Consumer Compliance Outlook
Rules Regarding Overdraft Services: Questions and Answers
On December 10, 2009, the Federal Reserve System held its first Outlook Live audio conference. Outlook Live is intended to be an ongoing series of teleconferences focused specifically on consumer compliance issues. In December, David Stein and Dana Miller, both with the Federal Reserve Board's legal staff, presented the new overdraft rules issued by the Board of Governors, primarily covering changes to Regulation E but also touching on previously proposed Regulation AA rules and the final Regulation DD disclosure rules effective January 2010.
This inaugural session of Outlook Live had a large number of participants and triggered a significant number of questions. While many of these questions were addressed during the call, time and other practical considerations limited the number of specific questions that could be answered. To address the hundreds of questions received during and after the call, Outlook is providing an overview of the new Regulation E rule and answers to the most common questions.
The new overdraft service rules apply to consumer accounts only. As described in §205.17(a) of Regulation E, "The term 'overdraft service' means a service under which a financial institution assesses a fee or charge on a consumer's account held by the institution for paying a transaction (including a check or other item) when the consumer has insufficient or unavailable funds in the account" (emphasis added). The regulation identifies three types of services that are not considered "overdraft services," including transfers from a line of credit, such as a credit card account, home equity line of credit, or an overdraft line of credit; transfers from another account held by the consumer, such as a savings account; or a line of credit or other transaction exempt from the Federal Reserve Board's Regulation Z (12 C.F.R. §226) pursuant to 12 C.F.R. §226.3(d) (i.e., securities or commodities accounts).
Scope of Opt-In
Generally, the new rule prohibits an institution that holds a consumer's account from assessing any fee or charge on a consumer's account for paying an ATM or a one-time debit card transaction as part of the institution's overdraft service, unless:
- The consumer is provided with a notice in writing, (or if the consumer agrees, electronically) segregated from all other information, explaining the institution's overdraft service;
- The consumer is given a reasonable opportunity to affirmatively consent (opt in);
- The consumer affirmatively consents (opts in) to the service; and
- The institution provides the consumer with confirmation of the consumer's consent in writing (or if the consumer agrees, electronically), which includes a statement informing the consumer of the right to revoke such consent.
The opt-in requirement applies to any ATM transaction (e.g., withdrawing cash, interaccount transfers, bill payments, and postage stamp purchases) at any location (e.g., institution-owned and operated, third party, proprietary, and foreign ATMs), and any one-time debit card transaction (e.g., at a merchant or store, online, or by telephone). The opt-in requirement applies to all accounts covered by Regulation E, including payroll card accounts. The final rule does not apply to check transactions, recurring debits, or ACH transactions.
The final rule has a mandatory compliance date of July 1, 2010. The opt-in requirement applies to both new and existing accounts. For accounts opened before July 1, 2010 (existing accounts), an institution must not assess any fees or charges on or after August 15, 2010, for paying an ATM or one-time debit card transaction, unless the consumer has affirmatively consented to the overdraft service for those transactions. For accounts opened on or after July 1, 2010 (new accounts), institutions must obtain affirmative consent before assessing fees or charges on the consumer's account for paying an ATM or one-time debit card transaction pursuant to the institution's overdraft service.
The final rule prohibits institutions from conditioning the payment of check, ACH, and other types of transactions on the consumer's consenting to the payment of ATM and one-time debit card transactions. In addition, institutions cannot decline to pay checks, ACH, and other types of transactions that overdraw the account simply because the consumer has not consented to the overdraft service for ATM and one-time debit card transactions. Finally, institutions are required to provide the same account terms, conditions, and features, including pricing, to those consumers who do not opt in that they provide to consumers who do opt in.
The final rule does not include any exceptions to the prohibition on charging overdraft fees for ATM and one-time debit card transactions without the consumer's affirmative consent. However, the final rule includes an exception to the notice and opt-in requirements for institutions that have a policy and practice of declining to authorize and pay any ATM or one-time debit card transactions when the institution has a reasonable belief at the time of the authorization request that the consumer does not have sufficient funds available to cover the transaction. The Board recently issued a proposal to clarify that the fee prohibition applies to all institutions, including institutions that have a policy and practice of declining to authorize and pay any ATM or one-time debit card transactions when there are insufficient funds in the account.1
The final rule was published in the Federal Register on November 17, 2009. The complete text of the Federal Register notice, a one-page highlights document, Model Form A-9, and a presentation of the consumer testing of overdraft disclosures are available online .
Relation to Regulation DD
The final rule for disclosures about overdraft programs was published in the Federal Register on January 29, 2009, and went into effect on January 1, 2010.2 This rule includes requirements for disclosures on periodic statements of the aggregate dollar amounts charged for overdraft fees and for returned item fees (for the statement period and the year-to-date). The final rule also requires institutions that provide account balance information through an automated system to provide a balance that excludes any additional funds that may be made available to cover overdrafts. Model Form B-10 provides an example of the required periodic statement disclosures.
QUESTIONS AND ANSWERS
- Do the new rules apply to institutions that do not offer a formal overdraft program but that merely pay overdrafts on an ad hoc basis and charge overdraft fees when that happens?
Yes, the new rules apply even if the institution does not have a formal overdraft program, but occasionally pays overdrafts and charges fees when it does, regardless of what the program is called or its informal nature. However, depending on their specific practices, these institutions may not have to provide opt-in notices to consumers or obtain consumer opt-ins if they do not charge overdraft fees.
- What is meant by a 'reasonable opportunity' to affirmatively consent or opt in?
Comment 205.17(b)-4 of the Official Staff Commentary addresses the question of reasonable opportunity to provide affirmative consent. It states that a financial institution provides a consumer with a reasonable opportunity to provide affirmative consent when, among other things, it provides reasonable methods by which the consumer may affirmatively consent, including:
- By mail. The institution provides a form that the consumer can fill out and mail to affirmatively consent to the service.
- By telephone. The institution provides a readily available telephone line that consumers may call to provide affirmative consent.
- By electronic means. The institution provides an electronic means for the consumer to affirmatively consent. For example, the institution could provide a form that can be accessed and processed on its website, where the consumer may click on a check box to indicate consent and confirm that choice by clicking on a button that affirms the consumer's consent.
- In person. The institution provides a form that the consumer can complete and present at a branch or office to affirmatively consent to the service.
- Is it possible for consumers to opt in electronically, such as through an online banking portal?
Yes, see question 2. However, the institution must first provide the consumer with an opt-in notice in writing or, if the consumer agrees, electronically. The consumer should also be given the right to revoke the opt-in agreement in the same manner he or she used to opt in.
- For joint account holders, do both parties have to opt in?
If two or more consumers jointly hold an account, the financial institution must treat the affirmative consent of any of the joint consumers as affirmative consent for that account. Similarly, the financial institution must treat a revocation of affirmative consent by any of the joint consumers as revocation of consent for that account. (§205.17(e))
- What are the permissible ways in which a financial institution can obtain the consumer's affirmative consent?
Comment 205.17(b)-6 states that a consumer's affirmative consent, or opt-in, to a financial institution's overdraft service must be obtained separately from other consents or acknowledgments obtained by the institution, including a consent to receive disclosures electronically. An institution may obtain a consumer's affirmative consent by providing a blank signature line or check box that the consumer could sign or select to affirmatively consent, provided that the signature line or check box is used solely for purposes of evidencing the consumer's choice whether or not to opt into the overdraft service and not for other purposes.
An institution does not obtain a consumer's affirmative consent by including preprinted language about the overdraft service in an account disclosure provided with a signature card or contract that the consumer must sign to open the account and that acknowledges the consumer's acceptance of the account terms. Nor does an institution obtain a consumer's affirmative consent by providing a signature card that contains a pre-selected check box indicating that the consumer is opting into the overdraft service.
- Are institutions required to provide an opt-in notice to customers who have a traditional overdraft line of credit associated with their accounts?
No, the final rule does not apply to the payment of overdrafts pursuant to an overdraft line of credit. See the definition of "overdraft service" in §205.17(a).
- How can an institution comply with the requirement to provide written confirmation of the consumer's affirmative consent?
A financial institution may comply with the written confirmation requirement in §205.17(b)(1)(iv) by providing to the consumer a copy of the consumer's completed opt-in form or by sending a letter or notice to the consumer acknowledging that the consumer has elected to opt into the institution's service. The written confirmation must include a statement informing the consumer of his or her right to revoke the opt-in at any time. To the extent that the institution complies with the written confirmation requirement by providing a copy of the completed opt-in form, the institution may include the statement about revocation on the initial opt-in notice. (Comment 205.17(b)-7). The final rule requires institutions to provide the written confirmation before overdraft fees may be charged. The proposed clarifications to the final rule would amend Comment 205.17(b)-7 to clarify that the written confirmation must be sent before overdraft fees may be charged.
- Can a financial institution provide existing customers with opt-in notices before July 1, 2010, but not implement their choices until August 15, 2010?
Yes, a financial institution may provide the notice required by §205.17(b)(1)(i) and obtain the consumer's affirmative consent to the financial institution's overdraft service for ATM and one-time debit card transactions before July 1, 2010, provided that the financial institution complies with all of the requirements of §205.17. (Comment 205.17(c)-1) However, to avoid misleading consumers, the institution should modify its notice to include a statement such as "After August 15, 2010, we will not authorize and pay overdrafts for the following types of transactions unless you ask us to (see below)." (§205.17(d)(6))
- If an existing customer does not opt in by August 15, 2010, what happens?
For existing customers, an institution will no longer be able to assess fees or charges for paying overdrafts of ATM and one-time debit transactions after August 15, 2010, unless the customer has affirmatively consented.
- Can a customer opt in at the customer level or must he or she opt in individually for each account he or she has with an institution?
Opt-in occurs at the account level, not at the customer level. Moreover, it can only occur for accounts that are already open, not for accounts that may be opened in the future.
- If a consumer revokes his or her affirmative consent, does the institution have to waive or reverse any overdraft fees assessed on the consumer's account prior to the implementation of the revocation request?
A consumer may revoke consent at any time in the manner made available to the consumer for providing consent. A financial institution must implement a consumer's revocation of consent as soon as reasonably practical. If a consumer does so, the final rule does not require the financial institution to waive or reverse any overdraft fees assessed on the consumer's account prior to the institution's implementation of the consumer's revocation request. (§205.17(f) and Comment 205.17(f)-1)
- Can a financial institution refuse to open a checking account when a consumer does not opt into the institution's overdraft service or can the institution offer different stand-in limits for those customers that opt in and those that opt out?
Section 205.17(b)(3) explains that an institution must provide the same account terms, conditions, and features to those consumers who do not opt in as to those who do. Based on this section, conditioning the opening of a checking account on opting in or creating different standards, such as stand-in limits, would be prohibited.
- Can a financial institution include a description of its overdraft service in the account agreement or in supplemental materials that accompany the opt-in notice in addition to the opt-in notice describing its overdraft service?
Yes, a financial institution may include a description of its overdraft services in account agreements or in other documents that accompany the opt-in notice, as long as the notice required by §205.17(b) is provided. However, documents that accompany the opt-in notice may constitute an advertisement promoting the payment of overdrafts. In that case, the institution must comply with the requirements of §230.11(b)(1) of Regulation DD by clearly and conspicuously disclosing in such advertisement: (1) the fee or fees for the payment of each overdraft; (2) the categories of transactions for which a fee for paying an overdraft may be imposed; (3) the time period by which the consumer must repay or cover any overdraft; and (4) the circumstances under which the institution will not pay an overdraft.
- Is there any limit to the number or amount of overdraft fees an institution can impose once the consumer has opted in?
The final rule under Regulation E does not limit the number or amount of overdraft fees that an institution can impose once the consumer has opted in. However, §205.17(d)(3) states that the notice required by §205.17(b)(1)(i) must disclose the maximum number of overdraft fees or charges that may be assessed per day or, if applicable, that there is no limit. Nevertheless, the February 2005 Interagency Joint Guidance on Overdraft Protection Programs identified daily limits on consumer costs as a best practice: "Consider imposing a cap on consumers' potential daily costs from the overdraft programs. For example, consider limiting daily costs from the program by providing a numerical limit on the total overdraft transactions that will be subject to a fee per day or by providing a dollar limit on the total fees that will be imposed per day." 70 Fed. Reg. 9127, 9132 (February 24, 2005)
- If a financial institution pays a check into overdraft, is it allowed to charge a fee even if the customer has not opted in?
Yes. Checks are not covered by the mandatory opt-in or fee prohibition rules in §205.17(b).
- If a financial institution does not charge a fee when it pays an item into overdraft, does it have any obligations under the new rules?
The final rules prohibit a financial institution that holds a consumer's account from assessing a fee or charge on a consumer's account for paying overdrafts in connection with ATM or one-time debit card transactions unless it has met the four requirements in §205.17(b)(1)(i)-(iv). If the institution never assesses such fees or charges, the notice and opt-in requirements do not apply.
- Do the new rules prevent an institution from charging for ATM or one-time debit card transactions that are declined?
The final rule does not address declined transaction fees. However, the supplementary information discussion in the Federal Register notice for the final rule notes that such fees could raise significant fairness issues under the FTC Act because the institution bears little, if any, risk or cost to decline authorization of an ATM or one-time debit card transaction.
- Does the prohibition on fees apply to all fees, such as nonsufficient funds (NSF) fees, daily fees, negative balance fees, or sustained overdraft fees?
Yes, the new rule prohibits the assessment of any fee or charge — regardless of the name ascribed to the fee — on a consumer's account for paying an ATM or a one-time debit card transaction as part of the institution's overdraft service. The proposed clarifications to the final rule would, if adopted, provide additional guidance on when daily, negative balance, sustained overdraft, and similar fees may and may not be charged.
- How can a financial institution distinguish between a recurring debit card transaction and a nonrecurring one?
Comment 205.17(b)-1.ii, which addresses the coding of transactions, states that a financial institution complies with the rule if it adapts its systems to identify debit card transactions as either onetime or recurring. If it does so, the financial institution may rely on the transaction's coding by merchants, other institutions, and other third parties as a one-time or preauthorized or recurring debit card transaction.
- Do the new rules address the order in which charges are posted?
No. However, the Federal Register notice for the final rule states that "the Board recognizes that additional consumer protections may be appropriate with respect to overdraft services, for example, rules to address transaction posting order. Therefore, the Board continues to assess whether additional regulatory action relating to overdraft services is needed." 74 Fed. Reg. 59050
- What are the record retention requirements for the opt-in notice?
The final rule does not contain record retention requirements specifically for overdraft services and opt-in notices. However, Regulation E does contain record retention rules in §205.13(b) that require financial institutions to retain evidence of compliance with the requirements imposed by the act and regulation for a period of not less than two years from the date disclosures are required to be made or action is required to be taken. Comment 205.13(b)-1 explains that a financial institution need not retain records that it has given disclosures and documentation to each consumer; it need only retain evidence demonstrating that its procedures reasonably ensure consumers' receipt of required disclosures and documentation. Accordingly, the general record retention requirements of Regulation E apply to overdraft services and opt-in notices.
- Must the new Regulation DD periodic statement disclosures include grid lines consistent with Sample Form B-10? Must the phrases "Total Overdraft Fees" and "Total Returned Item Fees" be used exactly as printed in the model form, or can other descriptions be used for an institution's fees?
The periodic statement disclosures must be disclosed using a format substantially similar to Sample Form B-10 in Appendix B of Regulation DD, including graphical elements such as the box and gridlines. Comment 230.11(a)(1)-3 states that institutions may use terminology such as "returned item fee" or "NSF fee" to describe fees for returning items unpaid. Proposed clarifications to the final rule under Regulation DD, if adopted, would clarify that use of the term "Total Overdraft Fees" is required.
- How do these new regulatory provisions relate to the 2005 Joint Guidance on Overdraft Protection Programs? There are some differences between the two, aren't there?
Although the Regulation E provisions and the Joint Guidance have some differences (among other things, "opt-in" versus "opt-out" for certain types of transactions), the concepts that formed the basis for both — transparency, fairness, and clear communication of program fees and features — are consistent. Consequently, the Federal Reserve expects the banks it supervises to consider the Joint Guidance when developing internal procedures, training personnel, and changing systems to incorporate the new regulatory provisions. The "best practices" contained in the guidance should be of assistance when developing and overseeing an overdraft protection compliance program.
- Are you preparing examination procedures for the new rules? If so, when will they be released? Will they include compliance with the 2005 Joint Guidance on Overdraft Protection Programs?
The Federal Reserve is currently working on revised Regulation E procedures that will address the new overdraft protection rules. Those procedures will be publicly available prior to the July 1, 2010, effective date of the new rules. The Federal Reserve's release of the procedures will reinforce the expectations of the Joint Guidance.
In advance of the July 1, 2010 effective date for the final overdraft rule, financial institutions should carefully review the compliance requirements and test their systems. Specific issues and questions should be raised with the consumer compliance contact at your Reserve Bank or with your primary regulator.