To: All Member Banks and Others Concerned in the Third Federal Reserve District
Attention: Chief Executive Officer and Chief Compliance Officer
Subject: Guidance on Overdraft Protection Programs; Final Rules
Summary:
The Board
of Governors of the Federal Reserve System and the
other federal bank and credit union regulatory agencies
today announced final joint guidance to assist insured
depository institutions in the disclosure and administration
of overdraft protection programs.
Depository institutions may offer overdraft protection
programs to transaction account customers as an alternative
to traditional ways of covering overdrafts. In response
to concerns about the marketing, disclosure, and implementation
of these programs, the agencies published for comment
proposed interagency guidance on overdraft protection
programs in June, 2004. The final joint guidance responds
to comments received by consumer and community groups,
individual consumers, depository institutions, trade
associations, vendors offering overdraft protection
products, other industry representatives, and state
agencies.
The final joint guidance contains three primary sections: Safety and Soundness Considerations; Legal Risks; and Best Practices. The safety and soundness discussion seeks to ensure that financial institutions offering overdraft protection programs adopt adequate policies and procedures to address credit, operational, and other associated risks. The legal risks discussion alerts institutions of the need to comply with all applicable federal and state laws, and advises institutions to have their overdraft protection programs reviewed by legal counsel to ensure overall compliance prior to implementation. Several federal consumer compliance laws are outlined in the guidance. The best practices section addresses the marketing and communications that accompany the offering of overdraft protection programs as well as the disclosure and operation of these programs. Some of these best practices include: avoiding the promotion of poor account management; providing a clear explanation of the discretionary nature of the overdraft protection program; clearly disclosing fees; explaining the impact of transaction clearing policies on the overdraft fees consumers may incur; and monitoring program usage.
The agencies also advise insured depository institutions to distinguish overdraft protection services from “free” account features, to prominently distinguish balances from overdraft protection funds availability, and to alert consumers before a transaction triggers any fees.
For more information, please refer to the Federal Register notice [Text | PDF ], published February 24, 2005.
Date: The final rule is effective now.
For Further Information: Minh-Duc T. Le, Senior Attorney, Daniel Lonergan, Counsel, or Elizabeth Eurgubian, Attorney, Division of Consumer and Community Affairs, (202) 452-3667; or William H. Tiernay, Supervisory Financial Analyst, Division of Bank Supervision and Regulation, (202) 452-2412. For users of Telecommunications Device for the Deaf (“TDD”) only, contact (202) 263-4869.