NEWS, EVENTS, PUBLICATIONS & EMERGING ISSUES

SW&M EMERGING ISSUE
October 30, 2009

OVERDRAFT PROTECTION COVERAGE

Many of our credit union clients are familiar with the changes Congress made to the Truth-in-Lending Act’s credit card provisions over the last year to curb what it perceived as unfair practices by card issuers. It seems that the next area that Congress may turn its attention to is the restriction of overdraft coverage programs, which could likely affect those credit unions that depend on overdraft fees as a significant source of income. An example of legislative action currently being considered by Congress to restrict overdraft protection programs is the “Fairness and Accountability in Receiving Overdraft Coverage Act of 2009” (or the “FAIR Overdraft Coverage Act”) introduced on October 19, 2009, by Senator Chris Dodd, D-Conn.

If enacted, the FAIR Overdraft Coverage Act will amend the Truth-in-Lending Act and, among other requirements, will require credit unions to (1) notify consumers if an ATM or teller transaction would trigger overdraft coverage fees and provide consumers a right to opt-out of such transaction; (2) limit overdraft coverage fees charged on an account to no more than one overdraft coverage fee per month and six per calendar year; (3) limit overdraft coverage fees to an amount reasonable and proportional to the cost of processing the transaction; (4) post transactions on an account in such a manner that the consumer does not incur avoidable overdraft coverage fees; and (5) promptly notify a consumer, through a reasonable means selected by the consumer, when overdraft coverage has been accessed.

While it is unclear whether Congress will enact the FAIR Overdraft Coverage Act, if enacted in its current form, the legislation will have a significant effect on credit unions’ overdraft programs and business operations, particularly those credit unions that are most dependent on overdraft fees as a source of income.

However, even if the FAIR Overdraft Coverage Act is not enacted, your credit union should anticipate that significant changes will be made to restrict overdraft programs in the near future. For example, the Federal Reserve issued a proposed regulation on January 29, 2009 amending Regulation “E” in relation to overdraft services. While the regulation has not yet been issued in the form of a final regulation, it proposed to prohibit assessing an overdraft fee on a consumer’s account for paying an ATM withdrawal or one-time debit card transaction unless the credit union provides notice to the consumer explaining the overdraft service. In addition, the credit union must provide the consumer either a right of opt-out or opt-in, depending on the terms of the final regulation to be issued by the Federal Reserve. The proposed regulation issued by the Federal Reserve includes alternative provisions for which it was soliciting comments to determine whether the final regulation should provide consumers an opt-out or opt-in right with regard to overdraft services.

In light of the anticipated legislative and/or regulatory changes in this area, credit unions will need to consider how such changes could affect their business operations and income. In addition, credit unions may need to develop a plan as to how income lost in the event of such legislative and regulatory changes will be replaced. If your credit union has any questions regarding the FAIR Overdraft Coverage Act or proposed Regulation “E” amendments, our office can provide assistance with your questions.

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