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Compliance Corner: Third Quarter 2005

Truth in Savings Act Incorporates Overdraft Protection Rules

The Second Quarter 2005 issue of Compliance Corner contained an article summarizing the Interagency Guidance on Overdraft Protection Programs (Interagency Guidance). This article addresses how some of the issues referred to in the Interagency Guidance have been incorporated into Regulation DD, which implements the Truth in Savings Act.

On May 19, 2005, the Federal Reserve Board published final amendments to Regulation DD and the official staff commentary to the regulation. These amendments address concerns about the uniformity and adequacy of information provided to consumers when they overdraw their deposit accounts.

The amendments, in part, address services sometimes referred to as “bounced check protection” or “courtesy overdraft protection,” which are offered by many depository institutions to pay consumers’ checks and allow other overdrafts when there are insufficient funds in the accounts. These are typically automated services provided to transaction account consumers as an alternative to a traditional overdraft line of credit.

The final rule creates a new section to the regulation that requires institutions that promote the payment of overdrafts in an advertisement to disclose on periodic statements total fees imposed for paying overdrafts and total fees imposed for returning items unpaid. These disclosures must be made for both the statement period and the calendar year-to-date. Certain other disclosures in advertisements of overdraft services are also included in the new section of Regulation DD.

This article provides a summary of the salient issues concerning the final amendments to Regulation DD pertaining to overdraft protection plans. The full text of the amendment is available on the Federal Reserve Board’s website.External Link

Disclosure of Overdraft Fees
Institutions must ensure that overdraft and returned-item fee disclosures are adequate and uniform and provided on a timely basis.

Periodic statements.
To assist consumers in understanding the financial impact of overdrawing their accounts, the final rule requires institutions that promote the payment of overdrafts in an advertisement to separately disclose on periodic statements the total amount of fees or charges imposed on the deposit account for paying overdrafts and the total amount of fees charged for returning items unpaid. These disclosures must be provided for the statement period and for the calendar year-to-date for any account to which the advertisement applies.

To facilitate compliance, the staff commentary provides specific examples of when an institution is promoting the payment of overdrafts in an advertisement. For example, stating the overdraft limit for an account on a periodic statement or stating an account balance that includes available overdraft funds on an ATM receipt would be considered an advertisement triggering the required disclosures.

An institution that does not otherwise promote the payment of overdrafts would not trigger the requirement to provide aggregate fee disclosures on periodic statements solely by:

  • Providing educational materials that do not specifically describe the institution’s overdraft service.
  • Promoting in an advertisement a traditional line of credit that is subject to the Board’s Regulation Z, which implements the Truth in Lending Act.
  • Engaging in an in-person discussion with a consumer.
  • Making a disclosure required by federal or other applicable law .
  • Including information on a periodic statement or providing a notice informing a consumer about a specific overdrawn item or the amount the account is overdrawn.
  • Including in a deposit account agreement a discussion of the institution’s right to pay overdrafts.
  • Notifying a consumer that completing a requested transaction, such as an ATM withdrawal, may trigger an overdraft fee or providing a general notice that items overdrawing an account may trigger an overdraft fee.
  • Communicating information about the payment of overdrafts in response to a consumer-initiated inquiry about overdrafts or deposit accounts generally. However, providing information about the payment of overdrafts in response to a balance inquiry made through an automated system, such as a telephone response machine, an ATM, or an institution’s Internet site, is not a response to a consumer-initiated inquiry for purposes of this provision and would trigger the periodic statement disclosure requirements.

New account disclosures.
Institutions must specify in new account disclosures the categories of transactions for which an overdraft fee may be imposed. An exhaustive list of transactions is not required; it is sufficient to state that the fee is imposed for overdrafts created by checks, in-person withdrawals, ATM withdrawals, or other electronic means, as applicable. This requirement applies to all institutions, including institutions that do not promote the payment of overdrafts in an advertisement.

To avoid confusion with traditional lines of credit, institutions that promote the payment of overdrafts are required to include certain disclosures in their advertisements about the service. These disclosures include the applicable fees or charges, the categories of transactions covered, the time period consumers have to repay or cover any overdraft, and the circumstances under which the institution would not pay an overdraft. Stating the available overdraft limit or the amount of funds available on a periodic statement would be considered an advertisement triggering the required disclosures.

The final rule provides safe harbors from the advertising requirements similar to those described above for the periodic statement disclosure requirements. For example, the advertising disclosure requirements would not apply to institutions when they provide educational materials, respond to a consumer-initiated inquiry about overdrafts or deposit accounts, or notify a consumer about a specific overdraft in their account.

Advertising disclosures are not required on ATM receipts because of space limitations. Similarly, advertising disclosures are not required for advertisements using broadcast media, billboards, or telephone response systems. These rules parallel an exemption in Regulation DD that applies to other types of advertising disclosures. Limited advertising disclosures are required on ATM screens, telephone response machines, and indoor signs.

Prohibition of Misleading Advertisements
The prohibition against advertisements, announcements, or solicitations that are misleading or that misrepresent the deposit contract is extended to communications with consumers about the terms of their existing accounts.

The staff commentary has been revised to provide the following five examples of advertisements that would ordinarily be deemed misleading:

  • Representing an overdraft service as a line of credit
  • Representing that the institution will honor all checks or transactions when the institution retains discretion at any time not to honor any transaction
  • Representing that consumers with an overdrawn account are allowed to maintain a negative balance when the terms of the account’s overdraft service require consumers to promptly return the deposit account to a positive balance
  • Describing an overdraft service solely as protection against bounced checks when the institution also permits overdrafts for a fee in connection with ATM withdrawals and other electronic fund transfers that permit consumers to overdraw their accounts
  • Describing an account as “free” or “no cost” in an advertisement that also promotes a service for which there is a fee (including an overdraft service), unless the advertisement clearly and conspicuously indicates that there is a cost associated with the service

Overdraft Protection Programs and the Truth in Lending Act
The amendments to Regulation DD recognize that an overdraft service is provided as a feature and a term of a deposit account and that the fees associated with the service are assessed against the deposit account. Consumer advocates and some others who commented on the proposed revisions to Regulation DD believe that certain overdraft services should be covered by Regulation Z.

The advocates believe that overdraft services compete with traditional credit products such as open-end lines of credit, credit cards, and short-term closed-end loans. These products are covered under Regulation Z and provide consumers with the cost of credit expressed as a dollar finance charge and an annual percentage rate. The advocates believe that Regulation Z disclosures would enhance consumers’ understanding of the cost of overdraft services and their ability to compare costs of competing financial services.

The Federal Reserve Board’s adoption of final rules under Regulation DD does not preclude a future determination that Regulation Z disclosures for overdraft protection programs would also benefit consumers. The Board expressly stated in its proposal that further consideration of the need for coverage under Regulation Z may be appropriate in the future.

Final Thoughts
The new provisions of Regulation DD are not effective until July 1, 2006. However, institutions offering overdraft protection programs should begin now to develop policies and procedures that comply with the Regulation DD amendments.

If you have any questions about this article, please contact either Supervising Examiner Eddie L. Valentine or Supervising Examiner John D. Fields through the Regulations Assistance Line at (215) 574-6568.

The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.