders. They must avoid messages that essentially encourage customers to overdraw.

"They should educate and consistently inform customers of their overdraft limits on their monthly statements and when they use an ATM to access their account balances to avoid triggering unexpected charges.

"Floyd & Associates' nondiscriminatory Overdraft Privilege program complies with all existing bank regulations as well as currently suggested changes," he stated.

Overdraft Offers Multiple Benefits

This discreet customer service avoids the humiliation of customers "making good" on a check with a valued retailer. Neither the customer nor the merchant loses time or productivity in "straightening out an NSF mess," Floyd said. "They don't wind up on bad check lists."

Consumers would rather pay one $20 NSF to their financial institution than pay multiple higher charges from a merchant, or larger late payment penalties on house notes, car loans and tuition payments, as well as bad marks on their credit record or potential visits from law enforcement for inadvertent but repeat bad checks.

"Overdraft Privilege is a valid safety net for millions of middle class Americans living from paycheck to paycheck," he said. "Bank executives need to act conscientiously, and consumers need to use their privileges wisely, not habitually. Otherwise, a beneficial and legitimate service will become abusive and abused, lessening its value to all parties."

(End of advance for release 4 p.m. Pacific, Saturday, April 5.)