Overdraft program well worth the effort, if run responsibly.

• Author: Floyd, John M.
• Position: View Point: Advertisement

AN INTERESTING DEBATE HAS EMERGED OVER WHETHER BANKS AND THRIFTS ARE SAINTS OR SINNERS WHEN IT COMES TO OVERDRAFT PRIVILEGES.

The payment of NSF checks is not a new concept. Historically, banks have always provided selective overdraft payment for their preferred account holders in informal relationships and without noisy promotion. Often no overdraft fees are assessed.

Some banks have installed automated systems to pay overdrafts, Overdraft privilege programs cover paper checks-and sometimes automated teller machine and debit card transactions that would have returned because of insufficient funds. The programs are usually structured so that an account holder can overdraw his/her account subject to pre-established limits and on the condition that the account returns to a positive balance every 30 days. For this privilege, the account holder pays the bank the same fee to pay his/her NSF check that would be paid if the check were returned.

More than 1,500 of the nation's financial institutions offer such overdraft programs, and others are considering their implementation. With bankers turning to non-interest income to strengthen their bottom lines, overdraft fees are definitely attractive. They generally boost income from insufficient funds; or "NSF," by 50% to 200% because, given the choice, the vast majority of account holders would rather pay a reasonable fee to their bank to pay an NSF check than pay much greater fees for late payments or bounced checks.

Customers with overdraft privilege simply pay their bank one fee per NSF-paid check, rather than getting charged both by the bank and the retailer or their credit card provider, landlord or mortgage company. Simple math says $25 is better than $75 or more in charges. Customers also appreciate the fact that their checks do not get returned, which embarrasses them, causes them inconvenience, puts them on bad-check lists and most likely effects their credit-worthiness.

But some consumer groups have been complaining that overdraft privilege programs are predatory; the fees "are hidden" and violate banking regulations and represent high interest loans; and that the banks are profiting only from low-income account holders. Those complaints are absolutely erroneous. Recently, the General Counsel to the Office of the Comptroller of the Currency stated that privilege fees do not violate current banking regulations.

John M. Floyd & Associates (JMFA) has installed its overdraft privilege program in...