|Fed proposes targeted approach to overdrafts (February 2009)|
The Fed backed away from its “UDAP” proposal and instead will rely on changes to Reg DD disclosure requirements. Here’s what it means for your automated overdraft programs.
Federal regulation of popular automated overdraft checking service continues to evolve. On January 29, the Federal Reserve Board published the latest iterations in the Federal Register.
The Fed’s announcement referenced research that FDIC unveiled late in the fourth quarter. Highlights are covered in the box to the right.
The Fed backed away from the approach it proposed in May 2008 (with the Office of Thrift Supervision and the National Credit Union Administration) that drew on “UDAP”—unfair and deceptive practices—provisions of the Federal Trade Commission Act. Instead, it adopted disclosure requirements under Regulation DD, which will become effective Jan. 10, 2010, and proposed changes under Regulation E in relation to overdrafts resulting from ATM and POS/ debit use. The Reg E proposal involves alternative opt-in/opt-out concepts as well as important potential limitations on debit holds at the point of sale.
Reg DD changes
Current Fed regulations differentiate between banks that promote automated overdraft service and those that don’t. The new Reg DD rules do away with that difference, and add some new wrinkles, including format requirements.
All banks will have to disclose overdraft fees on their periodic customer statements, including the total of both overdraft and NSF fees charged in that period and year to date. This includes both formal and informal programs, but excludes linked- account-transfer service.
Another requirement: If a bank provides balances through electronic means, such as ATMs, websites, and phone banking, the rule will require that reported balances exclude monies from automated overdraft or linked-account-transfer service. A supplemental balance that includes such services can be provided so long as it is explained in a prominent manner.
Opt-in/opt-out for e-banking
The Fed preamble to its proposal indicated that the agency found strong value in automated overdraft service for checking, but found the service less valuable for ATM withdrawals and POS/debit, based on consumer tests that the Fed had performed. Why the difference? The Fed noted that it could see the need for covering checks, which could help the consumer avoid merchant penalty fees. On the other hand, no such fees would be charged if an ATM or POS/debit transaction were denied. “Accordingly, the Board believes ... that a more targeted rule covering overdraft services is appropriate,” it stated. It also pointed out that for some debit transactions, the overdraft fee would exceed the debit purchase (e.g. paying $25 for bouncing after buying a chocolate bar).
The Reg E proposal includes two alternative approaches to automated overdraft programs that include coverage for ATM withdrawals and POS/debit transactions.
1. Opt-out alternative. A bank could not charge an overdraft coverage fee for paying ATM withdrawals or one-time POS/debit transactions that overdraw a consumer’s account, unless the consumer is given notice of their right to opt out of such coverage, generally when they open the account. (The proposal only applies to automated overdraft programs, not to linked-account or line of credit programs.) Also, under this alternative, a bank could not design its program such that consumers have to take overdraft service on all types of payment, or not have the service at all.
2. Opt-in alternative. A bank could not charge an overdraft coverage fee unless the consumer is informed of the program and chooses to opt in, also generally at account opening. Under this alternative, banks would be permitted to make overdraft service “all or nothing.”
Under both proposals, a one-time debit card transaction includes electronic use (PIN-based) of a debit card at point of sale, an online transaction, or a telephone transaction. It does not include paper-based (signature-based) use of a debit card at point of sale. Recurring preauthorized debit transactions also are not covered; the Fed pointed out that these may be used for important household expenses, much like a check.
Under the first alternative, notice of the ability to opt out would have to be provided in each periodic statement cycle where a charge is made for such overdraft coverage; under the second, no additional notices would be required.
“It’s important for institutions to comment on this, because the Fed is looking at both,” said Nessa Feddis, ABA vice-president and senior counsel, during an association telephone briefing about pending regulations. (For more information or to order a CD of the event, go to www.aba.com/teleweb/tb011309.htm)
Concerning the “all or nothing” opt-out proposed, the Fed also includes two variations concerning whether a bank could determine that opting out from electronic transactions would automatically remove the consumer from all overdraft coverage. One variation would permit an “all or nothing” approach, the other would not. As proposed, the “all or nothing” variation would be subject to product design restrictions. The agency expressed concern that banks might put consumers who wish to opt out of electronic overdraft coverage into accounts with less-attractive features, so that the consumer’s ability to choose to opt out would be discouraged.
The proposal also addresses the design of accounts covered and not covered by automated overdraft service. Model forms are also proposed.
Debit hold issue targeted
Another key part of the proposal concerns debit holds. These are amounts “reserved” when a card user presents their card for payment. Time lags between imposition and release of the holds vary somewhat by purpose, network rules, and types of vendor, the Fed noted. At issue are the times when a hold triggers an overdraft that would not otherwise have occurred because the consumer actually had sufficient funds for what they actually spent.
In general, under the proposal, overdraft charges would not be permitted where the debit hold caused the overdraft.
However, charges could be made if the bank adopted procedures to release the hold within a reasonable time. Certain exceptions would also apply, as proposed.
The proposed rule would apply to situations such as pay-at-the-pump gas purchases and restaurant charges, where the actual transaction amount can be determined relatively quickly after the institution has authorized the transaction. On the other hand, the rule would not, as proposed, be applied to debit holds in longer-term situations, such as a hotel stay of multiple nights or a car rental.
“Moreover,” the Fed noted, “the board believes that overdraft fees are less likely to occur for hotel and car rental transactions because consumers tend to use credit cards for these transactions.” The Fed believes this targeted approach will address most situations where debit holds are imposed, based on its experience with consumer complaints. A safe harbor based on payment network efforts to reduce hold times is also proposed.
ABA’s Nessa Feddis expects a final rule based on aspects of the proposal to be published somewhere between mid-2009 and mid-2010. BJ
FDIC overdraft study drills down
• Promotion. Nearly eight in ten banks offering automated overdraft service promote it. More than half of the survey sample (54%) use a vendor’s program to run their offering, and, of those banks, seven in ten pay their vendors based on a percentage of new fees generated. FDIC reported that the banks generally paid the vendors 10%-20% of additional fees generated.
• Range of programs offered. Most institutions (88%) offer at least one formalized means of covering overdraft (versus ad hoc decisions), be it the newer, automated overdraft programs; linked-account-transfer service; or lines of credit. Among that group, 62% offered a linked program; 50% offered a line of credit program; and 40% offered an automated overdraft program.
• Enrollment. Most banks offering automated overdraft programs enroll customers automatically. On the other hand, nearly every bank offering linked-account-transfer service required customers to opt in for that service. Line-of-credit service is subject to credit evaluation.
Nearly three out of four banks set limits for automated overdraft customers. The average was $783.70, with a range of $85 to $10,000.
• Opting in and out. The centerpiece of the Fed’s Regulation E proposal (main article) deals with opting in or opting out of overdraft service in relation to electronic transactions. The FDIC survey found that: among all banks offering automated overdraft service and linked-account service, 75% offered an opt-out from the overall program; 11% offered an opt-in to the program; and the remaining 14% did not provide an option.
More specifically, among banks promoting automated overdraft programs, 83% permit opt-outs, while 14% require opt-ins. Among banks with programs that are not promoted, 45% require opt-out.
• Fees. Banks usually charged lower fees for linked-account-transfer service and traditional line-of-credit overdraft service than for automated overdrafts.
Most banks offering automated overdrafts charged by the item (98%), while a handful charged per daily occurrence. The overdraft fees themselves ranged per-transaction from $10 to $38, with the median fee $27. (The average was nearly the same, at $27.12.)
Forty-nine percent of the banks offering linked-account service charged no explicit fee. Where a fee was charged, the median fee for a transfer came to $5. Nearly 60% of those banks offering transfer service charged the same fee no matter how many transfers were made on a single date, rather than by the item. Line-of-credit service usually relied on interest charges rather than fixed fees. The median APR level was 18% APR and the average was 16.38%. (One in ten charged an “initiation” fee, ranging from $5 to $200, with a median of $25.)
Of the banks offering automated overdraft service, one out of four charged fees for accounts that remained in overdraft past a given point.
• Electronic overdrafts. Eight of ten banks offering automated overdraft plans permitted use at ATM and POS/debit locations. Of these, most only informed the customer of the overdraft after it was committed; 89% for POS/debit and 71% for ATM transactions. On the other hand, 8% told customers in advance that a transaction would cause an overdraft at POS/debit locations, and 24% did at ATMs.
The electronic version of this article available at: http://lb.ec2.nxtbook.com/nxtbooks/sb/ababj0209/index.php?startid=40
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