Originator of Check Overdraft Programs Praises Fed's Proposed Rules to Correct Abuses; John Floyd Calls Some Proposed Changes `Troublesome...Potentially Burdensome'.

HOUSTON -- "The Federal Reserve Board (FRB) is on the right track with its recent ruling on share draft/check overdraft fees and its proposed rules to reign in the abusive practices of some courtesy pay and bounce protection programs," says John M. Floyd, who originated overdraft programs 16 years ago. "Its comprehensive efforts are highly laudable."

John M. Floyd & Associates (JMFA) of Houston, a profitability consulting firm to financial institutions, has established nearly 700 such automated programs at banks, thrifts and credit unions across the nation. Floyd, Founder and CEO of JMFA, is encouraging his clients to contact the Fed before the Aug. 6 deadline with their comments on the Fed's suggested changes. Letters should be faxed or provided by e-mail to [e-mail] to avoid delay. JMFA's own response - in full -- can be viewed at www.jmfa.com/news/news.html.

Due to the potential impact that the Proposed Rule may have on institutions' overdraft protection programs, it is important that institutions file comment letters on this matter," he said.

Through contractual arrangements with state banking associations, credit union leagues and their service firms, Floyd & Associates jointly markets its JMFA OVERDRAFT PRIVILEGE(SM) to their members in 21 states. The firm also has a business associate relationship with the Delaware Credit Union League; is a "strategic alliance provider" with CUNA and Affiliates and is allied with Fiserv Inc.'s IntegraSys unit, a leading core technologies solutions provider for credit unions. (www.JMFA.com)

During the past 18 months, Floyd has warned the Consumer Advisory Council to the Federal Reserve System, the Banking Section of the American Bar Assn. and the Consumer Federation of America, among others, that endemic abuses are incorporated in the implementation, marketing and management of some overdraft programs.

"Some are discriminatory in nature, over-promote the service or under-educate consumers on its appropriate use," he has commented coast to coast. "Some even base overdraft limits on a 'mystery matrix' in which the consumer's overdraft limit is calculated on his/her financial activity -- but never shared with the customer or member."

FRB Decision, Call for Comments

On June 7, the FRB published a proposed rule to address the treatment of overdraft protection programs as a deposit service under Regulation DD (Truth in Savings). The Fed will consider issuing final rules after the Aug. 6 deadline for filing comments.

At the urging of consumer advocate groups, including the National Consumer Law Center, the Fed has spent at least two years reviewing compliance issues concerning overdraft programs.

Critics contended the programs need stricter controls under the Truth in Lending Act and equated the fees with exorbitant interest rates on short-term loans.

The Fed, however, stated the programs should not be covered under that Act or treated as loans. The service fees, based on deposits, are essentially the same as a financial institution's charge for any nonsufficient funds (NSF) item on an overdrawn account. The Fed proposed no substantive restrictions, but did propose some minor changes in the way the programs are marketed.

Some Proposed Rules Called 'Troublesome'

"In general, I applaud the FRB's plan to treat overdraft programs as a deposit service rather than as a credit product," the consultant stated. "I believe this approach is fully consistent with the purposes of the Truth in Savings and the Truth in Lending acts and reflects a sound public policy decision. Nonetheless, there are several troublesome issues raised by the FRB's proposed amendments to Regulation DD."

JMFA's letter to the Fed supports the proposal to provide additional information to accountholders about the type of transactions for which overdraft fees may be imposed -- overdrafts created by check, ATM withdrawal or other electronic transfers -- but called for more "flexibility" in the account-opening disclosures.

"We urge the FRB to clarify this provision ... clarify that an institution is not required to describe every type of transaction, but rather an illustrative list that accurately and clearly discloses to the consumer that a fee may be imposed for overdrafts. This list would avoid the need for institutions to determine whether an additional 'change-in-terms' notice is needed if, at a later time, it adds another channel in which overdrafts can be created, such as by telephone transfer."

Floyd also believes it is essential for the FRB to clarify in the final rule that this provision does not require institutions that offer overdrafts to re-disclose or provide additional information to existing customers for those overdraft services, "since that could pose significant risks for institutions."

He strongly disagrees with the proposed provision to require a monthly and year-to-date total for returned item and overdraft fees, since the existing disclosures -- letters and periodic statements -- clearly inform consumers about the amount of and specific type of fee incurred.

"The FRB has provided no evidence for why overdraft fees should be treated differently from other fees assessed in connection with account services provided to consumers, and why it is necessary to provide a monthly and year-to-date total for these fees," Floyd said. "The rationale 'to highlight the overall cost to consumers' and 'to better inform consumers about the cumulative effect of using an overdraft service on a regular basis' belies the lack of evidence that account-opening disclosures and periodic statement disclosures inadequately inform consumers. This issue should be addressed through the use of consumer educational materials."

While "strongly supporting the existing rule in Regulation DD that prohibits the use of misleading or inaccurate advertisements, and that provides that an advertisement shall not misrepresent an institution's deposit contract," Floyd expressed concern about the breadth of the proposed changes to the advertising rules.

He believes "they may discourage the provision of factual information to consumers due to the costs and burdens imposed in connection with such advertisements. We also believe the scope of the rules is unclear, and should be clarified by the FRB.

"The Board and its staff should be applauded for their deliberate and concerted effort to protect consumers and to eliminate some of the unfriendly practices of overdraft programs," the program vendor concluded. "The public and financial executives should now weigh in to make sure the proposed changes are not burdensome to the institutions or drive up the cost of this service."

Guaranteed Regulatory Compliance

JMFA, founded in 1973, is a leading provider of noninterest or fee income products to financial institutions. The company has installed profit improvement programs in 1,750-plus financial institutions, adding more than $10 billion in increased pre-tax earnings for its clients in 49 states and Central America.

"Our automated, software program is nondiscriminatory and guaranteed to be 100% compliant with federal and state regulations, as well as with many recently suggested changes," Floyd emphasized. He also noted:

--An estimated 2,500 of the 18,000 financial institutions in the United States are believed to now have defined and communicated overdraft programs.

--The typical fee charged on an insufficient funds (NSF) check is $17 to $35. The average in 2003 was $22.50.

--Studies indicate the average accountholder writes about 3.4 NSF items per year.

"A well-managed overdraft program is a win-win-win for the consumer, the merchant and the financial institution," he said. "Even the FRB prefers the NSF items be paid by the institutions, since it saves the Fed money.

"This discreet, value-added service can help accountholders avoid embarrassment, inconvenience and additional costs in multiple NSF charges or late payment penalties and still 'make good' on a bad check," Floyd contends. "Neither the consumer nor the merchant lose time or productivity in correcting the situation. It also can prevent negative entries on your credit record or potential visits from law enforcement for inadvertent -- but repeated -- bad checks.

"The public is actually demanding value-added services like overdraft privilege and expressing satisfaction with the service. Additionally, automated programs help identify troubled accountholders for necessary counseling," he said.

JMFA creates strategic overdraft programs specific to each institution, its organization and its market in order to maximize all aspects of NSF revenue. It then delivers expert training, marketing and software (PRIVILEGE MANAGER CRM(TM)) to assure successful implementation, full regulatory compliance and activity monitoring.

JMFA OVERDRAFT PRIVILEGE(SM) and PRIVILEGE MANAGER CRM(TM) are service marks of John M.

Floyd & Associates, Inc. PRIVILEGE MANAGER CRM(TM) is patent pending.