Compliance Article
07/09/2008
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Overdraft services (sometimes referred to as overdraft protection, bounce protection, or courtesy pay) are for-a-fee services pursuant to which depository institutions pay items that overdraw accounts, rather than returning them for non-sufficient funds, without line of credit agreements, linked account agreements, or other agreements committing them to do so. New overdraft services regulations have recently been proposed under the Federal Trade Commission Act (“FTCA Regulations”) (as well as other changes, including changes regarding consumer credit cards) and the Truth-in-Savings Act. The deadline for comments on the FTCA Regulations is August 4, 2008, and for the TISA Regulations it is July 18, 2008.
General Summary of Proposed New FTCA Regulations
The proposed new FTCA Regulations make it an unfair or deceptive act or practice for a financial institution to charge a consumer fees for overdraft services unless the consumer is given notice of the right to opt out of such services both (a) before any such fees are charged, and (b) subsequently at least once during or for any periodic statement cycle in which such fees are charged. Moreover, the institution must provide the consumer with the choice of opting out of (a) all overdraft services or (b) just those with respect to overdrafts at ATMs or for point-of-sale transactions initiated by debit card.
General Summary of Proposed New TISA Regulations
The proposed new TISA Regulations require disclosure of a right to opt out of overdraft services for consumer accounts. The proposed new TISA Regulations provide a sample form for this disclosure and state that it must include:
- The categories of transactions that may result in overdraft fees;
- The dollar amount of the overdraft fees that may be imposed;
- The lowest dollar amount of an overdraft that may result in overdraft fees being imposed;
- Any limits on overdraft fees or that there are no limits;
- An explanation that the consumer can opt out of the institution’s payment of overdrafts with respect to all overdrafts or with respect to only overdrafts for ATM withdrawals and debit card purchases;
- An explanation of the method(s) by which the consumer can exercise its right to opt out; and
- As applicable, a statement that the institution offers alternatives to the payment of overdrafts and, if the institution offers lines of credit for the payment of overdrafts, a statement to that effect.
The proposed new TISA Regulations state that this disclosure must be given (a) prior to the imposition of fees for overdraft services, and (b) subsequently on each periodic statement reflecting such fees or at least once per statement period on any notice sent promptly after payment of an overdraft.
The proposed new TISA Regulations also require separate disclosures in periodic statements of all fees charged for overdraft services and all fees charged for returning items NSF for the statement period and for the year to date. This disclosure, which previously had been required only for institutions that advertise their overdraft services, will now be required for all institutions, whether or not they advertise their overdraft services. The new TISA Regulations also prescribe the location in the periodic statements for, and the format of, such disclosures and provide a sample form for such disclosures.
And finally, the proposed new TISA Regulations provide that in response to an account balance inquiry by a consumer through an automated system an institution can disclose only funds in the account that are available for withdrawal without including any additional amounts that the institution might provide through overdraft services. Once this disclosure is made, however, the institution can at its option disclose a second balance that includes overdraft services, provided the institution prominently indicates that this second balance includes funds provided by the institution to cover overdrafts.
Issues Raised by the Proposed New Overdraft Services Regulations and Their Section-by-Section Analyses
We believe that the proposed new FTCA Regulations and TISA Regulations and their Section-by-Section Analyses raise a number of issues that should be considered before the regulations become final. Included among these issues are the following:
- Whether the Initial Notice of the Right to Opt-Out Must Be Given to Existing Account Owners:
There appears to be some inconsistency between the proposed new FTCA Regulations and the proposed new TISA Regulations and their respective Section-by-Section Analyses as to whether the initial notice of the right to opt out of overdraft services must be given to existing account owners, or whether it is required only when new accounts are opened. Moreover, there appears to be some inconsistency and confusion in this regard within the proposed new TISA Regulations and their Section-by-Section Analysis themselves.
The Section-by-Section Analysis of proposed new FTCA Regulations Section __.32 states:
“Assessing overdraft fees before the consumer has been provided with notice and a reasonable opportunity to opt out of the institution’s overdraft service appears to be an unfair act or practice under 15 U.S.C. 45(n) and the standards articulated by the FTC.”
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“Under...__.32(a)(1), institutions would be prohibited from assessing any fees on a consumer’s account in connection with an overdraft service unless the consumer is given notice and a reasonable opportunity to opt out of the service, and the consumer does not opt out.”
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“The proposal would require notice of the opt-out to be provided both before the institution’s assessment of any fee...and subsequently at least once during or for each periodic statement cycle in which any overdraft fee or charge is assessed...,”
The Section-by-Section Analysis of proposed new TISA Regulations Section 230.10 (c) states:
“The Board anticipates that the requirement to provide notice before overdraft fees are assessed would apply only to accounts opened after the effective date of the final rule. Thus depository institutions would not be required to provide initial opt-out notices to existing customers. Nevertheless, the requirement to provide subsequent notice of the opt-out after the customer has overdrawn the account and fees have been assessed on the account would apply to all accounts after the effective date of the final rule, including those existing on the effective date of the rule.”
Moreover, despite its Section-by-Section Analysis, there is nothing in the actual text of proposed new TISA Regulations Section 230.10(c) indicating that the initial notice of the right to opt out does not have to be given to existing account owners and is required only when new accounts are opened. The actual text of proposed new TISA Regulations Section 230.10(c) is as follows:
“Timing. As applicable, the...[notice of the right to opt out]...must be given:“(1) Prior to the institution’s imposition of any fee for paying a check or other item when there are insufficient funds in the consumer’s account, provided that the consumer has a reasonable opportunity to exercise the opt-out right prior to the assessment of any fee for paying an overdraft; and
“(2) (i) On each periodic statement reflecting any fee(s) or charge(s) for the paying of an overdraft, in close proximity to the disclosures required by...230.11(a); or (ii) At least once per statement period on any notice sent promptly after the institution’s payment of an overdraft.”
Thus, (a) the proposed new FTCA Regulations make the assessment of an overdraft fee without prior notice of the right to opt out a prohibited unfair act or practice and requires both the initial notice and the subsequent notice, without distinction between existing accounts and new accounts; (b) the proposed new TISA Regulations Section-by-Section Analysis indicates that the initial notice does not have to be given to existing accounts and is required only when opening new accounts; and (c) there is nothing in the actual proposed new TISA Regulations text indicating that the initial notice does not have to be given to existing account owners and is required only when new accounts are opened.
Hopefully, the final regulations will clarify this inconsistency and confusion, so financial institutions will know whether the initial notice of the right to opt out must be given to existing account owners. Unless this is clarified, financial institutions will be left to wonder whether the proposed new TISA Regulations really give them the authority to assess overdraft fees on existing account owners without prior notice of the right to opt out, even though this practice is prohibited as unfair by the proposed new FTCA Regulations.
- Whether Less Than All the Owners of a Multi-Owner Account Can Opt Out of Overdraft Services for the Account:
There does not appear to be anything in the proposed regulations indicating whether less than all the owners of a multi-owner account, such as a joint account, can opt out of overdraft services for the account. We believe that this needs to be addressed by the final regulations. Without this clarification an institution will be left to wonder if one owner of a multi-owner account opts out, but another does not, whether it can pay overdrafts written on the account.
- Whether Institutions Should Be Required to Provide a Form with a Check-Box That Consumers Can Mail in to Opt Out:
The agencies have asked for comment on whether institutions should be required to provide a form with a check-box that consumers can mail in to opt out.
Requiring such a check-box would certainly be convenient for consumers.
Moreover, it could be beneficial to both consumers and institutions in that it could avoid disputes such as whether an opt out was requested, whether the request was by the required number of account owners on a multi-party account, and whether the consumer provided the information (such as the account number) needed to accomplish the opt out.
We believe that any such form should require the signature(s) of the account owner(s).
- Whether There Should Be an Option to Provide the Subsequent Notice of the Right to Opt Out on a Separate Document with the Periodic Statement, Rather Than on the Periodic Statement:
Proposed TISA Regulations Section 230.10(c)(2) provides that the subsequent notice of the right to opt out must be given as follows:
“(i) On each periodic statement reflecting any fee(s) or charge(s) for paying an overdraft...”; or“(ii) At least once per statement period on any notice sent promptly after the institution’s payment of an overdraft.”
We believe that consideration should be given to an option to provide the subsequent notice on a separate document with the periodic statement, rather than on the periodic statement. Such an option could be beneficial to both financial institutions and consumers, because it could be less expensive for financial institutions, it could be more conspicuous for consumers, and it could facilitate combining the notice with a form of opt-out that the consumer could complete, sign, and return to the financial institution.
- Whether the Provisions of Proposed New TISA Regulations Appendix B-10 Are Model Clauses Providing Safe Harbors:
Proposed new TISA Regulations Appendix B appears to provide safe harbors for its “model clauses” by stating that, “Institutions that modify the model clauses will be deemed in compliance as long as they do not delete required information or rearrange the format in a way that affects the substance or clarity of the disclosures.”
Proposed new TISA Regulations Appendix B-10 is entitled “Overdraft Services Opt-Out Notice Sample Form”. The words “Sample Form” in this title suggest that Appendix B-10 and its contents may not be “model clauses”, and thus may not provide safe harbors.
However, the Section-by-Section Analysis of proposed new TISA Regulations section 230.10 states that “Sample Form B-10 provides a model form institutions can use to satisfy their disclosure obligations under the proposed rule” (emphasis added), thus suggesting that Appendix B-10 may be intended to provide safe harbors.
Hopefully the final regulations will provide clarification as to whether the provisions of Appendix B-10 provide safe harbors. And if they do provide safe harbors, the final regulations should clarify that the safe harbors are for FTCA purposes as well as TISA purposes.
- Whether the Requirement That Responses to Balance Inquiries Through Automated Systems Include the Account Owners’ Funds Only, and Not Funds Available Under Overdraft Services, Should Be Expanded to Include Automated Balance Disclosures Made Without Balance Inquiries:
Proposed new TISA Regulations 230.11(c) provides that:
“In response to an account balance inquiry by a consumer through an automated
system, an institution must provide a balance that solely includes funds that are
available for the consumer’s immediate use or withdrawal, and may not include
additional amounts that the institution may provide to cover an item when there are
insufficient or unavailable funds in the customer’s account.”
Consideration should be given to expanding this provision to include automated balance disclosures made without balance inquiries. Automated balance disclosures made without balance inquiries are just as capable of misleading as those made in response to balance inquiries. Expanding this provision to include automated balance disclosures made without balance inquiries would avoid the possibility of disputes over the meaning of “balance inquiries”. Moreover, if this provision is limited to balance inquiries, institutions might avoid it by modifying their automated systems to volunteer account balances before balance inquiries can be made.
- Clarification Is Needed as to Whether Providing an Account Balance at an ATM That Includes Funds Available Under an Overdraft Service Is an Unfair or Deceptive Practice and/or Requires Additional Disclosures at Account Opening or Otherwise:
We understand that some financial institutions have been written up for unfair or deceptive practices for providing at ATMs account balances that include funds available under overdraft services, especially in the absence of additional disclosures at account opening or otherwise. Clarification is needed as to whether this is actually an unfair or deceptive practice, as to whether additional disclosures at account opening or otherwise (such as on the machine, on screen, or on the receipt) would avoid such unfairness or deception, and as to the content of such additional disclosures.
Conclusion
We believe that careful consideration should be given to these issues before the proposed new overdraft services regulations become final, and we contemplate submitting comment letters to the agencies so indicating. If you agree, if you disagree, or if you believe that there are other issues that should be considered, we urge you to submit comment letters to the agencies stating your positions by the deadlines indicated above. Strong industry participation will increase the likelihood that the final regulations will be sound.
