Written by Benjamin M. Litchfield, Regulatory Compliance Counsel
Greetings to all of you out there in regulatory compliance land. While NCUA’s Truth in Savings Rule and Regulation E address the disclosure of credit union overdraft and bounce protection programs, we sometimes receive questions regarding the substantive features of these products. For example, credit unions have asked whether federal regulations prohibit automatically enrolling members into bounce protection programs to cover checks presented for payment that may overdraw an account. This blog post covers some of these more frequently asked questions on overdrafts and bounce protection.
May Credit Unions Automatically Enroll Members in Overdraft or Bounce Protection Programs?
Regulation E prohibits credit unions from assessing a fee against a member’s account for paying an ATM or one-time debit card transaction as part of an overdraft service unless the member has affirmatively consented to participate in the overdraft program. See, 12 C.F.R. § 1005.17(b)(1)(i)-(iii). The member must be provided with “confirmation of the [member’s] consent in writing, or if the [member] agrees, electronically, which includes a statement informing the [member] of the right to revoke such consent.” 12 C.F.R. § 1005.17(b)(1)(iv). Therefore, while the rule does not specifically require that a member opt in to the overdraft program, it does prohibit the credit union from charging the member a fee for overdrawing an account.
Aside from the disclosure requirements in Section 707.11 of Truth in Savings, there does not appear to be any comparable opt-in requirement for bounce protection programs that may pay the full amount of a check even though it overdraws a member’s account. Article 4 of the Uniform Commercial Code, which sets forth model laws that have been adopted to some extent in each state, generally permits credit unions to pay checks even though they may cause an overdraft and leaves questions regarding bounce protection programs to state contract and common law principles. See, U.C.C. § 4-401. For example, specific bounce program practices may be subject to claims under state unfair or deceptive trade practices laws.
That being said, NCUA does recommend as a best practice that credit unions “obtain affirmative consent of [members] to receive overdraft protection. Alternatively, where overdraft protection is automatically provided, permit [members] to ‘opt out’ of the overdraft program and provide a clear consumer disclosure of this option.” Letter to Credit Unions 05-CU-03 (Feb. 2005). Even though this is couched in interagency guidance, the clear supervisory expectation here appears to be that credit unions either obtain affirmative consent or permit members to opt out of overdraft or bounce protection programs.
Is it Necessary to Send a Cure Notice Each Time a Member Overdraws an Account?
While neither Regulation E nor Truth in Savings appears to require credit unions to provide a cure notice with each overdraft, NCUA strongly recommends that credit unions provide such notices as a best practice. Here is another excerpt from Letter to Credit Unions 05-CU-03:
Best Practices
Clear disclosures and explanations to consumers of the operation, costs, and limitations of an overdraft protection program and appropriate management oversight of the program are fundamental to enabling responsible use of overdraft protection. Such disclosures and oversight can also minimize potential consumer confusion and complaints, foster good customer relations, and reduce credit, legal, and other potential risks to the institution. Institutions that establish overdraft protection programs should, as applicable, take into consideration the following best practices, many of which have been recommended or implemented by financial institutions and others, as well as practices that may otherwise be required by applicable law. While the Agencies are concerned about promoted overdraft protection programs, the best practices may also be useful for other methods of covering overdrafts. These best practices currently observed in or recommended by the industry include:
[…]
Promptly notify consumers of overdraft protection program usage each time used. Promptly notify consumers when overdraft protection has been accessed, for example, by sending a notice to consumers the day the overdraft protection program has been accessed. The notification should identify the date of the transaction, the type of transaction, the overdraft amount, the fee associated with the overdraft, the amount necessary to return the account to a positive balance, the amount of time consumers have to return their accounts to a positive balance, and the consequences of not returning the account to a positive balance within the given timeframe. Notify consumers if the institution terminates or suspends the consumer’s access to the service, for example, if the consumer is no longer in good standing.
(Emphasis added). Again, while this is provided as a “best practice,” the guidance appears to suggest that a program that lacks some or all of these recommended practices may be considered unsafe and unsound or possibly unfair or deceptive. Therefore, even though this does not appear to be an explicit requirement contained in a regulation, credit unions may still wish to provide cure notices to members both as a member service and to possibly avoid any compliance or litigation risk.
Is it Necessary to Provide an Adverse Action Notice when the Credit Union Denies an Overdraft?
While Regulation B defines “credit” and “consumer credit” broadly enough to include credit union bounce protection and overdraft programs within its scope, the rule also contains a number of exceptions from various provisions for incidental credit including the requirement to provide adverse action notices. See, 12 C.F.R. § 1002.3(c)(2)(vi). The term “incidental credit” is defined as an extension of credit that is not made pursuant to a credit card agreement, that is not subject to a finance charge, and that is not payable by agreement in more than four installments. See, 12 C.F.R. § 1002.3(c)(1). Since most overdraft charges are not considered finance charges, it may not be necessary to provide an adverse action notice under Regulation B. See, 12 C.F.R. § 1026.4(c)(3). That being said, if the credit union denies an overdraft as part of an overdraft line of credit program, there may be an obligation to provide an adverse action notice if one would otherwise be required since fees related to overdraft lines of credit are typically considered finance charges.
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