By Alex Kunigenas, Compliance Risk Coordinator, Federal Reserve Bank of San Francisco
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).
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 opt-in requirement applies to any ATM transaction (e.g., withdrawing cash, inter-account 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 onetime 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 .
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.
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.
Complete Issue (1.65 MB, 24 pages)
Kenneth Benton, Editor
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