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