Legal Ease
Fee Income — Where Do Banks Go Next?
O
verdraft protection programs have provided Texas
banks with significant income in the last decade and
Texas consumers with readily accessible credit. The
recent FDIC guidance, if fully implemented, is likely
to reduce NSF income significantly. In addition, it
appears that overdraft protection programs are a high priority
of the Consumer Financial Protection Bureau—right behind
predatory mortgage lending and credit cards. Thus, the CFPB
is likely to pick up the FDIC’s mantle and further regulate ODP,
perhaps under its “unfair, deceptive or abusive acts and practices” authority.
The Durbin Amendment to the Dodd-Frank Act requires
the Fed to regulate interchange, and its first effort at such a rule
would reduce banks’ income by as much as 90% according to
news articles and comment letters on the proposed rule. The
future of the rule is uncertain at this writing. The banking industry and consumers agree that big box retailers benefit from the
cap on interchange, but everyone else loses.
Combined, the interchange cap and assault on overdraft
protection programs are likely to cut deeply into operational
income. So, now bankers need to get creative to identify possible new (or rejuvenated) sources. Let’s look at some old ideas
and the regulatory compliance concerns.
customers an email about the change, notifying them to log on
securely to their web page for complete information.
Debit Card Fees
With lower interchange fees, debit cards become a cost center rather than a source of revenue. Therefore, bankers should
consider a monthly service fee for availability of the card. Alternatively, customers could be charged for each use of their card.
There are two potential problems with the per use fee. First is
that consumers are really resistant to this approach, which is
arguably a bit harder for them to track and manage. Second,
some pundits have argued that the Durbin Amendment prohibits banks from assessing this fee. While this isn’t clear, it does
present some legal risk in pursuing.
Compliance Issues. As with the service fee, this new fee
must be disclosed to consumers with an advance 30 day written notice as described above. However, it is not clear that this
fee is the sort of monthly fee that keeps the account from being
categorized as “free.” The commentary to Reg DD indicates that a
“home banking fee” would not be a
maintenance fee since the service is
optional.
Unfree Checking
Overdraft Fees
The biggest banks have already dumped universal free
retail checking accounts. Generally, only customers who maintain account balances at certain levels (like $1500) get truly
free checking. For those whose balances drop below a specified
threshold, there are new fees, like a monthly service charge. The
trend toward a single, basic consumer account is reversing in
favor of more stratification.
Compliance Issues. A monthly service or maintenance fee
keeps an account from being advertised as “free.” If you introduce a minimum balance for your “free” account, it no longer qualifies for that moniker. Further, any change to the fee
schedule requires an advance 30 day written notice. Both the
Truth in Savings Act (Reg DD) and the Texas Finance Code
§34.302 mandate this notice. For online customers, this notice
can be provided electronically. The more secure way is to send
While it is likely that overdraft
protection programs will be reined
in by changing regulations, they
should still be a viable, but revised,
product. If the FDIC “best practice”
requiring in-person counseling after
six overdrafts in a rolling 12 month
period remains, the cost of complying with this may simply destroy the
product. However, if the number of
overdrafts that triggers counseling
is made more rational and the “inperson” aspect is removed, then the
program can still be a viable one.
Nonetheless, bankers must
12 ★ The Texas Independent Banker May/June 2011
Karen Neeley
received her BA and
JD from the University
of Texas at Austin.
She is a director for
the Texas Association
of Bank Counsel and
General Counsel for the
Independent Bankers
Association of Texas.
revisit the 2005 Best Practices and the 2010 ones and cap fees.
Further, programs should set a de minimis amount below which
fees will not be imposed. Here are some options to evaluate. For
example, the program could limit NSF fees to a specified number per day. Alternatively, the fee for the first overdraft in a day
could be at the “normal” rate but subsequent fees during that day
could be at a lower amount.
In developing a “de minimis” threshold, the bank could
specify that items below a specified amount would not be subject
to a fee. This is the approach that some large banks have taken.
Another method would be to provide that a transaction that
overdraws the account by a small, specified amount will not be
subject to a fee. The de minimis amount should be proportional
to the fees, according to Best Practices. This provision is not
clear. It doesn’t say “equal” to the fee but rather proportional!
The latest FDIC Guidance requires that the order of posting
be selected not for the purpose of maximizing fees. Banks should
IBAT
not
commingle transactions and then pay largest to smallest.
TIBthis
ad guidance and the California class action suit against
Both
Wells
7.5 Fargo
x 4.56would point the prudent banker to that conclusion.
Instead,
pay wires
and cash transactions first, then debit cards,
May-June
2011
and finally checks and ACH recurring payments. This will
accomplish several objectives.
First, the consumers who have opted in to debit card coverage expect their debit card transactions to be paid. Second,
these transactions are “must pay” due to the pre-authorization
process of the networks. So, if large checks were paid first, the
debit card transactions that were pre-authorized would still have
to be paid even if they took the account over the pre-set courtesy balance. That increases the risk to the bank.
Compliance Issues. A reduction in fees doesn’t harm consumers and so doesn’t trigger the requirement for 30 days’ advance
notice. However, even though the FDIC and consumer advocates believe that these changes are advantageous, a plausible
case can be made that at least some consumers would disagree!
Therefore, the more prudent approach is to give the 30 days’
advance notice as described in this article.
Conclusions
Although consumers have grown fond of free checking and
the easy protection of overdraft courtesy plans, they are now
likely to face new, old fees as both community and mega banks
reinstitute checking account fees and revised overdraft protection programs.
Next phase: creative development of truly new products
and services? H
May/June 2011 www.ibat.org ★ 13