Fed Clarifies Regs E and DD on Overdraft Issues; Pat Yourself on the Back

Posted by Anthony Demangone

On Friday, the Federal Reserve issued proposed changes to Regulations E and DD (their Truth in Lending regulation).  The changes were designed to answer a number of questions that arose concerning both regulations as they relate to overdraft protection issues.  But don't get excited.  None of the clarifications really go our way.

Regulation E.  The Fed's proposal clarifies the following:

• If your credit union has a policy and procedure to only pay ATM and non-recurring debit card transactions when you have a reasonable belief that funds are available, you are exempt from having to send an opt-in notice to the member  But the Fed goes to great lengths to clarify that the exception does not permit your credit union to charge an overdraft fee should a transaction somehow overdraft the account.  Here's how they dropped the hammer.

 The proposal adds new comment 17(b)(4)-1 to explain that, assuming a consumer has not opted in, if an institution with such a policy and practice authorizes an ATM  or one-time debit card transaction on the reasonable belief that the consumer has sufficient funds in the account to cover the transaction, but at settlement the consumer has insufficient funds in the account (for instance, due to intervening transactions that post to the consumer’s account), the institution may not assess an overdraft fee or charge for paying that transaction. However, institutions that have such a policy and practice are not required to comply with the requirements of §§ 205.17(b)(1)(i)-(iv), including the notice and opt-in requirements, if no fees are assessed.

• The proposal also clarifies that for credit unions with an overdraft protection program, the credit union may not charge an overdraft fee against a consumer's account until it sends the consumer a written confirmation of his or her choice to opt into the overdraft program.  Note: you don't have to wait for the consumer to receive it. As I read it, once the notice is sent - you can begin charging overdraft fees for ATM and non-recurring debit card transactions.
• If your credit union uses a tiered fee arrangement concerning negative account balances.  Rather than try to explain it, just read the following for yourself:

To the extent institutions impose tiered fees based on the amount of the consumer’s outstanding negative balance, proposed new comment 17(b)-8 clarifies that the fee or charge must be based on the amount of the negative balance attributable solely to check, ACH, or other transactions not subject to the fee prohibition. For instance, if a consumer’s negative balance of $30 is attributable in part to a debit card transaction that initially overdrew the account, and in part to a $10 check that the bank subsequently paid, the institution should base any overdraft fees solely on an outstanding negative balance of $10.

• The rule also clarifies how the restriction concerning ODP fees works in relation to daily or sustained overdraft/negative account fee.

Under the final rule, consumers who do not opt in may not be assessed any overdraft fees for paying ATM or one-time debit card transactions, including daily or sustained overdraft, negative balance, or similar fees or charges. As noted above, consumers who do not opt in may reasonably expect not to incur per-item overdraft fees for ATM and one-time debit card transactions, even if such transactions overdraw their account. Similarly, such consumers would reasonably expect not to incur daily or sustained overdraft, negative balance, or similar fees or charges due to these transactions. For clarity, proposed comment 17(b)-9.i explains that if a consumer has not opted in, the prohibition on assessing overdraft fees and charges overdraft fees or charges in § 205.17(b)(1) applies to all overdraft fees or charges, including but not limited to daily or sustained overdraft, negative balance, or similar fees or charges, assessed for paying an ATM or one-time debit card transaction. Thus, where a consumer’s negative balance is attributable solely to an ATM or one-time debit card transaction, the rule prohibits the assessment of such sustained overdraft fees if the consumer has not opted in.

Truth in Savings.  Here's what the Fed "clarified."

• The Fed now included the aggregate ODP and NSF fee (yearly and month-to-date) requirement in the section pertaining to periodic statement requirements.
• You must use the term "Total Overdraft Fees" in the aggregate fee disclosure for overdraft fees.  You cannot substitute any other name for those fees.
• It addresses retail sweep accounts, noting that the new TIS requirements concerning the disclosure of account balances does not affect retail sweep accounts.  If your credit union uses retail sweep accounts, be sure to read the discussion beginning on page 6 of the proposal.

Those comprise the biggest pieces of guidance within the two proposals, as I read them.  Again, the Fed makes no reversals that really help us.  But I really didn't expect that. 

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Today's the big day - February 22, 2010.  I know how hard you have worked to bring your credit unions into compliance with the numerous new requirements found within the Fed's changes to Reg Z.  You are all to be commended.  Steve Van Beek is working on an article for March's Compliance Monitor that will tee-up the July 1, 2010 deadline issues.  But for now, pat yourself on the back for a job well done.