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WASHINGTON-The Federal Reserve Board’s Consumer Advisory Council took a crack at the controversial issue of overdraft protection, its advertisement and disclosure during its meeting this month. Overdraft protection is a product gaining steam in the credit union industry. E Federal Credit Union President and CEO Kenneth Bordelon, who has a seat on the 30-member council, said that his credit union does not offer overdraft protection, though he does provide overdraft loans. He said he objects to overdraft protection because the advertisement for it can encourage consumers to bounce checks. On the other hand, Bordelon acknowledged that it is less expensive for the member than paying an institution’s NSF fee plus the merchant’s fee. He added that E FCU recently upped its Not Sufficient Funds charge from $15 to $20. He also explained that if NSF protection fell under the Truth in Lending Act, it would “kill the program for credit unions” because of the 18% usury cap for credit unions. For example, if E FCU covered a $20 NSF and charges $20, the APR would be well over 18%. Consumer groups represented at the CAC argued that the charges for overdraft protection should be presented as an annual percentage rate. Massachusetts economic law professor Patricia McCoy suggested providing consumers with the ultimate APR after the fact to educate accountholders on the cost of their NSFs. “We don’t want to stop the program; we just want it to be transparent,” she explained. Elizabeth Renuart, as staff attorney with the National Consumer Law Center of Boston, recommended providing a chart with sample APRs for different check bounce protection dollar amounts and time intervals. However, Interchange Bank (Saddle Brook, N.J.) President and CEO Anthony Abbate pointed out that the APR disclosures are aimed at allowing comparison shopping, which is impossible to do with overdraft protection fees. He also commented that it is not an extension of credit since there is no judgment by the institution of credit worthiness. Customers at his bank have not been complaining of the charges, he added. Abbate did say that “enticing” advertising did make the product look like payday lending. In written comments to the Council, John M. Floyd, CEO of John M. Floyd & Associates of Houston, said regulators could expect “consumer revolt if overdraft programs at banks and credit unions are terminated.” He continued, “Our research indicates overdraft programs are deeply appreciated by a large majority of account holders, who would rather pay their bank one reasonable fee ($17 to $35; average, $22.50) to cover an insufficient funds check. The alternatives are additional, higher charges from the merchant, landlord, credit card or mortgage company, as well as personal embarrassment and inconvenience. They may even wind up on bad-check lists that might affect their credit-worthiness.” One JMFA bank client in Kentucky said that account turnover had actually slowed since they started offering the product. In a memo to the CAC, Strunk & Associates, L.P. President Sam Davis cited a case, First Bank v. Tony’s Tortilla Factory, Inc., in which the business was charged $20 each for 2,165 NSFs between April and December 1984. “The court held that the NSF fees charged by First Bank were separate and additional consideration for processing the overdrafts of Tony’s Tortilla Factory, and that they were not interest on the amount advanced to cover the overdraft checks for purposes of the Texas usury law,” Davis wrote. He noted that the law had been cited and followed in Florida and Mississippi cases. Davis concluded, “Consumers are receiving more disclosures and more information regarding their accounts and the costs associated with those accounts than ever before, and all of that information is coming from financial institutions. High fees, mandated and voluntary disclosures and pages upon pages of information show no signs of stemming the tide of checks being written against insufficient funds. Since when did it become the job of financial institutions to implement social policy or serve as a behavior-correctional institution? It seems to us that those people who want to protect consumers from themselves are in a much better position of educating their constituencies on financial sobriety than are financial institutions.” Most agreed-including Fed Governors Susan Schmidt Bies, Edward Gramlich, and Ben Bernanke-that consumers need better educating and that advertising for the product should be done ethically and not encourage consumers to write NSFs. Other unsavory practices can occur with check bounce protection programs, including discrimination; institutions covering a larger check in order to bounce a number of smaller ones totaling more NSF fees; and the overdraft funds being included in an accountholder’s balance through an ATM, resulting in the belief that the extra money is actually theirs and further NSFs. In an interview following the meeting, Bordelon said his sense was that the board “doesn’t seem inclined to bring it into Truth in Lending,” unless a gross abuse occurs. He added that he felt the vendors had brought the added scrutiny of the Council on themselves with their aggressive advertising tactics. The CAC also discussed predatory lending, of which the general consensus was that the registered lenders were not the problem, according to Bordelon. The group also considered federal preemption of state predatory lending laws. In addition, historical APRs on credit card disclosures for cash advances were discussed. While consumer groups said they served to demonstrate to consumers the cost of repeatedly taking cash out against a credit card, the industry said they only confuse the consumer and that the fee itself-not disclosed as an APR-should be sufficient, Bordelon said. [email protected]

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