No checking account required payday loan

bounce protection plans under fire

Bounce protection plans help members resolve short-term financial problems.

Another bank product has received bad publicity recently. Unfortunately, this may have implications for credit unions.

The product under fire is commonly referred to as a "bounce protection" or "overdraft privilege" plan. Many financial institutions, including credit unions, offer these services, in which they pay overdrafts up to an established limit without a case-by-case assessment, while preserving the right not to pay particular items. Consumers pay a fee for each overdraft paid.

Critics say some of these plans charge high fees and are promoted with intensive, sometimes misleading, marketing. Such marketing, they charge, encourages consumers to use these services frequently, generating fee income without regard to consumers' financial well-being.

Some practices that have drawn criticism:

* Including the overdraft limit in account balances displayed at automated teller machines. This may mislead consumers regarding their balances and encourage overdrafts.

* Requiring direct deposit to be tied to checking accounts with high-fee bounce protection.

* Conducting aggressive marketing campaigns encouraging consumers to bounce checks.

In contrast, credit unions offer overdraft privilege to help members who occasionally overdraw their share draft accounts. This is helpful for members who inadvertently bounce share drafts.

Credit unions save members embarrassment and substantial merchant fees by helping them avoid bouncing share drafts. But the bad publicity surrounding bounce protection plans doesn't differentiate between those that credit unions offer and consumer-unfriendly plans others offer.

Critics also charge that bounce protection programs are similar to products associated with predatory lending, primarily payday loans. Ironically, if credit unions no longer could provide such a service, the beneficiaries might well be predatory lenders. Bounce privilege services might provide opportunities for credit unions to help eradicate predatory lending.

National Credit Union Administration (NCUA) rules allow credit unions to provide bounce privilege programs without having to follow the general requirements for loans, such as having a credit application on file. NCUA added these provisions at the Credit Union National Association's (CUNA's) urging.

Credit unions offering bounce protection need to have a written policy including:

* A cap on the number of overdrafts the credit union will honor;

* A cap on the dollar amount of overdrafts per member;

* A time limit up to 45 days during which a member must cover the overdraft, either by repayment or through a loan from the credit union; and

* The fees and interest rate the credit union will charge.

As a result of recent criticisms, other regulators are considering actions that would impose additional requirements. The Federal Reserve Board recently questioned whether bounce protection should be covered under the Truth in Lending Act. If covered, applicable fees would have to be expressed as an annual percentage rate (APR).

CUNA's response to the proposal supported the general idea that institutions should disclose fees in some fashion. In fact, fees are disclosed as required under the Truth in Savings Act.

CUNA argued, however, that such fees shouldn't be covered under Truth in Lending. Requiring an APR calculation would present numerous compliance problems, including the difficulty of calculating the APR for a loan with no fixed term. Also, the Federal Credit Union Act forbids federal credit unions from charging more than 18% interest on loans. Because of these problems, credit unions would, for all practical purposes, have to stop offering bounce privilege services.

We have heard that the Fed has considered these concerns and likely won't require an APR calculation. Fed staff have said they understand these programs provide a real benefit for consumers, but they're still concerned these programs can be costly for those who use the service without fully understanding costs and terms.

Washington, Colorado, Michigan, and Indiana recently issued bounce protection guidelines, and the Georgia legislature is considering restrictions.

During CUNA's 2004 Governmental Affairs Conference, the CUNA Board expressed strong support for the ability of credit unions to offer bounce privilege plans to help members resolve short-term financial problems. The board also approved bounce privilege standards and ethical guidelines, drafted by CUNA's Consumer Protection Subcommittee. Credit unions may adopt these standards and guidelines to emphasize their concern for consumers and further distinguish credit unions as institutions that care more about people than money.

These guidelines and standards stress that bounce privilege services, when offered as an alternative to bouncing share drafts, are consistent with credit unions' unique service philosophy and principles. By adopting these standards, credit unions recognize the following practices aren't consistent with credit union philosophy and principles, and agree they won't engage in them:

* Deceptive advertising. This includes advertising or implying that members should expect that all overdrafts will be paid, but stating in other documents that paying overdrafts is discretionary, a standard feature of bounce privilege plans. This may lead members to expect the credit union to pay all overdrafts and could cause problems if the credit union didn't cover an overdraft.

* Enticing members to overdraw accounts repeatedly. Members should use bounce privilege as an occasional convenience. Credit unions' financial education programs discourage frequent overdrafts.

* Failing to inform users of alternatives. Bounce privilege might not be appropriate for members who routinely rely on it to pay daily living expenses. Credit unions may offer such members other products and services that are more appropriate, including transfers from savings to the share draft account and less expensive secured and unsecured loans.

Offering loans as an alternative to bounce privilege may be an effective way to differentiate credit unions from banks. Member education is a credit union strength banks might not provide. Credit unions' financial literacy efforts, especially those geared toward younger members, help members choose products and services that work best for them. This may or may not include bounce privilege programs.

"Although these guidelines are voluntary, we hope all credit unions will look at them," says Kris Mecham, president/CEO of $279 million asset Deseret First Federal Credit Union in Salt Lake City, and chairman of CUNA's Consumer Protection Subcommittee. "We think credit unions will realize they already follow these guidelines in their efforts to help members with the shortterm difficulties causing them to use bounce privilege programs."

CUNA will continue to work to ensure that key policy makers and regulators understand the benefits bounce privilege plans provide for members, consistent with credit unions' role as not-for-profit, member-owned financial institutions. The new bounce privilege standards and guidelines already have been shared with Washington state regulators. CUNA encourages leagues to discuss them with any state regulator that may take action in this area.

JEFFREY BLOCK is assistant general counsel for the Credit Union National Association. Contact him at 202-508-6732 or at jbloch@cuna.com.