The Federal Reserve Board (“FRB”) recently issued a new Notice of Proposed Rulemaking (the “New NPR”), that would amend its Regulation E, which implements the Electronic Funds Transfer Act, to address issues related to certain overdraft services. The New NPR represents a narrower proposal than a previously proposed rulemaking on the topic. The FRB also recently issued a final rule amending its Regulation DD, which implements the Truth in Savings Act, to impose additional disclosure requirements regarding fees for overdraft services.
The FRB’s New NPR reflects the view that overdraft payment services have evolved over the years from a discretionary act on the part of the institution involved to an automated process by which specific criteria is set to determine whether, and to what extent, overdrafts should be honored. The New NPR further notes that overdraft services have been extended from just checking accounts to cover overdrafts resulting from ATM withdrawals, debit card point-of-sale transactions, on-line transactions, preauthorized transactions and Automated Clearing House (“ACH”) transactions.
The federal banking agencies have previously issued guidance on overdraft protection programs which discussed safety and soundness issues, legal risks and “best practices.” The FRB also previously amended Regulation DD (Truth in Savings) to address issues related to disclosure of overdraft fees and advertisement of overdraft services. In May, 2008, the FRB, the Office of Thrift Supervision (“OTS”) and the National Credit Union Administration (“NCUA”) issued a Notice of Proposed Rulemaking (the “Prior NPR”), which was based on authority in the Federal Trade Commission Act, that would have prohibited fees on overdraft payment services related to all methods of payment unless the customer was given notice and an opportunity to opt out of the service.
In response to the approximately 1,500 comments received, the FRB (with the agreement of the OTS and the NCUA) issued the New NPR in lieu of taking further action on the Prior NPR. The New NPR proposes to amend Regulation E to adopt one of two approaches. The first approach would require each institution to provide consumers with notice of the right to opt out of overdraft payment services for ATM withdrawals and one-time debit card transactions. The opt-out notice would need to be given prior to any overdraft fees being assessed on such transactions and for each periodic statement cycle in which such overdraft fees are charged.
The second proposed approach is to provide consumers with notice of the right to opt in to the institution’s overdraft payment services for ATM withdrawals and one-time debit card transactions. The notice would need to be given prior to such fees being assessed but, once given and consent is received, additional notices would not be required.
The New NPR also requests comment on whether institutions should be allowed to vary the terms, conditions or features of an account that does not permit the payment of ATM and one-time debit card overdrafts so long as the changes would neither discourage a reasonable consumer from exercising the opt out option or compel that consumer to exercise the opt in option.
The New NPR also proposes to prohibit an institution from assessing an overdraft fee where the overdraft would not have occurred but for a debit hold placed on funds in an amount that exceeds the actual transaction amount and where the merchant can determine the actual transaction amount within a short period of time after authorization of the transaction. One example would be fuel purchases at a gas station. The prohibition would not apply if the institution adopts procedures desired to release the hold within a reasonable period of time.
The FRB’s reasoning for proceeding with a proposed rulemaking involving opt out/opt in procedures for ATM and one-time debit card transactions, but not check overdraft payment services, is that, with the latter, a consumer is generally charged the same fee for an overdrawn check regardless of whether the institution pays it or not. Moreover, the New NPR notes that a consumer may avoid other adverse consequences, such as the imposition of additional merchant returned item fees, if a checking overdraft is paid. However, the FRB does not believe such features/benefits are present with respect to payments of overdrafts on ATMs and one-time debit card transactions, which makes it more likely that a consumer would want to decline the service. The FRB also noted that it believes that overdraft fees assessed in connection with ATM and debit card transactions may substantially exceed the amount overdrawn and could reasonably cause a consumer to prefer to have the overdrawn transaction declined rather than incur the overdraft fees. Consequently, the FRB has determined that a more targeted approach is appropriate than in the Prior NPR.
In conjunction with the New NPR, the FRB issued a final rule amending Regulation DD to require disclosure of the aggregate dollar amounts charged for overdraft fees for returned item fees (for the statement period and year-to-date). Currently, only institutions that promote or advertise overdraft payment services must disclose aggregate amounts. The Regulation DD amendments also require institutions that provide account balance information through an automated system to provide a balance that does not include additional funds that may be made available to cover overdrafts. Those amendments are effective January 1, 2010.
The New NPR is subject to a 60 day comment period from the date of publication in the Federal Register .