In a proposal published in the Federal Register on June 8, 2011, the Office of the Comptroller of the Currency (OCC) has outlined general principles applicable to any deposit-related consumer credit product and detailed how such principles would specifically apply to automated overdraft protection and deposit advance programs.  As the proposal notes, because the Dodd-Frank Act transfers all functions of the Office of Thrift Supervision to the OCC effective July 21, 2011, any final guidance on deposit-based credit products in effect for national banks on or after that date will also apply to federal savings associations.  Comments on the OCC’s proposal must be submitted by July 8, 2011.

The OCC proposal is the latest pronouncement from federal regulators concerning overdraft programs.  Previously, the FDIC issued final Overdraft Payment Supervisory Guidance, held a conference call clarifying its Guidance, and then issued a Q&A. The OTS issued guidance and took an enforcement action for unfair overdraft practices. The Consumer Financial Protection Bureau is likely to weigh in at some point on or after July 21, 2011.

Summary of Proposal:  The OCC proposal, like the FDIC Guidance, applies only to automated and not ad hoc overdraft protection programs.  However, the OCC proposal, unlike the FDIC Guidance, also addresses open-end deposit advance programs.  With one critical exception, the OCC proposal is more general and less detailed than the FDIC Guidance.  However, the OCC cautions banks against undue reliance on fees generated by such products and states that it is “concerned” with “imposition of fees that cumulatively exceed a customer’s overdraft credit limit.”  It goes on to state: “If, after account review and making any appropriate changes to an account, the account continues to demonstrate excessive overdrafts, overdraft privileges should be terminated and, if appropriate, the account should be closed.”  By contrast, the FDIC would not require state banks to discontinue overdraft protection on account of excessive use so long as the depositor is properly advised of the costs of coverage and the options available to him or her.

Other overdraft highlights from the OCC proposal include the following:

  • Unlike the FDIC’s Final Guidance, the OCC’s proposal would make the payment of all overdrafts, including those arising from check and ACH transactions, subject to an opt-in requirement.
  • The OCC suggests “a grace period of one or more days to allow a customer to return the account to a positive balance before any overdraft fee may be imposed.”
  • While not expressly criticizing all high-to-low processing orders, the proposal states that a bank’s processing order should not be “solely designed or generally operated to maximize overdraft fee income.” (emphasis added)

We perceive a significant distinction between the overdraft and deposit advance aspects of the OCC proposal—namely, the OCC guidance on deposit advance products does not include any specific fee limits among the “prudential limitations” banks should establish.  However, it does state that banks should establish limits (of some type) on: (1) the number of periods that back-to-back advances can be made before a “cooling-off” period will be triggered; (2) the number of months in which advances may be outstanding; (3) the total amount or percentage of any deposit that may be advanced in any period; and (4) the total amount or percentage of any deposit that may be used to repay an advance.  The guidance would direct banks to allow advances that are substantial relative to the regular deposit amount to be repaid in multiple installments over more than one month.

A Philosophical Critique:  The FDIC has been forthright in tying its overdraft guidance to concerns about unfair and/or deceptive practices.  It addressed these concerns by suggesting strong (and repeated) disclosures and ensuring consumer autonomy in deciding whether to opt for overdraft protection.  By contrast, the OCC purports to tie its proposal primarily to safety and soundness considerations, and it proposes to require national banks to discontinue overdraft coverage (and/or even close an account) if the consumer incurs fees exceeding his or her overdraft limit.  In our view, it is hard to see the connection between this proposed limitation and a bank’s safety and soundness.  Additionally, it is hard to see how charging fees over this level – seemingly plucked out of thin air – can be justified under Section 5 of the FTC Act or the Dodd-Frank Act, which provides that conduct is not “unfair” if it is in a consumer’s power to avoid any injury resulting from the conduct.  Here, assuming the bank has made appropriate disclosures of opt-in and opt-out rights, the consumer can just say “no” to overdraft coverage.

Recommendations:  The OCC’s proposal, coupled with prior regulatory actions, the avalanche of overdraft fee litigation and the general ferment surrounding overdraft protection, reinforces the need for all financial institutions not only to promptly undertake a thorough review with counsel of their overdraft practices but to also closely examine overdraft alternatives, including potential direct deposit advance programs.  Banks without pre-dispute arbitration programs should consider implementing such programs, especially in light of the Supreme Court’s recent decision in Concepcion.  We have counseled and are counseling a number of banks in these matters, and have represented and are representing a number of banks defending overdraft fee class actions.  In fact, we have prevailed in overdraft fee cases on four separate occasions, including two cases that were the subject of prior legal alerts — “Ballard Spahr Client Compels Individual Arbitration of Debit Card Overdraft Fee Claims” and “Third Circuit Affirms Dismissal of Class Action Challenge to Bank’s ‘High-to-Low’ Debit Card Processing Policy.”