NEWS, EVENTS, PUBLICATIONS & EMERGING ISSUES

SW&M EMERGING ISSUE
April 23, 2010

FEDERAL RESERVE ISSUES CLARIFICATIONS ON REGULATION E OVERDRAFT FINAL RULE

As our clients are well aware, the Board of Governors of the Federal Reserve (the “Board”) published a final rule amending Regulation E in November 2009 (the “Final Rule”). In general, the Final Rule limits the ability of financial institutions to assess overdraft fees for paying automated teller machine (“ATM”) and one-time debit card transactions that overdraw a consumer’s account, unless the consumer affirmatively “opts-in” to the institution’s payment of overdrafts for those transactions. In response to questions and concerns about the Final Rule from financial institutions, the Board issued written revisions to the Final Rule and the official staff commentary on March 1, 2010 to provide certain “technical corrections” and clarifications. The Board issued clarification in four principal areas, each of which is summarized below.

1. Opt-In Requirement is Not Negated by the Institution’s Policies and Procedures.

Section 205.17(b)(4) of the Final Rule included an exception from the notice and opt-in requirement for institutions that have a policy and practice of declining ATM and one-time debit card transactions when the consumer’s account has insufficient funds at the time of the authorization request. Many financial institutions interpreted this exception to mean that institutions with such a policy and practice would be permitted to assess an overdraft fee without the consumer’s affirmative consent if an authorized transaction later settled on insufficient funds.

The Board has clarified that the Final Rule does not permit institutions to assess overdraft fees if the consumer does not affirmatively opt in, regardless of the institution’s policy and practice of declining such transactions when the consumer has insufficient funds at the time of the authorization request. The proposal clarifies that institutions with a policy and practice of declining one-time ATM and debit card transactions when there are insufficient funds at the time the authorization is requested are exempt only from the notice and opt-in requirements.

2. Written Confirmation of the Opt-In is Required Prior to Assessing Overdraft Fees.

Section 205.17 (b)(1)(iv) of the Final Rule provides that a financial institution must give a consumer a written confirmation of his or her opt-in choice before charging overdraft fees (assuming that the consumer has indeed “opted in”). Some institutions have raised concerns about the practical implications of tracking compliance with this requirement. To clarify this issue, the Board has proposed to revise the official staff commentary to clarify that an institution may not assess any overdraft fee or charge on the consumer’s account until the written confirmation has been sent. The proposed revised comment also states that the institution will be deemed in compliance with this requirement if it has adopted “reasonable procedures” designed to ensure that the written confirmation is sent before fees are assessed.

3. Outstanding Negative Balance.

While some institutions charge the same per-item overdraft fee amount regardless of the amount of the consumer’s negative balance, others impose tiered fees based on the amount of the consumer’s outstanding balance at the end of the day. If an institution imposes tiered fees based on the amount of the consumer’s outstanding negative balance, and the consumer has not opted-in to payment of overdraft charges ATM and one-time debit transactions, proposed new comment 17(b)-8 clarifies that the fee or charge must be based on the amounts of the negative balance attributable solely to check, ACH, or other transactions that are not subject to the fee prohibition of the Final Rule.

4. Daily or Sustained Overdraft Fees.

Some financial institutions assess daily or sustained overdraft fees when a consumer has overdrawn an account and has not repaid the amount overdrawn within a specified period of time. The proposed revisions to the Final Rule clarify that if a consumer has not opted in, the prohibition on assessing overdraft fees applies to all overdraft fees, including a daily or sustained overdraft fee, that is assessed for paying an ATM or one-time debit card transaction. As such, if a consumer’s negative balance is attributable solely to an ATM or one-time debit transaction, the Final Rule prohibits the assessment of such sustained overdraft fees if the consumer has not opted in.

However, the Board underscored that the Final Rule does not apply to overdraft fees imposed in connection with other types of transactions, such as check or ACH transactions. As such, institutions may impose daily or sustained overdraft fees associated with paying overdrafts for such transactions. Where a consumer’s negative balance is attributable in part to a check or other transaction not subject to the Final Rule and in part to an ATM or one-time debit card transaction, the institution may impose an overdraft fee, but solely to the extent that the transaction not subject to the Final Rule causes the overdraft. Proposed comment 17(b)-9.ii includes several examples illustrating how fees may be applied when a negative balance is attributable in part to a check or other transaction not subject to the Final Rule. The proposed revisions were open for comments until April 1, 2010. However, the Board emphasized that the purpose of the revisions was merely to explain certain aspects of the Final Rule and to facilitate compliance with it, not to revisit the Final Rule on a substantive level or to re-examine the underlying “need” for it. Compliance with the Final Rule (as amended by the written revisions) continues to be July 1, 2010. Should your credit union have any questions regarding the Final Rule or the written clarifications, or need assistance in analyzing implementation procedures, please do not hesitate to contact our office for assistance.

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