OVERDRAFT Q & A
ABA BJ’s February Compliance Clinic featured 21 questions and answers concerning the Federal Reserve’s new overdraft regulation. ABA’s Compliance Center staff has continued to handle bankers’ questions as the original Fed announcement was followed by several proposed amendments and as certain matters have become clarified. The following questions address new areas, and elaborate on issues covered in the earlier questions. Additional questions and answers appear on www.ababj.com
Does the rule apply if the bank does not have an automated service for paying ATM or one-time debit overdrafts but on an ad hoc basis reviews non-sufficient funds reports and makes the decision to pay or return each transaction?
Yes. Moreover, there are no exceptions to the prohibition against charging an overdraft fee to a customer who has not opted in. (Covered in the Fed’s Feb. 19, 2010, proposed changes sections 205.17(b)(1) and (b)(4) and the related commentary. The changes would clarify that section 205.17(b)(4) provides an exception to only the notice and opt-in requirements for institutions that have a policy and practice of declining ATM and one-time debit transactions that would overdraw a customer’s account.)
Does the rule apply to all accounts, including savings, money market savings, or payroll card accounts?
Yes. The rule applies to all accounts covered by Regulation E, to the extent that they may be overdrawn by an ATM or one-time debit card transaction and a fee will be imposed.
What about daily overdraft fees and negative balance fees? Must customers opt-in to such fees before the bank may charge them for covered debit card transactions?
The commentary to the final rule states that any fee charged for an ATM or one-time debit card overdraft is subject to the opt-in requirement. This includes, but is not limited to, a per item, per occurrence, daily, sustained overdraft, or negative balance fee. However, in its proposed clarification of the rule, the Fed proposed new comment 17(b)-9.i to address the treatment of “daily or sustained overdraft, negative balance, or sustained fees” (sustained overdraft fees). The new comment clarifies that where a negative balance is attributable to “mixed” transactions—check, ACH, or other recurring debit card transaction and an ATM or one-time debit transaction—an institution may charge a sustained overdraft fee, even for customers who have not opted in. The comment also provides guidance on when the fee may be assessed, clarifying that the date is determined by the date on which the non-covered transaction is paid into overdraft.
What if a combination of transactions (e.g., ACH transaction, check, or recurring debit card transaction) causes the overdraft and the customer has not opted in. May the bank charge a fee?
The bank may impose fees for check, ACH, and recurring debit card overdrafts. The bank may also want to review its payment order policies. If it is obligated to pay certain transactions, such as debit card transactions, it might consider paying them first so that it is not the debit card transaction that overdraws the account. However, even if the bank does not knowingly pay debit card overdrafts, they may still occur, and the bank may not charge an overdraft fee unless the customer has opted in.
Assume a bank’s system is set to generate a written confirmation the same day that it receives notice of a customer’s decision to opt-in. However, depending on the time of day that a customer opts in, the confirmation notice may not be able to be mailed until the next day. When may the bank charge an overdraft fee?
The bank may not impose a fee for a covered transaction unless three things occur:
• The written opt-in notice has been provided (it may be provided any time prior to the fee and must be provided only once).
• The consumer has consented (which may be orally).
• The bank has “provided” written confirmation.
This means that a bank may charge a fee once it has sent the confirmation. It does not have to wait for the customer to receive it, as there is no way for a bank to know when someone receives mail.
Thus, depending on a bank’s process, a bank could receive an oral opt-in request (assuming the opt-in notice has been sent); send the confirmation immediately by email or regular mail; and immediately thereafter approve an overdraft transaction and impose a fee.
However, if the mail doesn’t go out until the next day, the bank would probably have to wait until the mail has been sent before imposing a fee. This would mean that if a customer calls to opt in–say he has just finished a meal at a restaurant and realizes that he has insufficient funds to cover the bill (and no cash)—the bank would have the choice to: 1. send the confirmation electronically and then approve the transaction; 2. approve the transaction, but forego the fee for this transaction; or 3. not approve the transaction.
Important note: In its proposed clarifications to the rule, the Federal Reserve expressly recognizes that customers may not choose to opt in until the service is needed. Therefore, in proposed comment 17(b)-7, the Fed would permit an institution to accept a customer’s opt-in request, and if procedures are in place to send the written confirmation immediately via mail or email, the institution could authorize the transaction and charge a fee. In addition, to address concerns about operational and litigation risk related to tracking compliance with the opt-in requirements, the proposed comment states, “An institution complies with §205.17(b)(I)(iv) if it has adopted reasonable procedures designed to ensure the written confirmation is sent before the fees are assessed.”
Must a bank send the opt-in notice to all of its customers? Or may it send it to particular categories of customers? An example would be only those customers that have used overdraft service in the past?
First, remember that the rule does not apply to business accounts, so these accounts should be excluded from your communication plans. Second, nothing in the rule prescribes with whom the bank communicates. It is permissible for a bank to choose to mail the opt-in notice only to customers who have used the bank’s overdraft services in the past. Bear in mind, however, that although banks may rationally choose to concentrate outreach efforts on particular groups, they should be careful not to appear to be applying undue pressure on any customers. To do so risks unwanted media and regulatory scrutiny as well as the possibility of litigation or even legislative action.
May a bank vary payment order or hold practices based on whether a customer has opted in or not?
No. Section 205.17(b)(3) makes it very clear that banks must provide to customers who do not opt in the same “account terms, conditions, and features” that it provides to those who do opt in. Funds availability and payment order fall within those categories. â–
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