CUNA Regulatory Comment Call

January 13, 2009

Proposed Revisions to Regulation E for Overdraft Protection Plans

EXECUTIVE SUMMARY

Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Senior Vice President and Deputy General Counsel Mary Dunn at mdunn@cuna.com or to Senior Assistant General Counsel Jeff Bloch at jbloch@cuna.com; or mail them to Mary or Jeff in c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, 6th Floor, Washington, DC 20004. If commenting directly to the Fed, you must refer to Docket No. R-1343. You may also contact us if you would like a copy of the proposal or you may access it here.

BACKGROUND

The EFT Act establishes rights, liabilities, and responsibilities for parties involved in EFT systems, which include transfers through automated teller machines, point-of- sale terminals, automated clearinghouses, telephone bill-payment plans, and remote banking programs. Regulation E implements the EFT Act, which contains official staff commentary that interprets the regulation and provides guidance in applying the regulation to specific transactions.

In February 2005, the National Credit Union Administration (NCUA) and the other financial institution regulators issued guidelines on overdraft protection plans that addressed safety and soundness considerations, legal risks, and best practices. These guidelines will still be in effect after this proposed rule is finalized.

In May 2008, these regulators issued rules under the UDAP Act that would have required institutions to provide consumers with the right to opt-out of overdraft protection plans and would have prohibited fees if the overdraft occurred as a result of a debit hold that exceeded the amount of the transaction. These provisions were not finalized, but are now being proposed again under Regulation E, although they will now be limited to ATM transactions and one-time debit card overdrafts. The other proposed revisions to the UDAP rules have been finalized and are the subject of a separate CUNA Final Rule Analysis.

In May 2008, the regulators issued a related proposal under Regulation DD, the Truth in Savings Act, which outlined the form, content, and timing requirements for providing the opt-out notice and included additional disclosure requirements. This proposal has also been finalized and is the subject of a separate CUNA Final Rule Analysis.

DESCRIPTION OF THE PROPOSED RULE AND CHANGES TO THE OFFICIAL STAFF COMMENTARY

Opt-out / Opt-in Approaches

The proposed rule outlines two alternative approaches for providing consumers a choice regarding the payment of ATM and one-time debit card overdrafts by their financial institution. ATM transactions would include those at both proprietary and foreign ATMs, and debit card transactions would include those at point-of-sale (POS) with a merchant, online, or by telephone. These choices for consumers will not be required for other types of transactions under the overdraft plan, such as checks, automated clearinghouse (ACH) transactions, and preauthorized EFTs. This differs from the earlier proposed UDAP rules in that financial institutions would have been required to provide consumers with the right to opt-out of all types of overdraft transactions. Model forms will be provided that institutions may use to satisfy these disclosure requirements

The proposed rule will apply to both automated overdraft programs and to non-automated, ad-hoc accommodations. The rule will not apply to overdrafts paid pursuant to a line of credit under Regulation Z, including transfers from a credit card account, a home equity line of credit, an overdraft line of credit, or overdrafts paid pursuant to a service that transfers funds from another consumer account.

The proposal provides alternatives for implementing the consumer’s choice for both the opt-out and opt-in approach. One alternative would be for the institution to offer an account with the same terms, conditions, rates, fees, and features that are provided to those who participate in the overdraft plan, except for features addressing the payment of overdrafts. Another alternative would allow institutions to provide such accounts with different terms, features, or conditions, as long as they are not so substantial that they discourage a reasonable consumer from exercising his or her right to opt-out of the plan, or compel a reasonable consumer to opt-in. Below is more information about the opt-out and opt-in alternatives.

I. Opt-out Alternative

Financial institutions would be required to provide consumers with a notice and a reasonable opportunity to opt-out of the overdraft plan for ATM withdrawals and one-time debit card transactions. This must be provided before any fees are assessed, which could also be at the time the account is opened. A fee could then be assessed if the consumer does not opt-out. If the consumer does not opt-out or revokes a previous opt-out election, an additional notice would also be sent during any periodic statement cycle in which a fee is assessed, although the consumer would be obligated to pay the fee in those situations. The initial opt-out notice would not be required for accounts opened before the mandatory compliance date of this rule, although opt-out notices for these accounts will be required whenever an overdraft fee is assessed in the future in connection with an ATM or debit card overdraft. The proposed rule will require an institution to treat an opt-out direction by any joint accountholder as an opt-out from all the accountholders.

The institution may still pay the overdraft if the consumer chooses to opt-out, but cannot charge a fee, except under these circumstances:

The proposal provides that a consumer has a “reasonable opportunity” to opt-out if he or she has thirty days to make this decision after receiving the notice. A shorter time may be considered adequate, depending on the circumstances. Methods of exercising the opt-out include the following:

The following are two exceptions to the requirement of providing consumer notice and a reasonable opportunity to opt- out of the payment of overdrafts for ATM withdrawals and one-time debit card transactions:

The institution may not condition a consumer’s right to opt-out of the payment of ATM withdrawals or one-time debit card transactions under an overdraft plan on the consumer also opting out of the overdraft service with regard to other types of transactions, such as checks, ACH, or preauthorized EFTs. The proposed rule will also prohibit an institution from declining to pay overdrafts for these other types of transactions because the consumer has opted out of the overdraft service for ATM and debit card transactions.

Institutions will still have discretion to pay overdrafts, but the proposal will require that the institution apply the same criteria for deciding to pay overdrafts for checks, ACHs, and other types of transactions, regardless of the consumer’s opt-out choice with respect to ATM and debit card transactions. However, the Fed is considering another approach in which an institution would be permitted to condition the consumer’s ability to opt-out of the overdraft service for ATM and debit card transactions on the consumer also opting out of the service for checks and other types of transactions. This means the institution may decline to pay checks, ACH, and other types of transactions if the consumer has opted out for ATM withdrawals and one-time debit card transactions. This other approach is intended to address the operational issues associated with implementing a partial opt-out rule.

As noted above, if the consumer does not opt-out or revokes a previous opt-out election, he or she must receive additional opt-out notices in each periodic statement cycle in which an overdraft fee is assessed. Again, the consumer is obligated to pay the fee, even if he or she decides to opt-out after receiving the additional notice. A fee may also be assessed if the consumer has opted out but incurs an overdraft before the opt-out has been implemented, although the institution must comply with a consumer’s opt-out request “as soon as reasonably practicable” after receiving it. The consumer’s election to opt-out will remain in effect until it is revoked by the consumer.

These additional notices may be provided on the periodic statement or by way of a separate notice that is sent promptly after the overdraft occurs. If this notice is provided on the periodic statement, the opt-out information must be in close proximity to the aggregate totals for overdraft and returned item fees that will now be required to be disclosed under the recent changes to Regulation DD, the Truth in Savings Act. The obligation to provide these additional opt-out notices continues until the consumer decides to opt-out of future overdrafts.

The proposal provides model forms for both the initial opt-out notice and the additional notices that are provided during the periodic statement cycles in which overdraft fees are incurred. The initial notice provides detailed information about the overdraft service and the right to opt-out and includes the following information:

Although institutions must use notices that are substantially similar to the model forms, for both the initial and additional notices, the proposed rule will permit institutions to provide certain, additional information in the initial notices. This includes an explanation regarding the types of transactions that would not be covered by the opt-out, an indication that the payment of overdrafts is discretionary, and an explanation as to the consequences of opting out of overdraft services.

For the additional notices that are provided during the periodic statement cycles in which a fee is incurred, the institution may provide a notice that is the same as the initial notice or an abbreviated version. A model form is provided for this abbreviated version, which generally states the right to opt-out, the availability of alternatives to the overdraft service, and how to contact the institution for more information.

II. Opt-in Alternative

Under this alternative, financial institutions would provide consumers with a notice of the right to opt-in, or affirmatively consent, to the overdraft service for ATM withdrawals and one-time debit card transactions. This notice must explain the overdraft service and provide a reasonable opportunity to consent, or opt-in, to the service. The institution must provide confirmation of the consent if the consumer decides to opt-in. A fee cannot be charged until the notice is provided and the consumer elects to participate in the plan for these transactions. No subsequent notices would be required under this approach, such as the additional notices when overdraft fees are incurred, as would be required under the opt-out approach.

If the consumer does not opt-in, the institution may still pay the overdraft if it does not charge a fee. The institution may also refuse to pay an overdraft, even if the consumer affirmatively consents to the overdraft service, since these programs are designed to be discretionary.

To obtain the consumer’s opt-in, the institution must provide a notice explaining the overdraft service for ATM and debit card transactions. The notice must be segregated from other information and disclosures, and it must not contain any information that is not otherwise permitted under these rules. A notice will not be required if the institution has a policy and practice of declining to pay these transactions if it has a reasonable belief that the consumer does not have sufficient funds to cover these expenses.

The opt-in notice must be in a form that is substantially similar to the model notice that is provided in the rule. Any consent from a joint accountholder will be treated as an affirmative consent from all the joint accountholders.

The proposed rule requires the institution to provide a reasonable opportunity for the consumer to opt-in to the overdraft plan and to provide reasonable methods for providing the consent. Methods of exercising the opt-in include the following, which are similar to those that would be used for the opt-out alternative:

The institution cannot condition the payment of any overdrafts for checks, ACH, or other types of transactions on the consumer also consenting to the payment of overdrafts for ATM and debit card transactions. Similarly, an institution may not decline to pay checks, ACH, or other types of transactions because the consumer has not also consented to the overdraft service for ATM and debit card transactions.

In general, the decision to pay overdrafts is still discretionary, but the institution must apply the same criteria for deciding when to pay overdrafts for checks, ACH, or other types of transactions, regardless of whether the consumer has consented to the overdraft service for ATM and debit card transactions. However, the Fed is considering another approach in which institutions would be permitted to condition the payment of an overdraft for check, ACH, and other types of transactions on the consumer also consenting to the overdraft service for ATM and debit card transactions. Under this approach, the institution could then decline to pay checks, ACH, and other types of transactions because the consumer has not consented to the overdraft service for ATM and debit card transactions.

The institution may still pay the overdraft and charge a fee even if the consumer has opted in to the service under the similar exceptions described above for the opt-out alternative approach. These exceptions include when the institution reasonably believes there are sufficient funds in the account at the time the institution authorizes the transaction and if the merchant or payee presents a debit card transaction for payment by paper-based means, rather than electronically using a card terminal, and the institution has not previously authorized the transaction.

The timing requirements for providing the opt-in notice differs, depending on whether the account existed at the time the final version of this rule becomes effective. For new accounts, the notice must be provided before an overdraft fee may be assessed. For existing accounts, the rule will require institutions to provide notices to existing accountholders so that they are made aware of their rights to enroll in the overdraft program. These notices may either be provided to all the existing accountholders on or with the first periodic statement that is sent after the final rule goes into effect or provided following the first assessment of an overdraft fee that is on or after the date the rule becomes effective. If an existing consumer has not opted in within sixty days after receiving the notice, then the institution must cease assessing fees for overdraft services, unless a fee is permitted under one of the exceptions described in the above paragraph. However, fees may be assessed for all overdrafts during this sixty-day period.

These notice requirements for existing accounts would only apply for those specific accounts in which overdraft services are provided at the time the rule becomes effective. Therefore, institutions would not be required to provide these initial notices to those who have already opted out of or have not affirmatively consented to the overdraft service, depending on whether the institution currently has an opt-out or opt-in system. Institutions electing to provide notices before the rule becomes effective would not have to provide additional notices, as long as consumers were provided a reasonable opportunity to opt-in.

An opt-in election from a consumer will be effective until it is revoked by the consumer. However, the institution may also terminate access to the overdraft program, such as in situations in which there is excessive usage of the program by the consumer.

Debit Hold Provisions

The proposed rule will prohibit institutions from assessing an overdraft fee if the overdraft would not have occurred but for a debit hold that was placed on funds in an amount exceeding the actual transaction and if the merchant can determine the actual transaction amount within a short period of time after authorization (for example, gas and restaurant purchases). This prohibition will not apply if the institution adopts procedures designed to release the hold within a reasonable period of time, and the rule provides that two hours will be considered reasonable.

This prohibition will also not apply if the amount of the transaction itself would have caused the overdraft to occur or if the overdraft occurs for reasons other than the hold. Examples may include prior debit card transactions that may have been authorized but not yet presented for settlement or when a deposited check in the account is returned.

As mentioned above, the prohibition will not apply if the actual transaction amount cannot be determined for a considerable period after the merchant has submitted the transaction for authorization. Examples would include hotel stays and rental car transactions.

Even if the overdraft fee is prohibited under these provisions for debit holds, an institution will not be considered in violation if it promptly waive or refunds the fee. However, the institution may not require the consumer to provide notice or other information about the overdraft as a condition for the waiver or refund.

The proposal also describes the interaction between these debit hold provisions and the opt-in or opt-out requirements described above. Specifically, if a consumer is not enrolled in the overdraft service for ATM withdrawals or debit card transactions, either because he or she has opted out or not opted in, the institution may not assess a fee in connection with a debit hold even if the institution is otherwise not prohibited from doing so by these debit hold provisions, as outlined under the scenarios described above.

QUESTIONS TO CONSIDER REGARDING THE REGULATION E PROPOSAL
ON OVERDRAFT PROTECTION PLANS
(The Fed has specifically requested comment on the issues raised
in these questions.)

Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Deputy General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Luke Martone • Senior Regulatory Counsel • (202) 508-6743 • lmartone@cuna.com