New System Blamed for False Notices of Overdrafts

Valley Federal Savings & Loan, a major San Fernando Valley thrift that’s been struggling financially, recently changed computer systems to cut costs. But the S&L; may have swapped a bit of its good will in exchange for the savings.

Since the new computer system came on-line in late October, it has been sending notices to certain Valley Federal customers that appear to be telling them that they bounced checks--when in fact they had not.

The customers have checking accounts with overdraft protection, a line of credit that Valley Federal extends to people who want to write checks for more money than is in their checking account. The loan can be gradually paid back with interest.

The notices sent out by Valley Federal’s new computer system were meant simply to tell the customers each time they used their overdraft accounts. But, instead, the notices indicated that rather than being protected by the plan, the customers were overdrawn and they had better quickly make a deposit. Some customers weren’t pleased.

‘Countless Calls’

As one customer’s records show, the notices began by announcing that his account was overdrawn and that he needed to make a deposit in 5 days to cover the shortfall.

“I’ve been getting countless calls” from branches having to deal with customers’ complaints about the notices, said Saul Silver, who handles overdraft accounts in Valley Federal’s checking services office.

“One branch told me they were really upset because they had a premier customer that was threatening to close their account,” Silver said. “That’s obviously the type of thing we try to avoid.”

Customers also were confused. Valley Federal had not warned them that notices would be issued by the new computer system, said John Marquis, senior vice president for marketing. Previously, all information about customers’ overdraft-protection plans was limited to their monthly account statements.

So to end the confusion, Valley Federal decided Friday that it would stop mailing out the notices to overdraft-protection customers. “Until we can make the thing easier for customers to understand, we’re not going to send those out,” Marquis said.

Few Problems

Marquis insisted that the new system has continued clearing checks--drawn on Valley Federal’s regular checking accounts and those with the overdraft-protection plan--with virtually no problems. “It’s paying checks coming through the system correctly,” he said.

However, some customers said they were told by Valley Federal officials that in certain cases, S&L; officials had to override the computer to ensure that checks written by customers with the overdraft-protection plan were allowed to clear. Otherwise, the checks apparently would have bounced.

Early last week, Dan E. Nelms, the thrift’s president and chief executive, had downplayed any problems with the change in computers, saying “most of our managers have told us that the new system seems to be working fine.”

Valley Federal previously operated its own computer system. But in late October, it sold its computer operations to FIserv, a Milwaukee-based concern that specializes in providing computer services to financial institutions.

Valley Federal’s data center is in a separate building in Van Nuys. FIserv bought the building and the equipment, upgraded Valley Federal’s system and processes the thrift’s accounts, Marquis said. Many of the people who used to run Valley Federal’s computers were hired by FIserv.

Nelms said Valley Federal chose an outside service after determining that it would save more than $1 million a year in operating costs. Marquis added that the S&L; also needed upgraded computer capabilities, which it got from FIserv without having to spend millions of dollars for its own new system.

Valley Federal can use the savings. In the first 9 months of this year, the company lost $3.1 million, against a year-earlier profit of $19 million.

Citing competitive reasons, Valley Federal, with 46 branches and $3.5 billion in assets, won’t disclose how many checking accounts it services, including those that have the overdraft-protection plan.

However, Marquis said that checking accounts represent about 5%, or $128 million, of the S&L;’s $2.55 billion in total deposits, and that Valley Federal has more than 200,000 customers overall.

FIserv spokesman Kevin Kasper declined to comment about the problems.

Information Missing

To make matters worse, some of the monthly statements sent out by the new computer system had only blank space where there was supposed to be crucial information about the customers’ use of their overdraft-protection plans.

The culprit? A printing error by the computer system, Marquis said, adding that he did not know how many customers received the incomplete statements.

Marquis said Valley Federal’s operations staff “had identified the problem before the customers got the notices” that indicated they might be bouncing checks. “But, unfortunately, once the wheels got rolling, the notices kept on spewing out,” he said.

The misprint, the confusing overdraft-protection statements and the lack of early notification that the notices would be sent are problems that were termed “real surprising” by Lelah Jenkins, vice president for deposit-systems development at Glendale Federal Savings & Loan, a major Valley Federal competitor.

She said that when a financial institution changes computer systems, “there are always going to be a few things that slip through the cracks.” But careful quality control normally catches such errors, and to avoid confusion, Glendale Federal also will “try to always prepare the customers for any type of changes” in new forms that are to be mailed to customers, she said.