The Board of Governors of the Federal Reserve System (FRB) announced final rules under Regulation E on November 12, 2009, that require financial institutions to obtain a consumer’s consent before the financial institution may charge fees for paying overdrafts on automated teller machine (ATM) transactions and one-time debit card (OTDC) transactions made with a debit card issued by or on behalf of the account-holding institution. The overdraft rules, which apply to new and existing account holders, are designed to inform consumers about the terms and conditions of overdraft services offered by financial institutions and give them the opportunity to avoid fees when overdraft services do not meet the consumer’s needs. Although the FRB acknowledged the operational difficulties financial institutions will face as a result of the new rules, they failed to provide much guidance on how to comply with the new rules and continue to maintain the level of service many consumers want in a cost-effective manner.
Notice and Consent
The final overdraft rules generally require a financial institution to provide consumers (1) with written notice explaining the institution’s overdraft service for all ATM and OTDC transactions and the types of transactions for which a fee or charge may be imposed, and (2) a reasonable opportunity to affirmatively consent, or “opt-in”, to such overdraft services. The notice must be segregated from all other information, including other account disclosures, and the method of obtaining consent must be separate from other types of consents. The institution must also provide written confirmation of the consumer’s choice and information regarding the consumer’s right to revoke consent.
The opt-in approach mandated by the FRB will require a financial institution to invest considerable time and resources disclosing its overdraft services and the consequences of opting in to the services. The new rules set forth specific requirements for the content and format of the opt-in notice. The FRB provides a proposed form for financial institutions to use, but even with the suggested form, it is prudent for each financial institution to determine the most effective way to train its employees and inform its customers of the terms and conditions of its overdraft protection services in order to properly obtain consent.
If account holders do not opt-in to the services, some transactions that would have otherwise been paid will be declined even though the consumer would not have been assessed overdraft fees on their account. Financial institutions should anticipate the disruption this will cause account holders and explain the potential for this and similar occurrences.
The rule changes create an opportune time for each affected institution to review its processing procedures for improvements in light of the new rules. For example, moving toward real-time transaction clearance may reduce the occurrence of some compliance issues. A failed transaction may also present an opportunity to educate customers on the advantages of opting in to the overdraft services program.
No Fees or Charges Without Consent
The new rules do not require financial institutions to authorize or pay any overdrafts on ATM or OTDC transactions. Moreover, institutions may pay overdrafts without obtaining a consumer’s consent; however, they cannot charge fees against a consumer’s account after paying an overdraft until the financial institution obtains an account holder’s affirmative consent to overdraft services for such transactions.
Because these types of fees currently subsidize other services such as free checking or free online bill payment, financial institutions may need to explore charging higher fees for other services or modifying the fee schedule for consumer services. While the new rules do not address creating new fees for ATM or OTDC transactions that are declined, the FRB suggested that such fees could raise fairness issues under the Federal Trade Commission Act. The FRB believes financial institutions bear little risk or cost when declining an authorization for a transaction.
The FRB's regulatory approach bifurcates overdraft services based on the type of transaction involved. The new rules do not apply to other types of transactions, including check transactions, Automated Clearing House (ACH) transactions and recurring debit card transactions. The FRB does not provide any guidance as to how an institution should determine whether a transaction is an OTDC transaction or a recurring debit transaction. Any financial institution that adapts its systems to identify debit card transactions as one-time or recurring may rely on the transaction’s coding by merchants, other institutions and other third parties.
Financial institutions may not condition the payment of overdrafts for checks, ACH transactions or other types of transactions on the consumer’s consent to overdraft services for ATM or OTDC transactions. The institution is also required to provide those consumers who do not opt-in with the same account terms, conditions and features for all other services as are provided to consumers who do.
The FRB’s bifurcated approach presents both opportunities and challenges for financial institutions that offer a variety of overdraft services to their customers. If it is possible to enhance existing systems or develop new ones that differentiate between one-time and recurring debit transactions, the process is likely to be complex and expensive. After reviewing the costs of compliance, some institutions may decide not to offer overdraft services. In addition, the disparate application of fees to transaction types that consumers may view as the same will likely cause confusion, particularly with respect to declined bill payments. It will be important for each institution to thoroughly review the overdraft services it offers and its methods for explaining those services to consumers.
Policy and Practice Exception
The notice and opt-in requirements do not apply to an institution that has a policy and practice of declining to authorize and pay any ATM or OTDC 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. Financial institutions may apply the exception on an account-by-account basis. The FRB’s new overdraft rules present significant operational challenges to financial institutions and create a variety of risks for noncompliance
What This Means to You
Institutions need to examine their current overdraft policies and deposit accounting systems. Because ATM and debit card transactions are most often processed through separate systems, if the systems cannot be timely modified, the financial institution may need to consider changing its overdraft practices. The opt-in requirements present special operational challenges, including drafting the requisite content for the notice, preparing for and executing an adequate distribution plan, and collecting and retaining records of customers' choices. The cost associated with the opt-in procedure and the potential impact on fee income should be budget considerations. There is no indication that the July 1, 2010, effective date will be extended, so time is of the essence in preparing for the new rules.
If you have any questions about this or any other banking matter, please contact your Husch Blackwell Sanders attorney.
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