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WASHINGTON-NCUA, along with three of the other federal financial institutions regulators, issued a final joint guidance on overdraft privileges-the Office of Thrift Supervision issued a separate guidance-which has raised mixed emotions in the industry. The final guidance, according to a joint release by the regulators, is aimed at helping in disclosure and administration of overdraft protection programs and covers safety and soundness considerations, legal risks, and best practices. It seeks to ensure that the financial institutions offering the programs adopt appropriate policies and procedures concerning credit, operation, and other risks. The guidance also advises institutions to have overdraft programs reviewed by legal counsel and outlines best practices in marketing and communications regarding the service. Suggested best practices include avoiding promotion of poor account management and clearly disclosing fees. Overdraft programs have raised controversy among the credit union community with some saying it exploits the least credit worthy among the membership while others say the service saves them from other additional fees. According to State Employees Credit Union CEO Jim Blaine, an adamant opponent of the programs for credit unions, the regulators “express their concern, but it doesn’t express much.” He noted that the guidance states that “when overdrafts are paid, credit is extended,” and, therefore it should be covered under Truth in Lending, which the regulators are resisting. The Federal Reserve is supposed to come out with a proposed regulation covering overdrafts under Truth-in-Savings. On the other hand, Mike Moebs of Moebs $ervices makes a distinction between a loan and credit, as the agencies did, and argues that Truth in Savings is the appropriate place for the issue to fall. Overdrafts are ancillary to a checking account, he explained. This is why the guidance strongly discourages institutions from revealing a limit on the credit, which is misleading, he said. He added that the guidance provides a hint as to what the Federal Reserve may do with its TISA regulation. Institutions and vendors that have taken a `consumer first’ approach to overdrafts will not have much problem with compliance with the new guidance, Moebs said. On the other hand, the 9-10% each of banks and credit unions that have been very aggressive with the programs will have costly compliance adjustments, not to mention likely lost revenue. Cheryl Lawson, executive vice president of implementation for John M. Floyd & Associates commended the regulators on the final guidance and noted that Floyd will not have many changes to make under the new guidance. “We think it’s an excellent step.Some of the things we were most concerned about are not in the guidance,” she said. Lawson said Floyd had commented in favor of extending the charge off period from 30 days, which the regulators did, to 60 days, citing that some people are only paid monthly and that may not be enough time for them to pay off an overdraft. Moebs, however, said a shorter period would allow quicker reporting and easier collections. Lawson agreed with Moebs that those who have implemented these programs “with a clear eye for the consumer” should not have problems with the new guidance. Even though the items were issued as guidance and not regulation yet, they are not to be taken lightly, Moebs said. “Yes, they are guidelines but they are guidelines that examiners at the four agencies that have accepted them will treat as epistles. Maybe not gospel, but epistles,” he said. Blaine was frustrated that NCUA missed a chance to differentiate credit unions with this joint guidance. “NCUA, they’ve missed on this the best opportunity in years to distinguish between credit unions and for-profit institutions,” he stated. He said making money off overdrafts is fine, if you are in it for the money, as banks are, but with credit unions, that should not be the case. Moebs said that credit unions would be hardest hit by the guidelines, which will cause the more aggressive institutions to pull back in their marketing and offerings. While banks earned 17.9% of their net operating income from overdrafts-both paid and unpaid-and savings associations were at just 16%, credit unions saw 60% of their net operating income from overdraft-related fees. Additionally, for the more aggressive, there could be ATM changes to notify consumers of the lack of funds and charge for the overdraft, changes to receipts at teller windows for institutions that permit consumers to overdraw, and modifications to advertisements, as well as cut backs. The IT updates could be “very, very significant,” Moebs warned, plus possibly new membership agreements, increased training and a fall off in revenue. “I don’t think the consumer groups should be terribly unhappy,” he said. [email protected]

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