Whether or not you work for a federal savings bank, you might want to pay close attention to recent proposed "best practices" guidance on overdraft policies, issued by the Office of Thrift Supervision. This client alert discusses the OTS Supplementary Guidance on Overdraft Protection Programs ("Proposed Guidance"), attached below, and a related recent cease and desist order addressing the same issues, as well as updates you on overdraft fee class action litigation related to this issue.
Proposed Guidance. The Proposed Guidance updates the Guidance on Overdraft Protection Programs issued by the OTS in 2004 and the Joint Guidance on Overdraft Protection Programs issued by the other bank regulators in 2005 ("Joint Guidance"). Of particular significance in the Proposed Guidance is the OTS position that certain overdraft practices imposed by savings banks constitute unfair and deceptive acts or practices under Section 5 of the Federal Trade Commission Act. The FTC Act is enforced by both the FTC and the various bank regulators through the issuance of cease and desist orders and actions for civil money penalties and restitution. Comments on the Proposed Guidance are due to the OTS before June 28, 2010.
Contained in the Proposed Guidance are so-called best practices that the OTS expects banks to follow in offering overdraft protection to their customers. These best practices fall into two categories: Marketing and Consumer Communications and Program Features and Operations.
In connection with Marketing and Consumer Communications, the OTS recommends a number of best practices to avoid customer confusion and complaints, foster good customer relations, and reduce legal and compliance risks. The recommendations instruct savings banks to (1) fairly represent overdraft protection programs and the related fees; (2) provide information about alternative overdraft services or products; (3) clearly explain the discretionary nature of the program and related consequences; (4) distinguish overdraft protection programs from "free" account features; (5) clearly disclose program fees; (6) clarify that the imposed fees will reduce the amount of the overdraft protection provided; (7) demonstrate when multiple fees will be charged; (8) explain the impact of transaction-clearing policies; (9) illustrate the types of transactions covered; (10) disclose account balances in a manner that distinguishes consumer funds from funds made available through overdraft protection; (11) promptly notify consumers of overdraft protection program usage each time used; and (12) inform consumers when access to overdraft services will be or has been reinstated after suspension.
In regard to Program Features and Operation, the OTS recommends what it sees as best practices in structuring and providing overdraft protection programs. Its suggestions include (1) providing consumer choice that is, obtaining consumer consent (note that an opt-in will be required under Regulation E for one-time debit card transactions at ATMs as of July 1, 2010); (2) limiting aggregate overdraft fees (per day, for example); (3) prohibiting the manipulation of transaction clearing rules to increase fees imposed on customers; (4) monitoring overdraft protection usage; and (5) prohibiting the furnishing of negative information to credit bureaus when a customer pays overdrafts under the terms of the bank's overdraft protection program.
In essence, the Proposed Guidance provides a series of "Dos" and "Don'ts." The "Dos" require more disclosure and better disclosure. Banks are well advised to fairly and accurately disclose to their customers the terms of their overdraft protection programs, including when fees will be imposed, the amount of the fees, any per-day fee limitations, the order in which debits will be posted to the account, the effect of "holds" on account balances, and a customer's ability to opt in to or out of the program. If the bank offers alternatives to its overdraft protection programs, such as overdraft lines attached to a customer's checking account or linked savings accounts from which overdrafts can be debited, these should also be disclosed. Monitoring a customer's usage of the overdraft protection and advising heavy users of less expensive alternatives would also be a best practice. Any existing customer agreements should be reviewed and, where necessary, revised to accurately reflect overdraft terms and policies.
On the "Don'ts" side of the ledger are unfair practices, the sole purpose of which is to increase bank profits. Any overdraft protection program should be discretionary, with the customer, after full disclosure of the pros and cons of participating in the program, given the opportunity to opt in to or out of the program. Manipulation of the order in which debits are processed should be prohibited, with a consistent policy imposed. The safest policy would be to process debits in the order that they are presented or processing them in a manner that would cause the customer to incur the lowest amount of fees (i.e., processing smaller debits that can be covered by the account balance first, before processing a large debit that would use up the entire account balance). Finally, banks should not negatively report their customers to the credit bureaus if the customers comply with the terms of the banks' overdraft protection policies.
Lessons learned? Courts are likely to review the OTS "best practices" in connection with overdraft policies of non-OTS regulated institutions. Whether or not this is an appropriate practice (actually it's not), all depository institutions would be wise to reexamine their policies with the OTS best practices in mind.
Cease and desist order. As mentioned above, OTS also issued a cease and desist order against a bank, imposed monetary penalties of $400,000, and required refunds of $12 million to customers for what it deemed to be unfair and deceptive practices in connection with the bank's conditioning credit on repayment by preauthorized electronic funds transfers and false advertising regarding its overdraft protection program. In unrelated actions, litigation concerning overdraft fees continues unabated as predicted in our recent Client Alert dated April 9, 2010, which can be found here.
Class action litigation update. The OTS order is just the tip of the iceberg. More troubling to banks, plaintiffs are now pursuing putative class action cases alleging unfair and deceptive practices, breach of contract, unconscionability, conversion, breach of the implied covenant of good faith and fair dealing, and unjust enrichment by banks in connection with the imposition of overdraft fees. There are consolidated cases filed against all of the very largest banks, and the court has refused to dismiss the suits. Similar putative class action cases have been filed against a broad range of other banks. In all of these cases, plaintiffs allege (1) manipulation and reordering of debits to maximize the imposition of fees, (2) failure to contract or disclose the manner in which debits will be paid, and (3) the wrongful assessment of overdraft fees when balances in the account are on "hold."
At least two banks (Bank of America and Citibank) have elected to no longer offer fee-based overdraft protection to debit card users who exceed their available balances. Other banks are marketing their customer base and allowing customers to opt in to the bank's overdraft protection programs. This latter model mirrors the new requirement under Regulation E, effective July 1, 2010, that requires that a customer opt in to the bank's overdraft protection program and related fees in connection with ATM and one-time debit card transactions prior to the bank's imposition of a fee for its overdraft services.
Financial institutions should review their overdraft protection programs, customer agreements and debit payment policies to ensure that customers are being treated fairly and in accordance with any customer agreements. Efforts should also be under way to comply with the Regulation E change prior to July 1, 2010. Banks not regulated by the OTS should refer to the Joint Guidance for its regulator's recommendations but should also note that the other bank regulators are likely to follow the OTS lead in updating their overdraft protection requirements as they did in 2005.
Click here for the Department of the Treasury Supplemental Guidance on Overdraft Protection.