[Federal Register Volume 74, Number 18 (Thursday, January 29, 2009)]
[Proposed Rules]
[Pages 5212-5243]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-31184]
[[Page 5211]]
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Part II
Federal Reserve System
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12 CFR Parts 205, 226, 227, and 230
Department of the Treasury
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Office of Thrift Supervision
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12 CFR Part 535
National Credit Union Administration
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12 CFR Part 706
Electronic Fund Transfers; Proposed Rule; Truth in Lending; Unfair or
Deceptive Acts or Practices; Truth in Savings; Final Rules and Proposed
Rule
Federal Register / Vol. 74, No. 18 / Thursday, January 29, 2009 /
Proposed Rules
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FEDERAL RESERVE SYSTEM
12 CFR Part 205
[Regulation E; Docket No. R-1343]
Electronic Fund Transfers
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule; request for public comment.
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SUMMARY: The Board is proposing to amend Regulation E, which implements
the Electronic Fund Transfer Act, and the official staff commentary to
the regulation, which interprets the requirements of Regulation E. The
proposal would limit the ability of a financial institution to assess
an overdraft fee for paying automated teller machine (ATM) withdrawals
and one-time debit card transactions that overdraw a consumer's
account, unless the consumer is given notice of the right to opt out of
the payment of such overdrafts, and the consumer does not opt out. As
an alternative approach, the proposal would limit the ability of a
financial institution to assess an overdraft fee for paying ATM
withdrawals and one-time debit card transactions that overdraw a
consumer's account, unless the consumer affirmatively consents, or opts
in, to the institution's payment of overdrafts for these transactions.
In addition, the proposal would prohibit financial institutions from
assessing an overdraft fee if the overdraft would not have occurred but
for a debit hold placed on funds in the consumer's account that exceeds
the actual amount of the transaction.
DATES: Comments must be received on or before March 30, 2009.
ADDRESSES: You may submit comments, identified by Docket No. R-1343, by
any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include the
docket number in the subject line of the message.
FAX: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Ky Tran-Trong, Counsel, Dana Miller,
Attorney, or Vivian Wong, Senior Attorney, Division of Consumer and
Community Affairs, Board of Governors of the Federal Reserve System,
Washington, DC 20551, at (202) 452-2412 or (202) 452-3667. For users of
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.
SUPPLEMENTARY INFORMATION:
I. Statutory Background
The Electronic Fund Transfer Act (15 U.S.C. 1693 et seq.) (EFTA or
Act), enacted in 1978, provides a basic framework establishing the
rights, liabilities, and responsibilities of participants in electronic
fund transfer (EFT) systems. The EFTA is implemented by the Board's
Regulation E (12 CFR part 205). Examples of the types of transactions
covered by the Act and regulation include transfers initiated through
an ATM, point-of-sale (POS) terminal, automated clearinghouse (ACH),
telephone bill-payment plan, or remote banking service. The Act and
regulation provide for the disclosure of terms and conditions of an EFT
service; documentation of EFTs by means of terminal receipts and
periodic account activity statements; limitations on consumer liability
for unauthorized transfers; procedures for error resolution; and
certain rights related to preauthorized EFTs. Further, the Act and
regulation restrict the unsolicited issuance of ATM cards and other
access devices.
The official staff commentary (12 CFR part 205 (Supp. I))
interprets the requirements of Regulation E to facilitate compliance
and provides protection from liability under Sections 915 and 916 of
the EFTA for financial institutions and other persons subject to the
Act. 15 U.S.C. 1693m(d)(1). The commentary is updated periodically to
address significant questions that arise.
II. Background
Overview of Overdraft Services
Historically, if a consumer sought to engage in a transaction that
would overdraw his or her deposit account, the consumer's financial
institution used its discretion on an ad hoc basis to determine whether
to pay the overdraft. If an overdraft was paid, the institution usually
imposed a fee on the consumer's account. In recent years, many
institutions have largely automated the overdraft payment process.
Automation is used to apply specific criteria for determining whether
to honor overdrafts and to set limits on the amount of coverage
provided.
Overdraft services vary among institutions but often share certain
common characteristics. In most cases, consumers that meet a depository
institution's criteria are automatically enrolled in overdraft
services. While institutions generally do not underwrite on an
individual account basis when enrolling the consumer in an overdraft
service, most institutions will review individual accounts periodically
to determine whether the consumer continues to qualify for the service
and the amount of overdraft coverage provided. Most institutions
disclose that the payment of overdrafts is discretionary, and that the
institution has no legal obligation to pay any overdraft.\1\
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\1\ These transactions are generally not covered under
Regulation Z (Truth in Lending) if there is no written agreement
between the consumer and institution to pay an overdraft and impose
a fee. See 12 CFR 226.4(c)(3).
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In the past, institutions generally provided overdraft coverage
only for check transactions. In recent years, however, the service has
been extended to cover overdrafts resulting from non-check
transactions, including ATM withdrawals, debit card transactions at
POS, online transactions, preauthorized transfers, and ACH
transactions.\2\
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\2\ According to the FDIC's Study of Bank Overdraft Programs,
nearly 70 percent of banks surveyed implemented their automated
overdraft program after 2001. In addition, 81 percent of banks
surveyed that operate automated programs allow overdrafts to be paid
at ATMs and POS debit card terminals. See FDIC Study of Bank
Overdraft Programs 8, 10 (November 2008) (hereinafter, FDIC Study)
(available at: http://www.fdic.gov/bank/analytical/overdraft/FDIC138_Report_FinalTOC.pdf). See also Overdraft Protection: Fair
Practices for Consumers: Hearing before the House Subcomm. on
Financial Institutions and Consumer Credit, House Comm. on Financial
Services, 110th Cong., at 72 (2007) (hereinafter, Overdraft
Protection Hearing) (available at http://www.house.gov/apps/list/hearing/financialsvcs_dem/hr0705072.shtml) (stating that as
recently as 2004, 80 percent of banks still declined ATM and debit
card transactions without charging a fee when account holders did
not have sufficient funds in their account).
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[[Page 5213]]
A flat fee is charged each time an overdraft is paid, regardless of
the amount of the overdraft. Institutions commonly charge the same
amount for paying the overdraft as they would if they returned the item
unpaid. Some institutions may also impose a fee for each day the
account remains overdrawn.
According to a recent report from the Government Accountability
Office (GAO), the average cost of overdraft and insufficient funds fees
was just over $26 per item in 2007.\3\ The GAO also reported that large
institutions on average charged between $4 and $5 more for overdraft
and insufficient fund fees compared to smaller institutions.\4\ In
addition, the GAO noted that a small number of institutions (primarily
large banks) apply tiered fees to overdrafts, charging higher fees as
the number of overdrafts in the account increases.\5\
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\3\ See Bank Fees: Federal Banking Regulators Could Better
Ensure That Consumers Have Required Disclosure Documents Prior to
Opening Checking or Savings Accounts, GAO Report 08-281, at 14
(January 2008) (hereinafter, GAO Bank Fees Report). See also
Bankrate 2008 Checking Account Study, posted October 27, 2008
(available at: http://www.bankrate.com/brm/news/chk/chkstudy/20081027-bounced-check-fees-a1.asp?caret=2) (reporting an average
overdraft fee of approximately $29 per item).
\4\ See GAO Bank Fees Report at 16. A recent survey suggests
that the cost difference in overdraft fees between small and large
institutions may be larger than reported by the GAO, however. See
also ``Disparities in Checking Overdraft Fees by Geography and
Size,'' Press release, Moeb$ Services (October 25, 2008) (Moeb$ 2008
Pricing Survey Press Release) (available at: http://moebs.com/AboutUs/Pressreleases/tabid/58/ctl/Details/mid/380/ItemID/29/Default.aspx) (reporting that banks with more than $20 billion in
assets charged on average $33.43 per overdrawn check compared to
$24.28 per overdrawn check for banks and credit unions with less
than $100 million in assets).
\5\ According to the GAO, of the financial institutions that
applied up to three tiers of fees in 2006, the average overdraft
fees were $26.74, $32.53 and $34.74, respectively. See GAO Bank Fees
Report at 14.
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Industry and Consumer Group Perspectives
From the industry's perspective, automated overdraft services
enable institutions to reduce the cost of manually reviewing individual
items, and also ensure that all consumers are treated consistently with
respect to overdraft payment decisions. Industry representatives
observe that whether an overdrawn check is paid or returned, the
consumer will be charged the same amount by the consumer's financial
institution. Industry representatives also assert, however, that when
an overdrawn check is paid, consumers receive significant benefits
because they can avoid additional fees that would be charged by the
merchant if the item was returned unpaid, and other adverse
consequences, such as the furnishing of negative information to a
consumer reporting agency.\6\
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\6\ See, e.g., Overdraft Protection Hearing at 44.
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In contrast, consumer groups assert that overdraft transactions are
a high-cost form of lending that trap low- and moderate-income
consumers into paying high fees. Consumer groups also state that
consumers are often enrolled in overdraft services automatically
without their request or consent. In addition, consumer groups believe
that by honoring overdrafts, institutions encourage consumer reliance
on the service and therefore, consumers incur greater costs in the long
run than they would if the transactions were not honored. Consumer
groups note, for example, that historically, institutions declined a
consumer's request for an ATM withdrawal or debit card transaction if
the consumer did not have sufficient funds in his or her account.\7\
Today, however, institutions are more likely to cover those overdrafts
and assess a fee on the consumer's account for doing so.\8\ According
to consumer groups, this practice can be particularly costly in
connection with debit card overdrafts because the dollar amount of the
fee is likely to considerably exceed the dollar amount of the
overdraft.\9\ In addition, multiple fees may be assessed in a single
day for a series of small-dollar transactions. Because of these costs,
consumer groups assert that most consumers would prefer that their bank
decline debit card transactions if the transactions would overdraw
their account.\10\
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\7\ See, e.g., Overdraft Protection Hearing at 72 (stating that
as recently as 2004, 80 percent of banks still declined ATM and
debit card transactions without charging a fee when account holders
did not have sufficient funds in their account).
\8\ See, e.g., FDIC Study at 10 (reporting that 81 percent of
banks surveyed that operate automated programs allow overdrafts to
be paid at ATMs and POS debit card terminals).
\9\ See, e.g., Overdraft Protection Hearing at 72.
\10\ See Leslie Parrish, Consumers Want Informed Choice on
Overdraft Fees and Banking Options, Ctr. for Responsible Lending
(April 16, 2008) (reporting the results of a survey indicating that
80 percent of consumers would prefer that a debit card transaction
be declined if a $5 purchase would result in an overdraft and an
accompanying $34 fee) (available at: http://www.responsiblelending.org/pdfs/final-caravan-survey-4-16-08.pdf).
But see 80 Percent of Consumers Have Not Paid Overdraft Fees in Past
Year, Says ABA Survey, Press Release, American Bankers Association
(August 30, 2007) (reporting survey results indicating that of those
consumers who had paid an overdraft fee in the past 12 months, 88
percent had wanted the payment covered) (available at: http://www.aba.com/Press+Room/083007ABASurvey.htm).
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Previous Agency Actions
In February 2005, the Board, Federal Deposit Insurance Commission
(FDIC), Office of the Comptroller of the Currency (OCC), and National
Credit Union Administration (NCUA) (collectively, the federal banking
agencies) issued guidance on overdraft protection programs in response
to the increased availability and customer use of overdraft protection
services (Joint Guidance).\11\ The Joint Guidance addresses three
primary areas--safety and soundness considerations, legal risks, and
best practices. The Office of Thrift Supervision (OTS) issued separate
guidance (OTS Guidance) that focuses on safety and soundness
considerations and best practices.\12\ The best practices described in
the Joint Guidance and the OTS Guidance address the marketing and
communications that accompany the offering of overdraft services, as
well as the disclosure and operation of program features, including the
provision of consumer choice to opt out of the overdraft service.\13\
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\11\ See Interagency Guidance on Overdraft Protection Programs,
70 FR 9127, Feb. 24, 2005.
\12\ See OTS Guidance on Overdraft Protection Programs, 70 FR
8428, Feb. 18, 2005.
\13\ The federal banking agencies have also published a consumer
brochure on overdraft services. The brochure, entitled ``Protecting
Yourself from Overdraft and Bounced-Check Fees,'' can be found at:
http://www.federalreserve.gov/pubs/bounce/default.htm.
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In May 2005, the Board revised Regulation DD and the staff
commentary pursuant to its authority under the Truth in Savings Act
(TISA) to address concerns about institutions' disclosure of overdraft
fees generally, and the advertisement of overdraft services.\14\ The
goal of the Regulation DD revisions was to improve the uniformity and
adequacy of disclosures provided to consumers about overdraft and
returned-item fees to assist consumers in better understanding the
costs associated with the payment of overdrafts. In addition, the final
rule addressed some of the Board's concerns about institutions'
marketing practices with respect to overdraft services.
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\14\ 70 FR 29582, May 24, 2005. A substantively similar rule
applying to credit unions was issued separately by the NCUA. 71 FR
24568, Apr. 26, 2006.
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May 2008 FTC Act and Regulation DD Proposals
In May 2008, the Board, along with the OTS and the NCUA
(collectively, the Agencies), proposed to exercise their authority
under the Federal Trade Commission Act (FTC Act) to prohibit
institutions from assessing any fees on a consumer's account in
connection
[[Page 5214]]
with an overdraft service, unless the consumer is given notice and the
right to opt out of the institution's overdraft service, and the
consumer does not opt out. 73 FR 28904, May 19, 2008. The proposed opt-
out right would have applied to overdrafts resulting from all methods
of payment, including checks, ACH transactions, ATM withdrawals,
recurring payments, and POS debit card transactions. The proposal also
would have required institutions to provide consumers with the option
of opting out only of the payment of overdrafts for ATM withdrawals and
debit card transactions at POS. In addition, the proposal would have
prohibited institutions from assessing overdraft fees where the
overdraft would not have occurred but for a debit hold placed on funds
in the consumer's account in excess of the actual transaction amount.
Concurrent with the issuance of the May 2008 FTC Act Proposal, the
Board separately issued a proposal under Regulation DD (Truth in
Savings), which set forth proposed form, content, and timing
requirements for providing the opt-out notice. 73 FR 28730, May 19,
2008. To facilitate compliance, the Regulation DD proposal contained a
model form that institutions could use to satisfy the opt-out notice
requirement. Collectively, the two proposals on overdraft services were
intended to ensure that consumers understand how overdraft services
operate generally and have the opportunity to avoid the associated
costs where such services do not meet their needs.
In addition to the proposed requirements regarding the form and
content of the opt-out notice, the Regulation DD proposal set forth
proposed revisions that would require all institutions to provide
aggregate totals for overdraft fees and for returned item fees for the
statement period and the year-to-date. Currently, only institutions
that promote the payment of overdrafts are subject to this requirement.
The Regulation DD proposal also addressed balance disclosures provided
to consumers through automated systems, such as ATMs and online banking
services. These provisions are adopted in final form under Regulation
DD elsewhere in today's Federal Register.
Overview of Comments Received
The Agencies received approximately 1,500 comment letters on the
proposed opt-out right for overdraft services under the May 2008 FTC
Act Proposal. Consumer groups, members of Congress, the FDIC, and
individual consumers supported the Agencies' proposal, but urged the
Agencies to require institutions to obtain a consumer's affirmative
consent (that is, an opt-in) before any fees could be charged for
paying an overdraft. Some of these commenters also argued that
overdraft services provide extensions of credit that should be subject
to the Truth in Lending Act (TILA) so that consumers would be better
able to compare the cost of overdraft services to the cost of other
credit alternatives.
In contrast, the majority of industry commenters opposed the
proposed rule. Industry commenters asserted that consumers derive
substantial benefit from overdraft services, particularly in connection
with check transactions. While institutions generally assess the same
fee whether a check is paid or returned, industry commenters observed
that the payment of overdrafts for checks enables consumers to avoid
other adverse consequences, such as merchant fees, the furnishing of
negative information for credit reports, and violations of bad check
laws. Some industry commenters urged the Board to instead use other
regulatory authority, such as Regulations DD or E, to address concerns
about overdraft services.
Industry commenters also asserted that consumers may not fully
understand the implications of opting out, and that those who elect to
do so might unintentionally incur significant costs. In this regard,
industry commenters and the OCC stated that if the opt-out right
applied to check transactions, more checks would be returned unpaid.
Industry commenters and the OCC also noted a potential unintended
consequence of the proposal could be that institutions would lengthen
their availability schedules to the extent permitted by the Board's
Regulation CC, 12 CFR part 229, to ensure that there are sufficient
funds in the payor's account to cover a deposited check. As a result,
they argued, consumers may experience a longer waiting period before
gaining access to deposited funds than currently is the case today.
With respect to implementing the proposed opt-out requirement,
industry commenters raised a number of operational issues. These
commenters were most concerned about the feasibility of limiting the
opt-out right only to overdrafts paid in connection with ATM
withdrawals and POS debit card transactions. Some industry commenters,
however, argued that if the Agencies deemed it necessary to create a
consumer opt-out right, it should be limited to ATM withdrawals and POS
debit card transactions. These commenters noted that the majority of
complaints about overdraft services arise in connection with debit card
transactions in which the amount of the overdraft fee is substantially
higher than the amount of the overdraft. Industry commenters also
questioned the merits of requiring institutions to provide an opt-out
notice following the assessment of an overdraft fee in light of the
costs of printing and mailing additional opt-out notices.
With respect to the debit hold provision, individual consumers and
consumer groups generally supported the Agencies' proposal. Industry
commenters, in contrast, expressed concern about the operational
burdens associated with the proposal because it could require
institutions to retroactively monitor, and adjust, overdraft fees that
have been assessed to a consumer's account. Industry commenters also
urged the Agencies to instead adopt a disclosure-based rule applying to
merchants that are responsible for placing the hold.
The Board also received over 600 comments in response to the
Regulation DD proposal regarding the timing, format and content of the
opt-out notice. Most of the comments came from individual consumers,
who supported the proposed rule. The remaining comments came from
financial institutions, industry trade associations, consumer groups,
members of Congress, other federal banking agencies, state and local
governments, and others.
Consumer groups supported the proposed content and model form for
notifying consumers of their right to opt out of an overdraft service,
but urged the Board to enhance the model form in various ways,
including making the opt-out notice more prominent. Several industry
commenters argued that the proposed model form was unduly biased
towards encouraging consumers to opt out, and did not sufficiently
explain that the payment of overdrafts was discretionary. Some industry
commenters also urged the Board to eliminate the requirement to provide
notice of the opt-out right following the assessment of an overdraft
fee, stating that an initial notice was sufficient to apprise consumers
of that right.
Consumer Testing
In addition to reviewing the comments received on the two
proposals, the Board worked with a testing consultant, Macro
International, Inc. (Macro), to revise the proposed model opt-out
notice and conduct consumer testing of the revised notice. Two rounds
of one-on-one interviews with a diverse group of consumers were
completed in the fall of 2008. In general,
[[Page 5215]]
after reviewing the model disclosures, test participants generally
understood the concept of overdraft coverage, and that they would be
charged fees if their institution paid their overdrafts. Participants
also appeared to understand that if they opted out of overdraft
coverage, this meant their checks would not be paid and they could be
charged fees by both their institution and by the merchant.
During the first round of testing, Macro tested an opt-out form
that allowed consumers to opt out of the payment of overdrafts for all
transaction types, including checks and recurring debits. In the second
round of testing, Macro tested an opt-out form that limited the opt-out
right to ATM withdrawals and one-time debit card transactions made at
POS and online. The majority of participants during both rounds
indicated that they likely would not opt out if the opt-out also
applied to checks. However, when asked if they would opt out if the
choice was limited to opting out of overdrafts in connection with ATM
withdrawals and one-time debit card purchases, half of the participants
indicated that they would consider doing so.\15\
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\15\ See Review and Testing of Overdraft Notices. Macro
International, December 8, 2008.
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III. Summary of Proposal
Overdrafts
The Board is proposing amendments to Regulation E and the staff
commentary to assist consumers in understanding how overdraft services
provided by their institutions operate and to ensure that consumers
have the opportunity to limit the overdraft costs associated with ATM
withdrawals and one-time debit card transactions where such services do
not meet their needs. The Board is proposing two alternative approaches
in proposed Sec. 205.17 of Regulation E. In addition, as stated
elsewhere in today's Federal Register, the Board is not taking action
on the May 2008 FTC Act (Regulation AA) and Regulation DD Proposals
regarding consumers' right to opt out of overdraft services.
Under the first approach, institutions would be required to provide
consumers with notice of the right to opt out of the institution's
overdraft service for ATM withdrawals and one-time debit card
transactions. The notice must be provided to the consumer before the
institution may assess any fees or charges to a consumer's account for
paying such overdrafts. Under this approach, the opt-out notice would
generally be given at account opening (or any time before any overdraft
fees are assessed) and subsequently for each periodic statement cycle
in which the institution assesses a fee or charge to the consumer's
account for paying an overdraft.
Under the second approach, institutions would be required to
provide consumers with notice of the right to opt in, or affirmatively
consent, to the institution's overdraft service for ATM withdrawals and
one-time debit card transactions. The notice must be provided, and the
consumer's affirmative consent obtained, before the institution could
assess a fee or charge on the consumer's account for paying such
overdrafts. Under this approach, additional notices following the
assessment of a fee or charge for paying an ATM or one-time debit card
overdraft would not be required once the consumer has opted in to the
overdraft service.
Both approaches would permit institutions to implement the
consumer's choice by providing an account that would not permit the
payment of overdrafts for ATM withdrawals and one-time debit card
transactions. The proposal provides two alternatives for implementing
the consumer's choice for both of the opt-out and opt-in approaches.
Under one alternative, the proposal would require an institution to
provide an account that has the same terms, conditions, or features
that are provided for consumers who do not opt out, except for features
that limit the institution's payment of such overdrafts. Under another
alternative, the proposal would allow institutions to vary the terms,
conditions, or features for the account that does not permit the
payment of ATM and one-time debit card overdrafts, provided that the
differences are not so substantial that they discourage a reasonable
consumer from exercising his or her right to opt out of the payment of
such overdrafts (or compel a reasonable consumer to opt in).
To facilitate compliance, the proposal provides model forms that
institutions may use to satisfy their disclosure obligations. The Board
intends to conduct additional consumer testing of the proposed model
forms following issuance of this proposal.
Debit Holds
The Board is also proposing to prohibit institutions from assessing
an overdraft fee where the overdraft would not have occurred but for a
debit hold placed on funds in an amount that exceeds the actual
transaction amount and where the merchant can determine the actual
transaction amount within a short period of time after authorization of
the transaction (for example, fuel purchases at a gas station). The
prohibition, set forth in proposed Sec. 205.19, would not apply if the
institution adopts procedures designed to release the hold within a
reasonable period of time.
In light of this proposal, and as discussed elsewhere in today's
Federal Register, the Board is not taking action on the proposed FTC
Act (Regulation AA) amendments regarding debit holds.
IV. Legal Authority
The Board is issuing the proposed opt-out (and opt-in) and debit
hold provisions of this proposal pursuant to its authority under
Sections 904(a) and 904(c) of the EFTA (15 U.S.C. 1693b). Section
904(a) of the EFTA authorizes the Board to prescribe regulations
necessary to carry out the purposes of the title. The express purposes
of the EFTA are to establish ``the rights, liabilities, and
responsibilities of participants in electronic fund transfer systems''
and to provide ``individual consumer rights.'' See EFTA Section 902(b);
15 U.S.C. 1693. In addition, Section 904(c) of the EFTA provides that
regulations prescribed by the Board may contain any classifications,
differentiations, or other provisions, and may provide for such
adjustments or exceptions for any class of electronic fund transfers,
that the Board deems necessary or proper to effectuate the purposes of
the title, to prevent circumvention or evasion, or to facilitate
compliance.
The legislative history of the EFTA makes clear that the Board has
broad regulatory authority. The Senate Report states that section 904
of the EFTA ``authorizes the Federal Reserve Board to promulgate
regulations to carry out the act's purposes'' and notes that the Senate
Committee on Banking, Housing, and Urban Affairs ``regards regulations
as essential to the act's effectiveness.'' \16\ According to the Senate
Report, such regulations ``will add flexibility to the act by
permitting the Board to modify the act's requirements to suit the
characteristics of individual EFT services. Moreover, since no one can
foresee EFT developments in the future, regulations would keep pace
with new services and assure that the act's basic protections continue
to apply.'' \17\ The Senate Report states that the intent was to give
the Board ``flexibility in determining whether new or developing
electronic services should be covered by
[[Page 5216]]
the act and, if so, to what extent.'' \18\ ``This delegation of
authority to the Board is an important aspect of this legislation as it
would enable the Board to examine new services on a case-by-case basis
and would contribute substantially to the act's overall
effectiveness.'' \19\
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\16\ S. Rep. No. 95-1273, 95th Cong., 2d Sess., at 26 (Oct. 4,
1978).
\17\ S. Rep. No. 95-1273, at 26.
\18\ S. Rep. No. 95-1273, at 25.
\19\ S. Rep. No. 95-1273, at 26.
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The proposed opt-out (and opt-in) rules are intended to carry out
the express purposes of the EFTA by: (a) Establishing notice
requirements to help consumers better understand the cost of overdraft
services for certain EFTs; and (b) providing consumers with a choice as
to whether they want overdraft services for ATM withdrawals and one-
time debit card transactions in light of the costs associated with
those services. The proposed opt-out (and opt-in) rules include
provisions designed to prevent circumvention or evasion of the
requirement to provide the consumer with choice regarding these
overdraft services. These rules also include provisions, including
exceptions, designed to facilitate compliance by financial institutions
in light of certain operational constraints.
The proposed debit hold rule is intended to carry out the express
purposes of the EFTA by ensuring that consumers generally are not
assessed fees for overdrafts that would not have occurred but for the
placement of the hold. The proposed debit hold rule contains
classifications, differentiations, and other provisions, including
adjustments and exceptions, designed to facilitate compliance by
financial institutions in light of certain operational constraints.
The proposed disclosures that would implement the proposed opt-out
(and opt-in) requirements are issued pursuant to the Board's authority
under Sections 904, 905 and 906(b) of the EFTA. 15 U.S.C. 1693b, 1693c
and 1693d(c).
V. Section-by-Section Analysis
Section 205.12 Relation to Other Laws
Section 205.12(a) explains the relationship between Regulation E
and Regulation Z when an access device permits a consumer to obtain an
extension of credit incident to an EFT. In general, Regulation E
governs the issuance of access devices and the addition of an EFT
service to an accepted credit card, and Regulation Z governs the
issuance of a combined credit card and access device and the addition
of a credit feature to an accepted credit card. See Sec. 205.12(a).
The proposal would amend Regulation E to clarify that both the issuance
of an access device with an overdraft service and the addition of an
overdraft service to an accepted access device are governed by
Regulation E.
Currently, Sec. 205.12(a)(1)(ii) states that the EFTA and
Regulation E govern the ``issuance of an access device that permits
credit extensions (under a preexisting agreement between a consumer and
a financial institution) only when the consumer's account is overdrawn
or to maintain a specified minimum balance in the consumer's account.''
As the Board stated in the original March 1979 final rule, this
provision was intended to clarify that Regulation E, rather than
Regulation Z, applies to the issuance of ``access devices that are also
credit cards solely by virtue of their capacity to access an existing
overdraft credit line attached to the consumer's account.'' 61 FR
18468, 18472, March 28, 1979 (adopting Sec. 205.4(c) where this
provision originally appeared).
When the rule was originally adopted, the primary means of covering
overdrafts incurred in connection with EFTs was through an overdraft
line of credit linked to a debit card or other access device. Today,
however, consumers are more likely to have these overdrafts covered by
their institution's overdraft service, rather than by a separate
overdraft line of credit. In both cases, the Board believes that
Regulation E should apply to ensure consistent treatment.
Accordingly, the Board is proposing to amend Sec. 205.12(a)(1)(ii)
to provide that Regulation E governs the issuance of an access device
that permits extensions of funds under an overdraft service (as defined
below under proposed Sec. 205.17) when the consumer's account is
overdrawn. Proposed Sec. 205.12(a)(1)(iii) provides that Regulation E
also covers the addition of an overdraft service to a previously
accepted access device. See also comment 12(a)-2, as proposed to be
revised. Proposed comment 12(a)-3 clarifies that the addition of an
overdraft service to an accepted access device does not constitute the
addition of a credit feature under Regulation Z.
In addition, the Board is also proposing to amend Sec.
205.12(a)(1)(i) to conform the regulation to reflect the redesignation
of the definition of the term ``accepted credit card'' under Regulation
Z, adopted elsewhere in today's Federal Register. See 12 CFR 226.12,
comment 2. Current Sec. 205.12(a)(1)(iii), which provides that
Regulation E's liability limits and error resolution rules also apply
to extensions of credit under an overdraft line of credit, would be
redesignated as Sec. 205.12(a)(1)(iv) and revised to include a
reference to overdraft services.
Section 205.17 Requirements for Overdraft Services
Background
In the February 2005 Joint Guidance on overdraft protection
services, the federal banking agencies recommended as a best practice
that institutions obtain a consumer's affirmative consent to receive
overdraft protection. Alternatively, the Joint Guidance stated that
where overdraft protection is automatically provided, institutions
should provide consumers the opportunity to ``opt out'' of the
overdraft program and provide consumers with a clear disclosure of this
option. 70 FR at 9132.\20\
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\20\ The OTS made similar recommendations in its separate
guidance. See 70 FR at 8431.
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Although it appears that most institutions provide consumers the
right to opt out of overdraft services, this practice is not uniform
across all institutions.\21\ Moreover, even where an opt-out right is
provided, this right may not be clearly disclosed to consumers. For
example, some institutions may disclose the opt-out right in a clause
in their deposit agreement, which many consumers may not notice or may
not consider relevant because they do not expect to overdraw their
accounts. In other cases, the clause may not be written in clearly
understandable language. Accordingly, to ensure that all consumers are
given a meaningful choice regarding overdraft services, the May 2008
FTC Act Proposal would have established notice and opt-out requirements
for institutions providing such services. The content and format of the
opt-out notice were set forth in the Board's Regulation DD Proposal.
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\21\ According to the FDIC's Study of Bank Overdraft Programs,
75.1% of institutions surveyed permit consumers to opt out of their
automated overdraft program, while 11.1% of institutions require
consumers to opt in. According to the FDIC, banks that do not
promote automated programs were less likely to give consumers either
the option to opt in or to opt out of the automated overdraft
program. See FDIC Study at 27. See also Moeb$ 2008 Pricing Survey
Press Release (reporting that 89.9% of institutions offer some form
of a consumer opt-out).
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Discussion
Based on the comments received in response to the May 2008 FTC Act
and Regulation DD Proposals, the results of limited consumer testing,
and its own analysis, the Board believes that concerns about overdraft
services can be appropriately addressed under its rulemaking authority
under the EFTA
[[Page 5217]]
and Regulation E. The Board has a number of reasons for reaching this
conclusion.
First, the Board has considered the benefits to consumers of
covering check transactions under an overdraft service. In particular,
while a consumer will generally be charged the same fee by the
financial institution whether or not a check is paid, if the
institution covers an overdrawn check, the consumer may avoid other
adverse consequences, such as the imposition of additional merchant
returned item fees.\22\ Such benefits are not evident, however, with
regard to the payment of overdrafts for certain types of EFTs,
specifically ATM withdrawals and one-time debit card transactions. For
those types of transactions, if the transaction is declined because of
insufficient funds in the consumer's account, the consumer would not
incur any merchant returned item fees and typically would avoid any
fees assessed by the financial institution. Accordingly, the Board
believes it is unnecessary to apply an opt-out (or opt-in) rule to
check transactions in the proposed rule and that a more targeted rule
covering overdraft services is appropriate.
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\22\ According to one survey, the average merchant fee for a
returned check is $27.78. See Moeb$ 2008 Pricing Survey Press
Release. See also FDIC Study at 16 n.18 (stating that the fee
amounts for paying an overdraft and for returning an item unpaid
were the same for 98.1 of the surveyed institutions operating
automated overdraft programs that reported the two fees).
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Second, the Board has considered the cost impact to consumers from
overdraft fees assessed in connection with ATM and debit card
overdrafts.\23\ For one-time debit card transactions in particular, the
amount of the fee assessed may substantially exceed the amount
overdrawn.\24\ Given the costs associated with overdraft services in
these circumstances, consumers may prefer not to have these overdrafts
paid. In the Board's limited consumer testing, some participants stated
that they would prefer to have ATM withdrawals and debit card
transactions declined if they had insufficient funds, rather than incur
an overdraft fee.
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\23\ According to the FDIC's Study of Bank Overdraft Programs,
the median dollar amount for debit card transactions resulting in an
overdraft is $20. The FDIC's study also reported that POS/debit
overdraft transactions accounted for the largest share of all
insufficient funds transactions (41.0%). See FDIC Study at 78-79.
This compares to the average cost of overdraft and insufficient
funds fees of over $26 per item in 2007, as reported by the GAO. See
Bank Fees: Federal Banking Regulators Could Better Ensure That
Consumers Have Required Disclosure Documents Prior to Opening
Checking or Savings Accounts, GAO Report 08-281, at 14 (January
2008). See also FDIC Study at 15, 18 (reporting a median per item
overdraft fee of $27 for banks surveyed); Eric Halperin, Lisa James
and Peter Smith, Debit Card Danger: Banks Offer Little Warning and
Few Choices as Customers Pay a High Price for Debit Card Overdrafts,
Ctr. for Responsible Lending at 8 (January 25, 2007) (estimating
that the median amount by which a consumer overdraws his or her
account for a debit card purchase is $17).
\24\ See Overdraft Protection Hearing at 72 (stating that
consumers pay $1.94 in fees for every one dollar borrowed to cover a
debit card POS overdraft).
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Third, the Board notes that addressing overdrafts under its
authority under the EFTA and Regulation E would ensure that if
finalized, the rule would apply to all depository institutions,
including state-chartered credit unions which would not have been
covered by the NCUA's FTC Act authority.
Thus, for the reasons discussed above, the Board is proposing to
prohibit account-holding financial institutions from assessing
overdraft fees or charges on a consumer's account for paying an
overdraft on an ATM withdrawal or one-time debit card transaction
(whether at POS, online or by telephone), unless the consumer is given
notice and a reasonable opportunity to opt out of the institution's
overdraft service in connection with those transactions, and the
consumer does not opt out. As discussed below, the Board is also
proposing an alternative approach that would prohibit an account-
holding financial institution from assessing any fees on a consumer's
account for paying an ATM withdrawal or one-time debit card transaction
that overdraws the account, unless the consumer opts in, or
affirmatively consents, to the service.
1. First Alternative Approach--Opt-Out Requirement
A. Definition--Sec. 205.17(a)
Proposed Sec. 205.17(a) defines ``overdraft service'' to mean a
service under which a financial institution assesses a fee or charge on
a consumer's account held by the institution for paying a transaction
(including a check or other item) when the consumer has insufficient or
unavailable funds in the account. The term is intended to cover
circumstances when an institution assesses a fee for paying an
overdraft pursuant to any automated program or service, whether
promoted or not, or as a non-automated, ad hoc accommodation. The term
does not include an institution's payment of overdrafts pursuant to a
line of credit subject to the Board's Regulation Z, including transfers
from a credit card account, a home equity line of credit, or an
overdraft line of credit. The term also does not include any overdrafts
paid pursuant to a service that transfers funds from another account of
the consumer (including any account that may be jointly held by the
consumer and another person) held at the institution. The Board is not
proposing to include these methods of covering overdrafts under this
proposal because they require the express agreement of the consumer.
B. Opt-Out Requirement--Sec. 205.17(b)
General rule and scope of opt-out. Proposed Sec. 205.17(b)(1) sets
forth the general rule prohibiting an account-holding institution from
assessing a fee or charge on a consumer's account for paying an
overdraft on an ATM withdrawal or a one-time debit card transaction
pursuant to the institution's 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.\25\ The proposed opt-out would apply
to any ATM withdrawal, including withdrawals made at proprietary or
foreign ATMs. The proposed opt-out would also apply to any one-time
debit card transaction, regardless of whether the consumer uses a debit
card at a point-of-sale (for example, at a merchant or a store), in an
online transaction, or in a telephone transaction.
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\25\ As further discussed below under proposed Sec. 205.17(c),
notice must be provided both before the institution's assessment of
any fees or charges for paying an overdraft, and subsequently after
the consumer has incurred any such fees or charges.
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Proposed comment 17(b)-1 clarifies that a consumer's election to
opt out of a financial institution's overdraft service does not
prohibit the institution from paying any overdrafts for ATM withdrawals
or one-time debit card transactions. If the institution pays an
overdraft for these transactions, however, it would generally be
prohibited from assessing an overdraft fee or charge, except as
permitted under the exceptions set forth in proposed Sec.
205.17(b)(5), discussed below. The rule would not, however, limit the
institution's ability to debit the consumer's account for the amount of
the overdraft, if the institution is permitted to do so under
applicable law.
The proposed opt-out would not apply to other types of
transactions, including check transactions and preauthorized EFTs.\26\
As discussed above with respect to checks, the payment of overdrafts
for these transactions may enable consumers to avoid other possible
adverse consequences that might result if such items are returned
unpaid, such as merchant returned item fees. Consumers may also be more
likely to use checks
[[Page 5218]]
and preauthorized EFTs to pay for significant household expenses, such
as utilities and rent. In the Board's limited consumer testing,
participants indicated that they were more likely to pay important
bills using checks and preauthorized EFTs, and to use debit cards for
their discretionary purchases.
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\26\ The EFTA and Regulation E generally do not apply to check
transactions. See Sec. 205.3(c).
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The opt-out also generally would not apply to ACH transactions. For
example, if the consumer provides his or her checking account number to
authorize an ACH transfer online or by telephone, the institution would
be permitted to pay the item if it overdraws the consumer's account and
assess a fee for doing so. The Board notes that in many cases, ACH
transactions serve as a replacement for check transactions, such as
where a check is converted to a one-time ACH debit to the consumer's
account.\27\ In addition, the payment of an overdraft for an ACH
transaction could enable consumers to avoid merchant returned item
fees.
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\27\ See Geoffrey Gerdes, ``Recent Payment Trends in the United
States,'' Federal Reserve Bulletin at A79 (October 2008) (noting
that the number of checks converted to electronic payments in 2006
was 2.6 billion up from 0.3 billion in 2003).
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Operational considerations. As discussed above, the May 2008 FTC
Act Proposal would have required institutions to offer consumers the
option of opting out of the payment of overdrafts only for ATM
withdrawals and POS debit card transactions in addition to the option
to opt out of the payment of overdrafts for all transaction types. In
response, industry commenters stated that many processors do not
currently have systems set up to distinguish paying overdrafts for
some, but not all, payment channels, and that the reprogramming costs
would be significant. Specifically, industry commenters stated that
most systems today could either pay overdrafts for all transaction
types or pay overdrafts for none; however, these systems were not set
up to pay overdrafts for certain transaction types (e.g., checks and
ACH), but not others (e.g., ATM and POS debit card transactions). Some
industry commenters also asserted that most systems today are unable to
readily differentiate between POS debit card transactions and other
types of debit card transactions, such as a preauthorized transfer. A
few industry commenters, however, argued that any opt-out right should
be limited to ATM withdrawals and POS debit card transactions because
the majority of complaints about overdraft services arise in connection
with these transactions.
Notwithstanding the programming changes that would be required by
the proposed rule, the benefits of enabling consumers to have a choice
regarding the payment of overdrafts for ATM withdrawals and one-time
debit card transactions may outweigh the associated reprogramming
costs. From a consumer's perspective, any benefits from overdrawing the
consumer's account for ATM withdrawals and one-time debit card
transactions may be substantially outweighed by the costs associated
with the overdraft. Unlike for check and ACH transactions where the
consumer could be assessed fees by both the institution and the
merchant or other payee, the consequence of not having overdraft
services for ATM and one-time debit card transactions is to have a
transaction denied with no fees assessed. If a one-time debit card
transaction is denied, the consumer can provide another form of
payment, such as cash or a credit card. For ATM transactions, consumers
may reasonably expect that their withdrawal request will be denied if
they do not have sufficient funds in their accounts.
For these reasons, the Board is proposing to limit the scope of the
opt-out to ATM withdrawals and one-time debit card transactions. To
minimize the cost impact on institutions, however, the Board
anticipates allowing substantial lead time for institutions to
implement the necessary programming changes. Comment is requested on
whether the proposed opt-out should also apply to recurring debit card
transactions and ACH transactions. Comment is also solicited on an
appropriate implementation period for the proposed rule.
Reasonable opportunity for opt-out. Proposed Sec. 205.17(b)(1)(ii)
provides that once a consumer has received an opt-out notice, the
consumer must be given a reasonable opportunity to opt out of an
institution's overdraft service for ATM withdrawals and one-time debit
card transactions. Proposed comment 17(b)-2 provides examples to
illustrate what would constitute a reasonable opportunity to opt out,
including reasonable methods for opting out.
The first three examples provide a generally applicable safe harbor
for opt-out periods of 30 days after the consumer is provided an
initial notice informing the consumer of the opt-out right. During this
period, an institution generally would be prohibited from assessing any
fees or charges for paying an overdraft for an ATM withdrawal or a one-
time debit card transaction. Although 30 days would be a safe harbor,
an institution may decide that a shorter waiting period could be
adequate depending on the circumstances. Comment is requested regarding
whether a shorter time frame, such as 15 or 20 days, may be more
appropriate.
Proposed comment 17(b)-2.i contains an example of a reasonable
method of opting out when the institution provides a written form that
the consumer can fill out and mail to opt out. See proposed Model Form
A-9(A) in Appendix A, discussed below. Proposed comment 17(b)-2.ii
provides that an institution could also provide a toll-free telephone
number that the consumer may call to exercise the opt-out. Proposed
comment 17(b)-2.iii provides that an institution may provide an
electronic means to opt out, such as a form that can be accessed and
processed at an Internet Web site, provided that the institution
directs the consumer to the specific Web site address where the form
may be located, rather than solely referring to the institution's home
page.
The fourth example provides that an institution may provide an opt-
out notice prior to or at account-opening and require the consumer to
decide whether to opt out as a necessary step to opening the account.
See proposed comment 17(b)-2.iv. For operational reasons, an
institution may not want to set up an account for the consumer with
overdraft services, only to have to implement a consumer's opt-out a
short time later when the consumer opts out within 30 days after
receiving an initial opt-out notice.
Comment is requested whether the Board should require institutions
to provide a toll-free telephone number to ensure that consumers can
easily opt out. Participants in the Board's consumer testing indicated
that even if the institution provided a form with a check-off box for
the consumer's convenience, participants would still prefer to call
their institution to opt out. Comment is also requested regarding
whether the Board should add examples of methods of opting out that
would not satisfy the requirement to provide a reasonable opportunity
to opt out, such as requiring the consumer to write a letter to opt
out.
Conditioning the opt-out. Proposed Sec. 205.17(b)(2) provides that
a financial institution shall not condition a consumer's right to opt
out of the institution's payment of ATM withdrawals and one-time debit
card transactions pursuant to the institution's overdraft service on
the consumer also opting out of the institution's overdraft service
with respect to checks, ACH transactions or other types of transactions
(such as preauthorized EFTs). The Board is concerned that consumers may
be discouraged from exercising their opt-out rights with
[[Page 5219]]
respect to the institution's payment of ATM and debit card overdrafts
if the consumer's opt-out choice would also preclude the consumer from
having overdrafts paid for checks, ACH transactions, and other types of
transactions.\28\
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\28\ In the Board's limited consumer testing, participants
indicated that they would likely not opt out if checks and
preauthorized EFTs would be returned because they used these methods
of payment to pay important household bills, such as rent and
utilities. In contrast, several participants stated that they would
prefer that their institution decline their ATM withdrawals and one-
time debit card transactions if they did not have sufficient funds
in their accounts in order to avoid overdraft fees.
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To prevent circumvention of the opt-out right, the proposed rule
also would prohibit an institution from declining to pay checks, ACH
transactions, or other types of transactions that overdraw the
consumer's account because the consumer has opted out of the
institution's overdraft service for ATM and one-time debit card
transactions. Although the payment of overdrafts is generally at the
discretion of the institution, the Board is concerned that some
institutions may exercise that discretion in a manner that effectively
prevents consumers from exercising a meaningful choice regarding
overdraft services. Thus, the proposed rule generally would require an
institution to apply the same criteria for deciding whether to pay
overdrafts on checks, ACH transactions, or other types of transactions
regardless of the consumer's opt-out choice with respect to ATM and
one-time debit card overdrafts. For example, if an institution's
internal criteria would lead the institution to pay a check overdraft
if the consumer had not opted out of the institution's overdraft
service, it must also apply that same criteria in a consistent manner
in determining to pay the check overdraft if the consumer has opted
out.
This provision is not intended to create a contractual requirement
for the institution to pay overdrafts on checks, ACH transactions, or
other types of transactions. Comment is requested on whether there are
other, more effective means of ensuring that consumers are not
discouraged from opting out of an institution's overdraft service for
ATM withdrawals and one-time debit card transactions.
Notwithstanding the Board's concerns about potential chilling
effects, the Board is also proposing a modified version of proposed
Sec. 205.17(b)(2) that would expressly permit institutions to
condition the consumer's ability to opt out of an institution's
overdraft service for ATM withdrawals and one-time debit card
transactions on the consumer also opting out of the institution's
overdraft service for checks and other transaction types. Under this
alternative approach, an institution could also decline checks, ACH
transactions, and other types of transactions because the consumer has
opted out of the service for ATM withdrawals and one-time debit card
transactions. This alternative would address the potential operational
issues associated with implementing a partial opt-out rule.
The Board solicits comment on the merits of both alternatives. The
Board also seeks comment on other approaches that may sufficiently
balance concerns about the potential chilling effects from institutions
declining to pay overdrafts for checks and other transactions if a
consumer opts out of the payment of overdrafts for ATM withdrawals and
one-time debit card transactions against the operational difficulties
of implementing a partial opt-out rule.
Implementation of opt-out. Some institutions may choose to
implement a consumer's decision to opt out at the account level and
decline to pay overdrafts for ATM withdrawals and one-time debit card
transactions for those consumers that have opted out. Other
institutions for operational reasons may prefer to implement the
consumer's choice at the product level and offer two different
accounts, one account that allows the institution to pay overdrafts for
ATM withdrawals and one-time debit card transactions, and another that
is specifically designed for consumers who opt out (``opt-out''
account). Proposed Sec. 205.17(b)(3) is intended to provide
operational flexibility to financial institutions to implement an opt-
out using either approach.
This provision would not, however, permit an institution to
discourage, or chill, a reasonable consumer's exercise of the right to
opt out. The Board is concerned that institutions may circumvent the
proposed opt-out requirement and discourage consumers from opting out
by, for example, imposing higher fees, paying lower interest rates, or
limiting the features of the opt-out account. Thus, the proposal sets
forth two alternative approaches to address this concern.
Under the first alternative, if the institution is providing an
opt-out account that does not permit the payment of ATM and one-time
debit card overdrafts, the account must have the same terms,
conditions, and features, including interest rates paid and fees
assessed, as an account that permits the payment of such overdrafts,
except for features that limit the institution's payment of such
overdrafts.\29\
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\29\ As discussed in proposed comment 17(b)-1, a consumer's
election to opt out of an institution's overdraft service for ATM
and one-time debit card transactions does not prohibit the
institution from paying overdrafts in such cases. However, the
institution generally would not be permitted to assess a fee or
charge for paying the overdraft.
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Under the second alternative, an institution may alter some of the
terms, conditions, or features of an account that does not permit the
payment of overdrafts on ATM withdrawals and one-time debit card
transactions. For example, the institution may wish to price some
account services differently for the opt-out account. In light of the
Board's concern about possible chilling effects, however, the second
alternative permits an institution to vary the terms, conditions, or
features of the opt-out account, provided that the differences in the
terms, conditions, or features are not so substantial that they would
discourage a reasonable consumer from exercising his or her right to
opt out of the payment of overdrafts on ATM withdrawals and one-time
debit card transactions.\30\ For example, an institution may not
decline to provide ATM and debit card services altogether because the
consumer has opted out of the institution's overdraft service for ATM
withdrawals and one-time debit card transactions. See proposed comment
17(b)(3)-1 to this second alternative.
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\30\ An institution that varies a term, condition, or feature of
an account if a consumer opts out of the institution's overdraft
service would have to comply with the change-in-terms notice
requirements in Sec. 205.8 and 12 CFR 230.5, as applicable.
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The Board requests comment on both approaches. Specifically, the
Board requests comment on whether institutions that currently offer an
opt-out implement an opt-out at the account level (i.e., within the
same type of account) or at the product level (i.e., by placing the
consumer in a separate opt-out account). The Board also requests
comment on whether institutions that currently offer an opt-out vary
any other terms, conditions, or features of a separate opt-out account,
and if so, which terms, conditions, or features are varied and why.
Exceptions to the notice and opt-out requirements. In response to
the May 2008 FTC Act Proposal, several commenters urged the Agencies to
exclude institutions that require consumers to opt into the
institution's overdraft service from the requirement to provide opt-out
notices to consumers. These commenters stated that the Agencies'
proposed rule would impose
[[Page 5220]]
unnecessary costs on such institutions. Moreover, these commenters
stated that consumers would likely be confused by notices informing
them of their right to opt out of a service that they have
affirmatively requested.
In addition, some institutions may have a policy and practice of
declining any ATM withdrawals or debit card transactions when the
institution has a reasonable belief that the consumer does not have
sufficient funds available in his or her account to cover the requested
transaction at the time of authorization. An opt-out requirement would
serve little purpose in these circumstances, and could lead to
potential consumer confusion.
The Board is proposing to create exceptions to the notice and opt-
out requirements in the circumstances described above. Proposed Sec.
205.17(b)(4) contains the two proposed exceptions. First, institutions
that have a policy and practice of declining to pay ATM withdrawals or
one-time debit card transactions for which authorization is requested
if the institution has a reasonable belief that the consumer does not
have sufficient funds available to cover the transaction at the time of
the authorization request would not have to provide consumers with
notice and the right to opt out of overdraft services. Second,
institutions that require the consumer's affirmative consent, or opt-
in, before assessing any fees or charges for paying an ATM or one-time
debit card overdraft also would not be subject to Sec. 205.17.\31\
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\31\ This exception assumes that the Board adopts a rule
requiring consumer opt-out, rather than opt-in, as is proposed under
the second alternative approach discussed below.
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Proposed comment 17(b)(4)-1 states that institutions that qualify
for either of the exceptions in Sec. 205.17(b)(4) would not be
required to provide consumers notice and a reasonable opportunity to
opt out of the institution's payment of overdrafts for ATM withdrawals
and one-time debit card transactions. Proposed comment 17(b)(4)-2
clarifies that an institution is not required to obtain the consumer's
affirmative consent prior to each transaction that may overdraw the
consumer's account to qualify for the opt-in exception in Sec.
205.17(b)(4)(ii).
Exceptions allowing assessment of overdraft fees when a consumer
opts out. In limited circumstances, an institution may be unable to
avoid paying a transaction that would overdraw a consumer's account.
The proposal sets forth two exceptions that would permit an institution
to assess a fee or charge to a consumer's account for paying an
overdraft for an ATM withdrawal or one-time debit card transaction,
even if the consumer has opted out of the institution's overdraft
service.
FTC Act Proposal. The May 2008 FTC Act Proposal would have
permitted fees to be charged for an overdraft in two circumstances,
notwithstanding the consumer's decision to opt out. The first
circumstance was where the purchase amount presented at settlement by a
merchant for a debit card transaction exceeded the amount originally
requested for pre-authorization. The second circumstance was where a
merchant or other payee presented a debit card transaction for payment
by paper-based means, rather than electronically using a card terminal,
and where the payee did not obtain authorization from the card-issuing
financial institution at the time of the transaction.
In the supplementary information accompanying the May 2008 FTC Act
Proposal, the Agencies stated that they had considered, but did not
propose, an exception that would allow an institution to impose an
overdraft fee despite a consumer's opt-out election as long as the
institution did not ``knowingly'' authorize a transaction that resulted
in an overdraft. The Agencies expressed concern that given the
difficulty in determining a consumer's real-time account balance, such
an exception could undercut the protections provided by a consumer's
election to opt out. Nonetheless, the Agencies sought comment on other
circumstances in which an exception may be appropriate to allow an
institution to impose a fee or charge for paying an overdraft even if
the consumer has opted out of the institution's overdraft service.
Industry commenters urged the Board to consider additional
exceptions. Some industry commenters urged the Board to adopt a broad
principles-based exception allowing fees to be charged when overdrafts
are paid despite a consumer's decision to opt out. These commenters
suggested the following principles-based exceptions: if an institution
does not ``knowingly'' authorize the transaction that would overdraw
the consumer's account; or if the institution authorizes a transaction
on the ``good faith belief'' that there are sufficient funds in the
consumer's account.
Other industry commenters listed specific exceptions that the
Agencies should consider. Several commenters urged the Agencies to
allow fees to be assessed if an overdraft was paid when the institution
used a stand-in processor to authorize the transaction because the card
network was temporarily off-line. Industry commenters also stated that
the rule should permit fees to be assessed for ``force-post'' or ``must
pay'' debit card transactions where an institution authorizes payment
at the time of the transaction based on a determination that the
consumer had sufficient funds. Under these circumstances, card network
rules require institutions to honor or pay the transaction even if
intervening transactions (for example, checks that are presented for
payment or ATM withdrawals) causes the consumer to have insufficient
funds when the transaction is presented for settlement. In addition,
industry commenters supported exceptions permitting fees to be charged
where a consumer subsequently has a deposited item returned, and where
the transaction is not submitted for authorization by the merchant.
Reasonable belief exception. Proposed Sec. 205.17(b)(5)(i) would
permit a financial institution to assess an overdraft fee or charge for
paying an ATM withdrawal or one-time debit card transaction,
notwithstanding the consumer's opt-out, if the institution has a
reasonable belief that there are sufficient funds available in the
consumer's account at the time the institution authorizes the
transaction. Thus, an institution could assess an overdraft fee if the
institution has authorized a transaction on the reasonable belief that
there were sufficient funds available to cover the transaction, but
sufficient funds were not, in fact, available at settlement.
This could occur, for instance, where an authorization balance is
not updated in real-time. For example, some institutions use a daily
batch balance method for authorizing transactions and authorization
decisions may be based upon a balance which is not updated during the
day to reflect other account activity that occurred before the
authorization request. In such cases, the institution may authorize a
debit card transaction even though prior transactions that have posted
or otherwise taken place during the day may cause the consumer's
account to have insufficient funds for the debit card transaction. The
proposed exception would permit the institution to pay the debit card
transaction and assess an overdraft fee on the consumer's account
because the institution authorized the transaction on the reasonable
belief that there were sufficient available funds in the account to
cover the transaction.
An institution could also assess an overdraft fee if it authorizes
a
[[Page 5221]]
transaction on the reasonable belief that a previously deposited check
or other item was deposited on good funds, and the item is subsequently
returned, causing the transaction to overdraw the consumer's account.
For example, an institution may provide immediate availability for a
$100 check that a consumer has deposited, and subsequently authorize a
$75 debit card transaction on the belief that the check was written on
sufficient funds. However, if the check is later returned due to
insufficient funds in the check writer's account, the institution could
permissibly charge the account of the consumer that had deposited that
check if the debit card transaction overdraws the account because of
the returned deposit.
The proposed exception would also apply where the settlement amount
exceeds the amount submitted for pre-authorization. For example, a
consumer may use his or her debit card at a pay-at-the-pump fuel
dispenser to purchase $50 of fuel. At the time of authorization, the
gas station may request a pre-authorization hold of $1 to verify the
validity of the card. Assuming the card-issuing financial institution
does not increase the amount of the hold, if the consumer has less than
$50 in his or her account when the transaction is presented for
settlement, the institution would be permitted to pay the transaction
and assess a fee, even if the consumer has opted out of the
institution's overdraft service.
Finally, an institution could assess an overdraft fee or charge in
connection with force-post, or must-pay, debit card transactions that
the institution is required to honor even if, at settlement,
intervening transactions by the consumer have reduced the consumer's
available balance below the authorized amount of the transaction. For
example, a consumer may use his debit card to make a $50 purchase,
which the institution authorizes based on the consumer's available
balance at the time of authorization. However, because settlement may
not occur for some period of time after completion of the transaction,
intervening transactions may post to the consumer's account before the
$50 transaction is presented for settlement. If there are insufficient
funds in the consumer's account at the time of settlement, this
exception would allow the institution to assess a fee to the consumer's
account for paying the overdraft even if the consumer has opted out of
the institution's overdraft service. Proposed comment 17(b)(5)-1 sets
forth examples illustrating this exception.
The proposed exception in Sec. 205.17(b)(5)(i) is not intended to
permit an institution to assess an overdraft fee where a merchant has
not submitted the transaction to the institution for authorization. A
transaction may not be submitted for authorization, for example,
because it is below the floor limits established by card network rules
requiring authorization. Similarly, a merchant may decide not to submit
the transaction for authorization because the small dollar amount of
the transaction does not pose significant payment risk to the merchant.
In either case, the consumer's financial institution would be unable to
decline the transaction if the consumer did not have sufficient funds
in the consumer's account. Nevertheless, the Board believes that
institutions should not be permitted to assess a fee on the consumer's
account in these cases when the consumer has opted out. From the
perspective of a consumer who has opted out, it is reasonable to expect
that the transaction would be declined if he or she did not have
sufficient funds in the account. The merchant's decision not to seek
authorization for small dollar transactions generally is not
transparent to the consumer. In addition, because small-dollar
transactions are those most frequently not submitted for authorization,
prohibiting institutions from assessing overdraft fees in these
circumstances would reduce the possibility that the consumer will incur
overdraft fees that exceed the amount of the overdraft. An institution
may, however, debit the consumer's account for the amount of the
overdraft if permitted to do so under applicable law.
Similarly, the proposal would not permit the institution to assess
a fee if the institution uses a stand-in processor to authorize the
transaction and an overdraft was paid as a result. A stand-in processor
may be used by an institution when the debit card network is
temporarily unavailable. In such cases, the authorization decision may
be made by the processor based on the institution's pre-determined
amount, rather than the consumer's account balance. The Board is
concerned about the appropriateness of permitting an institution to
assess an overdraft fee on the consumer's account in these rare
circumstances because a consumer who has opted out would reasonably
expect the transaction to be declined if he or she did not have
sufficient funds in the account. The institution may, however, debit
the consumer's account for the amount of the overdraft if permitted to
do so under applicable law. Proposed comment 17(b)(5)-2 provides
examples of circumstances where an institution would not be permitted
to assess a fee for paying an overdraft if the consumer has opted out
because a transaction was never submitted to the institution for
authorization.
Paper-based debit card transaction exception. Proposed Sec.
205.17(b)(5)(ii) would permit an institution to assess an overdraft fee
or charge, notwithstanding the consumer's opt-out election, where a
merchant or other payee presents a debit card transaction for payment
by paper-based means, rather than electronically using a card terminal,
and the institution has not previously authorized the transaction. For
example, the merchant may use a card imprinter to take an imprint of
the consumer's card and later submit the sales slip to its acquirer for
payment.
The Board believes this circumstance is analogous to a check
transaction that is later returned for insufficient funds. In this
case, the institution cannot authorize the transaction because of the
way in which the transaction is processed. The consumer should be aware
that the merchant is not obtaining authorization from the financial
institution when the merchant takes an imprint of the consumer's card.
Thus, the consumer could reasonably expect that he or she would be
charged a fee if there are not sufficient available funds to pay for
the transaction. In contrast, where a merchant swipes a consumer's card
to capture the card information, but chooses not to submit the
transaction for authorization, the merchant's decision not to seek
authorization is not transparent to the consumer. Therefore, in the
latter circumstance, the consumer may reasonably expect that if he or
she did not have sufficient funds in his or her account that the
transaction would be declined. Proposed comment 17(b)(5)-3 illustrates
this exception.
C. Timing--Sec. 205.17(c)
The May 2008 FTC Act and Regulation DD Proposals would have
required institutions to provide notice of the opt-out both before the
institution's assessment of any fees or charges for paying an
overdraft, and subsequently after the consumer has incurred any such
fees or charges. The subsequent notice could be given on each periodic
statement reflecting any fees or charges imposed in connection with an
overdraft service, or at least once per statement cycle on any notice
sent promptly after the institution's payment of an overdraft under an
overdraft service. Proposed Sec. 205.17(c)
[[Page 5222]]
sets forth essentially the same requirements under Regulation E.
In response to the May 2008 FTC Act and Regulation DD Proposals,
the majority of industry commenters stated that the rule should only
require notices to be provided at account opening. These commenters
argued that the subsequent notice requirement would impose unnecessary
costs on institutions based on the expense of producing and mailing the
additional notices. In the alternative, industry commenters recommended
that the Board permit institutions to provide a shorter opt-out notice
on periodic statements to limit statement costs.
Consumer groups urged the Board to require institutions to provide
initial opt-out notices at account opening, segregated from other
account documents, to ensure that the notice would be noticeable. In
addition, consumer groups urged the Board to require institutions to
provide subsequent notice of the opt-out right both on the periodic
statement as well as on any notices the institution may send
immediately after an overdraft so that if the consumer failed to read
the opt-out language on the notice sent after an overdraft, it would
also appear on the periodic statement.
Proposed Sec. 205.17(c)(1) would require an institution to provide
an opt-out notice before the institution assesses a fee or charge for
paying an ATM withdrawal or one-time debit card transaction pursuant to
the institution's overdraft service for accounts opened after the
effective date of the final rule. For example, notice may be given at
account opening, either within the deposit account agreement or in a
stand-alone document. Institutions may also choose to provide the opt-
out notice closer to the time the overdraft service is available, so
long as the notice is provided before the institution assesses any fees
or charges for paying an ATM withdrawal or one-time debit card
transaction that overdraws the consumer's account. Proposed Sec.
205.17(c)(1) also provides that the consumer must be given a reasonable
opportunity to exercise the opt-out right after receiving the notice
before such fees or charges may be assessed to the consumer's account.
See proposed comment 17(b)-2 (providing that a consumer has a
reasonable opportunity to opt out if the consumer is given 30 days
after receiving an opt-out notice before an overdraft fee is assessed).
Comment is requested whether institutions should be required to
segregate the opt-out notice from other account disclosures to help
ensure that the notice can be seen by the consumer.
Under the proposal, initial opt-out notices would not have to be
provided to accounts that are opened prior to the effective date of the
final rule. In response to the May 2008 Regulation DD proposal,
consumer groups urged the Board to require institutions to provide
initial opt-out notices to existing accountholders. The Board is
concerned, however, that the costs of mailing initial opt-out notices
to the millions of existing accountholders may exceed any consumer
benefit. As further discussed below, existing consumers will still be
alerted to their right to opt out of the overdraft service because they
will receive an opt-out notice if and when they are assessed a fee or
charge by their financial institution for paying an ATM or debit card
overdraft.
If a consumer has not opted out (in the case of a joint account,
where no joint account holder has opted out) or the consumer has
revoked a prior opt-out election, proposed Sec. 205.17(c)(2) would
require institutions to provide an opt-out notice following the
assessment of any overdraft fees or charges for paying an ATM
withdrawal or one-time debit card transaction. The subsequent notice
requirement would apply to all accounts, including existing accounts as
of the effective date of the final rule.
The requirement to provide an opt-out notice following the
assessment of an overdraft fee or charge is designed to ensure that
consumers are given notice of their right to opt out at a time that may
be most relevant to them, that is, after they have been assessed fees
or other charges for the service. Consumers receiving an opt-out notice
only at account opening may not focus on the significance of the
information at that time because they may assume that they will not
overdraw the account. Or, consumers may not notice the opt-out
information provided with other account-opening documents.
Under the proposal, institutions would have the option of placing
an opt-out notice on the periodic statement reflecting an overdraft fee
or charge assessed to the consumer's account or on any notice sent
promptly after the ATM or debit card overdraft. If the subsequent
notice is included on the periodic statement, proposed Sec.
205.17(c)(2)(i) would require the notice to be placed in close
proximity to any aggregate totals for overdraft and returned item fees
required to be disclosed by 12 CFR 230.11(a), as adopted under the
Board's final rules under Regulation DD, published elsewhere in today's
Federal Register. During consumer testing, a version of the opt-out
form was placed directly below the cost totals associated with
overdrawing the account. This placement enabled consumers to easily
notice the information about their opt-out right.
The requirement to provide subsequent notice of the opt-out
terminates once the consumer has opted out. That is, once the consumer
has opted out, an institution need not provide notice of the opt-out
right following the assessment of any overdraft fees or charges to the
consumer's account (for example, under one of the exceptions in Sec.
205.17(b)(5)). Of course, if the consumer opts out after having
incurred an overdraft fee, the opt-out applies only to subsequent
transactions and the institution could permissibly assess an overdraft
fee without violating the general rule in Sec. 205.17(b). Similarly,
if the consumer has opted out but incurs an overdraft before the opt-
out has been implemented, the institution would be permitted to assess
a fee for paying the overdraft. See also proposed comment 17(g)-1
(stating that a consumer's subsequent opt-out does not require the
institution to waive or reverse any overdraft fees assessed to the
consumer's account prior to the institution's implementation of the
opt-out).
Comment is requested as to whether the rule should permit
institutions to include the opt-out notice on periodic statements in
any cycle in which the consumer has been assessed an overdraft fee or
charge, even if that fee or charge was not incurred in connection with
an ATM withdrawal or a one-time debit card transaction. For example,
the rule could permit institutions to provide an opt-out notice on a
periodic statement if the consumer incurred an overdraft fee in
connection with a check transaction. Comment is also requested as to
whether institutions should be permitted to include the opt-out notice
on the periodic statement if the consumer did not incur any overdraft
fees or charges during the statement cycle. Prohibiting institutions
from including the opt-out notice on each periodic statement where no
fee has been assessed could impose additional costs on institutions
because it would require a dynamic statement process that only permits
the opt-out notice to appear on statements that reflect an overdraft
fee. The Board is concerned, however, that consumers may dismiss the
opt-out notice as boilerplate language if the opt-out notice were
included on every periodic statement.
Proposed comment 17(c)(1)-1 contains guidance regarding the
applicability of the notice requirements
[[Page 5223]]
in Sec. 205.17(c) to existing consumers. As discussed above, the
requirement to provide notice before overdraft fees are assessed would
apply only to accounts opened on or after the effective date of the
final rule, that is, on or after the mandatory compliance date.
However, the requirement to provide subsequent notice of the opt-out
right after the consumer has overdrawn the account and assessed a fee
or charge on the account would apply to all accounts on or after the
effective date of the final rule, including existing accounts.
D. Content and Format--Sec. 205.17(d)
Proposed Sec. 205.17(d) specifies the information that an
institution would be required to include in its opt-out notices. In
general, the proposal includes information similar to what would have
been required under the May 2008 Regulation DD proposal, with certain
revisions to reflect industry and consumer group comments, as well as
the Board's consumer testing.
Two different notices are set forth in the proposal. First, the
proposal contains a detailed notice about the institution's overdraft
service and the consumer's opt-out right that would be provided before
an institution can assess any fees or charges for paying an ATM or one-
time debit card transaction that overdraws the consumer's account.
Second, the proposal includes a shorter notice which could be provided
to the consumer after an overdraft fee has been assessed (for example,
on a periodic statement) that generally informs the consumer of his or
her opt-out right and instructs the consumer to contact the institution
for more information.\32\ Model forms that institutions may use to
comply with the rule are also included in this proposal. See proposed
Model Forms A-9(A) and A-9(B) in Appendix A.
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\32\ Alternatively, after assessing an overdraft fee or charge
to the consumer's account, the institution could provide a notice
containing the same content as the initial notice.
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Initial notice content. Proposed Sec. 205.17(d)(1) sets forth the
information that must be included in the initial opt-out notice
provided to consumers before an institution may assess any fees or
charges for paying an overdraft. Proposed Sec. 205.17(d)(1) would also
require that the initial opt-out notice be in a form substantially
similar to Model Form A-9(A) in Appendix A.
Proposed Sec. 205.17(d)(1)(i) would require the institution to
provide a general description of the financial institution's overdraft
services and the types of EFTs for which an overdraft fee may be
imposed, including ATM withdrawals and one-time debit card
transactions.
Proposed Sec. 205.17(d)(1)(ii) would require the initial notice to
include information about the dollar amount of any fees or charges
assessed on the consumer's account for paying an ATM withdrawal or a
one-time debit card transaction pursuant to the institution's overdraft
service. Some institutions may vary the fee amount that may be imposed
based upon the number of times the consumer has overdrawn his or her
account, the amount of the overdraft, or other factors. Under these
circumstances, the institution must disclose the maximum fee that may
be imposed or a range of fees. Proposed comment 17(d)(1)-1 provides
that the institution may indicate that the consumer may be assessed a
fee ``up to'' the maximum fee or provide the range of fees. Comment is
requested whether additional guidance is necessary if an overdraft fee
is determined by other means, such as a percentage of the overdraft or
the transaction that caused the overdraft.
Proposed Sec. 205.17(d)(1)(iii) would require institutions to
disclose any daily dollar limits on the amount of overdraft fees or
charges that may be assessed. If the institution does not limit the
amount of fees that can be imposed, it must disclose this fact. The May
2008 Regulation DD Proposal contained a similar disclosure, but also
would have required institutions to state any dollar limits on the
amount of fees that may be imposed in a statement period. Upon further
analysis, however, a requirement to state any limits on the amount of
fees that may be imposed in a statement cycle is not included in this
proposal because the Board believes that this information is unlikely
to be relevant or helpful to consumers.
Proposed Sec. 205.17(d)(1)(iv) would require institutions to
inform consumers of the right to opt out of the institution's payment
of overdrafts for ATM and one-time debit card transactions, including
the method(s) that the consumer may use to exercise the opt-out right
and how to contact the institution for more information. See also
proposed Sec. 205.17(b)(1)(ii); comment 17(b)-2. An institution may
also include an explanation regarding the type of transactions that
would not be covered by the opt-out. See proposed comment 17(d)(1)-2,
discussed below.
Several industry commenters in response to the Regulation DD
proposed model forms urged the Board to add language to the forms
stating that the payment of overdrafts is discretionary even if the
consumer does not opt out. In addition, industry commenters urged the
Board to include language stating that the consumer's decision to opt
out would not ensure that overdrafts would not be paid. The proposed
model form does not include specific language regarding the
discretionary nature of overdraft services. However, institutions would
be permitted to include in their opt-out notices language indicating
that the payment of overdrafts is at their discretion. See proposed
comment 17(d)(1)-2.
Proposed Sec. 205.17(d)(1)(v) provides that institutions must
state whether they offer any alternatives for the payment of
overdrafts. Specifically, if an institution offers an overdraft line of
credit or a service that transfers funds from another account of the
consumer held at the institution to cover the overdraft (including an
account held jointly with another consumer), the institution must state
that fact and how to obtain more information about these alternatives.
Institutions may also, but are not required to, list any additional
alternatives they may offer to overdraft services. This provision
incorporates a recommendation from the February 2005 Joint Guidance
that institutions should inform consumers generally of other overdraft
services and credit products, if any, that are available when
describing an overdraft protection program.\33\
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\33\ See 70 FR at 9131.
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In some cases, these alternatives for paying overdrafts may be less
costly than the overdraft service offered by the institution.\34\
Consequently, requiring disclosures regarding these alternatives may
enable consumers to make an informed decision about the merits of the
overdraft service or whether other alternatives would be more
appropriate to their needs. Consumer testing indicated that
participants found information about alternatives helpful. Participants
also generally understood that they would have to qualify for an
overdraft line of credit, without a reference in the notice to any
qualification requirements.
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\34\ The FDIC Study on Bank Overdraft Programs indicated that
the median per usage fee charged by banks for automated overdraft
programs was $27. In contrast, the median per usage fee for linked-
account programs and overdraft lines of credit was $5. FDIC Study at
15, 20 and 23.
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Some institutions may wish to explain to consumers the consequences
of opting out of overdraft services. Proposed comment 17(d)(1)-2
provides that institutions may briefly describe these consequences. For
example, the institution may state that if a consumer opts out of the
institution's overdraft service for ATM withdrawals and one-time debit
card transactions, the
[[Page 5224]]
institution may decline such transactions if the consumer's account
does not have sufficient funds. Institutions that include an
explanation of the consequences of opting out, the type of transactions
that would not covered by the opt-out, or that the payment of
overdrafts is at the institution's discretion, would not violate the
requirement that opt-out notices be substantially similar to Model
Forms A-9(A) or A-9(B), as applicable. But see proposed Sec.
205.17(b)(3) (prohibiting institutions from declining to pay checks,
ACH transactions, or other types of transactions that overdraw a
consumer's account because the consumer opted out of the institution's
overdraft service for ATM withdrawals and one-time debit card
transactions). Comment is requested regarding whether the rule should
permit or require any other information to be included in the overdraft
notice.
Notice following assessment of overdraft fee. Proposed Sec.
205.17(d)(2) sets forth the content requirements for the short form
notice that institutions may provide to consumers following an
institution's assessment of a fee or charge to the consumer's account
for paying an ATM withdrawal or one-time debit card transaction
pursuant to the institution's overdraft service (assuming that the
consumer has not opted out).
The May 2008 Regulation DD Proposal would have required both the
initial notice and subsequent notice of the opt-out right to contain
the same content. Industry commenters urged that the Board to eliminate
the subsequent notice requirement to reduce compliance burdens and
costs. Alternatively, industry commenters urged the Board to permit
institutions to provide an abbreviated notice on periodic statements
that would generally remind consumers of their opt-out right and
instruct them to contact the institution for additional information.
Consumer group commenters supported the Board's proposal to require the
same content on all notices informing consumers of their opt-out right
to ensure that consumers can make an informed decision at the time they
review the opt-out notice.
Upon further analysis, the Board believes that permitting
institutions to provide a short-form opt-out notice may strike an
appropriate balance between including sufficient information to inform
consumers of their options regarding overdraft services and keeping
such notices short, simple, and cost-effective. The Board recognizes
that requiring institutions to provide the same amount of detail in the
subsequent notice as provided in the initial notice could impose
significant statement production and mailing costs. In addition,
participants during consumer testing indicated that it was sufficient
for them to receive all of the required information about the
institution's overdraft service at account opening. Nevertheless, test
participants indicated that it would be helpful to receive a concise
reminder of their right to opt out after they were assessed an
overdraft fee or charge.
Thus, proposed Sec. 205.17(d)(2) provides institutions with the
flexibility to provide either a notice containing the same content as
the initial opt-out notice or an abbreviated notice that is
substantially similar to Model Form A-9(B) in Appendix A. The proposed
abbreviated model notice generally states the consumer's right to opt
out, the availability of alternatives to the institution's overdraft
service, and how to contact the institution for more information.
Model forms. As noted above, proposed Sec. 205.17(d)(1) would
require the initial opt-out notice to be substantially similar to Model
Form A-9(A) in Appendix A. The model form has been revised from the
model form in the May 2008 Regulation DD proposal to reflect the more
limited opt-out right and to highlight near the top of the notice key
information about the consumer's opt-out right, including the
information about alternatives to the institution's overdraft service.
To comply with the subsequent notice requirement, proposed Sec.
205.17(d)(2) permits institutions to use a notice substantially similar
to proposed Model Form A-9(A) or an abbreviated notice substantially
similar to proposed Model Form A-9(B). The Board expects to conduct
additional consumer testing of both proposed model forms following
issuance of this proposal.
E. Additional provisions addressing consumer opt-out right--Sec.
205.17(e)-(h)
Joint accounts. Proposed Sec. 205.17(e) would require a financial
institution to treat an opt-out direction by any joint holder of an
account as an opt-out for the account from all of the joint consumers.
This provision takes into account recognizes the operational
difficulties that would otherwise arise if an institution had to
determine which account holder was responsible for a particular
transaction and then decide whether to authorize that transaction based
on that account holder's opt-out choice. Thus, if one joint consumer
notifies the institution that he or she wishes to opt out of the
institution's overdraft service, the institution must treat the choice
as applying to all overdrafts triggered by an ATM withdrawal or debit
card transaction for that account.
Continuing right to opt-out and time to implement opt-out. Proposed
Sec. 205.17(f) provides that a consumer may opt out of an
institution's overdraft service at any time in the manner described in
the institution's opt-out notice. Proposed Sec. 205.17(g) provides
that institutions must comply with a consumer's opt-out request as soon
as reasonably practicable after the institution receives it. Comment is
requested regarding the need for additional guidance on the ``as soon
as reasonably practicable'' standard. Proposed comment 17(g)-1 would
clarify that an institution is not required to waive or reverse any
overdraft fees or charges assessed to the consumer's account prior to
the institution's implementation of the consumer's opt-out request.
Duration of opt-out. Proposed Sec. 205.17(h) provides that once a
consumer opts out, the opt-out remains in effect until revoked by the
consumer in writing or electronically. Comment is requested on whether
consumers should also be permitted to revoke prior opt-out elections
orally, whether by telephone or in-person.
F. Request for Comment
The Board requests comment on all aspects of the opt-out proposal,
including the various alternatives set forth in the proposal. Comment
is also requested on the costs and benefits of the proposed opt-out
rule to consumers and financial institutions.
2. Second Alternative Approach--Opt-In Requirement
The Board is also soliciting comment on an alternative--an opt-in
approach. An opt-in requirement may be appropriate where the rule is
limited to the payment of overdrafts for ATM withdrawals and one-time
debit card transactions, and would not apply to the payment of
overdrafts for other types of transactions, including checks and ACH
transactions. While a check or ACH transaction that is returned for
insufficient funds may cause the consumer to incur possible merchant
fee(s) for the returned item or late payment penalties, as well as an
insufficient funds fee assessed by the consumer's financial
institution, a declined ATM or debit card transaction does not result
in the same adverse consequences.
Under an opt-out approach, consumers who may prefer to have ATM and
debit card transactions declined if they would result in an
[[Page 5225]]
overdraft may nonetheless incur overdraft fees simply because they fail
to act on the notice.\35\ For such consumers, establishing an opt-in
rule that generally does not allow institutions to impose fees for
paying these overdrafts unless a consumer affirmatively consents to the
overdraft service would enable consumers to avoid fees for a service
that they did not request or were unaware they had. An opt-in rule
would also provide an incentive for institutions to persuade consumers
of the benefits of the overdraft service and enable the consumer to
make an informed choice about the merits of the service before he or
she incurs any overdraft fees.
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\35\ Various studies suggest that consumers are likely to adhere
to the established default rule, that is, theoutcome that would
apply if the consumer takes no action, even if the default rule may
not always be in their best interest. For example, studies of
automatic enrollment in 401(k) savings plans indicate a significant
increase in employee participation if the default rule provides that
a consumer is automatically enrolled in the plan unless they opt
out, instead of requiring employees to affirmatively agree to
participate in the plan. See, e.g., Brigette Madrian and Dennis
Shea, The Power of Suggestion: Inertia in 401(k) Participation and
Savings Behavior, 116 Quarterly Journal of Economics 1149 (2001).
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However, for consumers who rarely, if ever, overdraw their
accounts, the occasional coverage of overdrafts by their institutions
may be a positive benefit.\36\ For such consumers, an opt-in regime may
result in more declined transactions even though the consumer may have
preferred to have the overdraft paid, despite the overdraft fee that
may be charged by the consumer's financial institution. Such a consumer
could be precluded from completing an important transaction when there
are insufficient funds in the consumer's account and the consumer does
not have another means of payment. For example, a consumer may need
emergency funds and attempt to withdraw such funds from an ATM using a
debit card. Or, the consumer may use a debit card to purchase essential
groceries or medicine and have no other means of payment. In such
cases, if the consumer has not opted in, the consumer would not be able
to complete the transaction if the consumer does not have another form
of payment.
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\36\ Available data indicates that the majority of account
holders do not overdraw their accounts in a given year. In its Study
of bank Overdraft Programs, the FDIC reported that almost 75 percent
of consumer accounts for banks that had an automated doverdraft
program had no overdrafts during the 12-month period examined. See
FDIC Study at 76. See also 80 Percent of Consumers Have Not Paid
Overdraft Fees in Past year, Says ABA Survey, Press release,
american Bankers Association (August 30, 2007) (available at http://www.aba.com/Press+Room/083007ABASurvey.htm).
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Thus, while an opt-in approach may benefit some consumers, it may
not be the optimal outcome for others. In addition, an opt-in rule
could result in greater inefficiency for processing systems due to the
potential increase in transactions that are declined. Accordingly,
because there are both benefits and costs associated with the opt-in
and opt-out approaches, the Board is soliciting comment on both
approaches.
A. Definition--Sec. 205.17(a)
The proposed definition of ``overdraft service'' is the same under
both the opt-out and the opt-in approaches, and means a service under
which a financial institution assesses a fee or charge on a consumer's
account held by the institution for paying a transaction (including a
check or other item) when the consumer has insufficient or unavailable
funds in the account. See Sec. 205.17(a). The term would cover
circumstances when an institution assesses a fee for paying an
overdraft pursuant to any automated program or service, whether
promoted or not, or as a non-automated, ad hoc accommodation. The term
does not include an institution's payment of overdrafts pursuant to a
line of credit subject to the Board's Regulation Z, including transfers
from a credit card account, a home equity line of credit, or an
overdraft line of credit. The term also does not include any overdrafts
paid pursuant to a service that transfers funds from another account of
the consumer (including any account that may be jointly held by the
consumer and another person) held at the institution. The Board is not
proposing to include these methods of covering overdrafts in this
proposal because they require the express agreement of the consumer.
B. Opt-In Requirement--Sec. 205.17(b)
General rule and scope of opt-in. Proposed Sec. 205.17(b)(1) sets
forth the general rule prohibiting an account-holding institution from
assessing a fee or charge on a consumer's account held at the
institution for paying an ATM withdrawal or a one-time debit card
transaction pursuant to the institution's overdraft service, unless the
consumer is provided with notice explaining the institution's overdraft
service for such transactions and a reasonable opportunity to
affirmatively consent, or opt in, to the service, and the consumer
affirmatively consents, or opts in, to the service. If the consumer
opts in, the institution must provide written confirmation of the
consumer's consent.
The proposed opt-in would apply to any ATM withdrawal, including
withdrawals made at proprietary or foreign ATMs. The proposed opt-in
would also apply to any one-time debit card transaction, regardless of
whether the consumer uses a debit card at a point-of-sale (for example,
at a merchant or a store), in an online transaction, or in a telephone
transaction.
Proposed comment 17(b)-1 clarifies that a financial institution may
pay overdrafts for ATM withdrawals and one-time debit card transactions
even if a consumer has not affirmatively consented or opted in to the
institution's overdraft service. If an institution pays an overdraft
for these transactions and the consumer has not opted in to the
service, however, the financial institution would generally be
prohibited from assessing a fee or charge for doing so, except as
permitted under the exceptions set forth in proposed Sec.
205.17(b)(5). The rule would not, however, limit the institution's
ability to debit the consumer's account for the amount of the
overdraft, provided that the institution is permitted to do so by
applicable law.
Proposed comment 17(b)-2 clarifies that Sec. 205.17 does not
require an institution to pay or honor any overdrafts on an ATM
withdrawal or a one-time debit card transaction even if a consumer
affirmatively consents to the institution's overdraft service for such
transactions.
Similar to the opt-out approach, the proposed rule requiring
consumer opt-in would not apply to other types of transactions, such as
checks, ACH transactions or preauthorized EFTs. In many of these cases,
the institution would assess the same fee amount whether the item is
paid or returned, but payment pursuant to the overdraft service would
enable the consumer to avoid other adverse consequences, such as
merchant returned item fees. In contrast, if a consumer does not opt in
to the payment of overdrafts for ATM withdrawals or one-time debit card
transactions, the transaction would generally be declined and the
consumer would not be assessed any fees either by the financial
institution or the merchant.
To enable consumers to make an informed choice about an
institution's overdraft service, proposed Sec. 205.17(b)(1)(i) would
require the institution to provide a consumer a notice explaining the
institution's overdraft service for ATM withdrawals and one-time debit
card transactions that is segregated from everything else,
[[Page 5226]]
including other account disclosures. In addition, the proposal would
provide that the notice may not contain any information that is not
specified or otherwise permitted by this section (see proposed Sec.
205.17(d) and comment 17(d)-2, discussed below). The separate notice
requirement is designed to ensure that this information is not buried
within other account documents and overlooked by the consumer.
Otherwise, institutions could include information about the overdraft
service in preprinted language in an account-opening disclosure, and a
consumer might inadvertently consent to the institution's overdraft
service merely by signing a signature card or other account-opening
document acknowledging acceptance of the account terms.
Reasonable opportunity to opt in. Proposed Sec. 205.17(b)(1)(ii)
requires an institution to provide a reasonable opportunity for the
consumer to affirmatively consent to the institution's overdraft
service for ATM withdrawals and one-time debit card transactions.
Proposed comment 17(b)-3 contains examples to illustrate what would
constitute a reasonable opportunity to affirmatively consent, including
the provision of reasonable method(s) to provide affirmative consent.
Proposed comment 17(b)-3.i contains an example of a reasonable
method of opting in when the institution provides a written form that
the consumer can fill out and mail to opt in. See proposed Sec.
205.17(b)(1)(i) and proposed Model Form A-9 in Appendix A, discussed
below. The institution may not, however, obtain a consumer's
affirmative consent in writing by including preprinted language about
the overdraft service in an account disclosure provided with a
signature card or contract that the consumer must sign to open the
account and that acknowledges the consumer's acceptance of the account
terms. Nor may an institution obtain a consumer's affirmative consent
by providing a signature card that contains a pre-selected check box
indicating that the consumer is requesting the service.
Proposed comment 17(b)-3.ii illustrates that an institution could
also provide a toll-free telephone number that the consumer may call to
provide affirmative consent. Proposed 17(b)-3.iii illustrates that an
institution may provide an electronic means for the consumer to
affirmatively consent, such as a form that can be accessed and
processed at an Internet Web site, provided that the institution
directs the consumer to the specific Web site address where the form is
located, rather than solely referring to the institution's home page.
Proposed comment 205.17(b)-4 states that an institution may provide
an opt-in notice prior to or at account opening and require the
consumer to decide whether to opt in to the payment of ATM withdrawals
or one-time debit card transactions pursuant to the institution's
overdraft service as a necessary step to opening an account. For
example, the institution could require the consumer prior to or at
account opening to choose between an account that does not permit the
payment of ATM withdrawals or one-time debit card transactions pursuant
to the institution's overdraft service or an account that permits the
payment of such overdrafts.
Written confirmation. Proposed Sec. 205.17(b)(1)(iii) requires
that upon obtaining the consumer's affirmative consent to the
institution's overdraft service, the institution must provide the
consumer with written confirmation documenting the consumer's choice,
to help ensure that the consumer intended to opt in to the service. An
institution could comply with the proposed written confirmation
requirement, for example, by providing a copy of a consumer's completed
opt-in form or sending a letter to the consumer acknowledging that the
consumer has elected to opt in to the institution's service if the
consumer has opted out by telephone or in person.
Conditioning payment of overdrafts on consumer's affirmative
consent. Proposed Sec. 205.17(b)(2) of the opt-in approach provides
that an institution shall not condition the payment of any overdrafts
for checks, ACH transactions, or other types of transactions on the
consumer also affirmatively consenting to the institution's payment of
overdrafts for ATM withdrawals and one-time debit card transactions.
The Board is concerned that some institutions may seek to tie the
ability of a consumer to have overdrafts paid for checks, ACH
transactions, and other types of transactions to the consumer
affirmatively consenting to the institution's payment of ATM and debit
card overdrafts. As discussed above, many consumers may prefer that
their account-holding financial institution cover overdrafts by check.
These consumers may elect to opt in to an institution's overdraft
service if not doing so would mean that checks would be returned
unpaid.
To prevent circumvention of the opt-out right, the proposed rule
also would prohibit an institution from declining to pay checks, ACH
transactions, or other types of transactions because the consumer has
not also affirmatively consented to the institution's overdraft service
for ATM and one-time debit card transactions. The proposed provision is
designed to ensure that institutions do not exercise their discretion
regarding the payment of overdrafts in such a manner as to prevent
consumers from exercising a meaningful choice regarding overdraft
services. Thus, the proposed rule generally would require an
institution to apply the same criteria for deciding when to pay
overdrafts for checks, ACH transactions, and other types of
transactions, whether or not the consumer has affirmatively consented
to the institution's overdraft service with respect to ATM and one-time
debit card overdrafts. For example, if an institution's internal
criteria would lead the institution to pay a check overdraft if the
consumer had affirmatively consented to the institution's overdraft
service, it must also apply that same criteria in a consistent manner
in determining to pay the check overdraft if the consumer has not opted
in. This provision is not intended to create a contractual requirement
for the institution to pay overdrafts on checks, ACH transactions, or
other types of transactions in any circumstances. See also proposed
comment 17(b)-2. Comment is requested on whether there are other, more
effective means of ensuring that consumers are not effectively
compelled to opt in to an institution's overdraft service for ATM
withdrawals and one-time debit card transactions.
Notwithstanding the Board's concerns about potential consumer
compulsion to opt in, the Board is proposing a modified version of
proposed Sec. 205.17(b)(2) that would expressly permit institutions to
condition the payment of any overdrafts for checks, ACH transactions,
and other types of transactions on the consumer also affirmatively
consenting to the institution's payment of ATM withdrawals and one-time
debit card transactions pursuant to the institution's overdraft
service. Under the alternative approach, an institution could also
decline checks, ACH transactions, and other types of transactions
because the consumer has not affirmatively consented to the
institution's overdraft service for ATM withdrawals and one-time debit
card transactions. See proposed Sec. 205.17(b)(2). This alternative
would address the potential operational issues associated with
implementing an opt-in that would apply to ATM withdrawals and one-time
debit card transactions, but not to other types of transactions.
[[Page 5227]]
The Board solicits comment on the merits of both alternatives. The
Board also seeks comment on other approaches that may sufficiently
balance concerns about consumers being effectively compelled to opt in
to an institution's overdraft service for ATM withdrawals and one-time
debit card transactions in order to have overdrafts paid for checks and
other transactions against the operational difficulties of implementing
a rule that enables consumers to decide whether to have overdrafts paid
for some but not all types of transactions.
Implementation of opt-in. Some institutions may choose to implement
a consumer's affirmative consent at the account level and pay
overdrafts for ATM withdrawals and one-time debit card transactions for
those consumers that have opted in. Other institutions for operational
reasons may prefer to implement the consumer's choice at the product
level and open different accounts for consumers depending on whether
the consumer has provided affirmative consent to the institution's
overdraft service for ATM withdrawals and one-time debit card
transactions (``opt-in'' account) or not (``no opt-in'' account).
Proposed Sec. 205.17(b)(3) is intended to provide operational
flexibility to institutions to implement a consumer's affirmative
consent using either approach.
The Board is concerned, however, that institutions could circumvent
the proposed opt-in right and effectively compel the consumer to
affirmatively consent to the institution's payment of overdrafts for
ATM withdrawals and one-time debit card transactions by providing a
``no opt-in'' account with significantly less favorable terms,
conditions, or features compared to the opt-in account. Thus, the
proposal sets forth two alternative approaches to address this concern.
Under the first alternative, an institution must provide to
consumers who do not affirmatively consent to the institution's
overdraft service for ATM withdrawals and one-time debit card
transactions an account with the same terms, conditions, and features,
including interest rates paid and fees assessed, as it provides to
consumers who do affirmatively consent, except for the features that
limit the institution's payment of such overdrafts.
Under the second alternative, an institution may wish to alter some
of the terms, conditions, or features of the account that does not
permit the payment of overdrafts on ATM withdrawals and one-time debit
card transactions. For example, the institution may wish to price some
account services differently for the ``no opt-in'' account. In light of
the Board's concern about possible chilling effects, however, the
second alternative permits an institution to vary the terms,
conditions, or features of the ``no opt-in'' account only if the
differences in the terms, conditions, or features are not so
substantial as to effectively compel a reasonable consumer to
affirmatively consent to the institution's payment of overdrafts on ATM
withdrawals and one-time debit card transactions. For example, an
institution may not decline to provide ATM and debit card services
altogether if the consumer has not affirmatively consented to the
institution's overdraft service for ATM withdrawals and one-time debit
card transactions. See proposed comment 17(b)(3)-1 of this second
alternative.
The Board requests comment on both approaches. For institutions
that require consumers to opt in to the institution's overdraft
service, the Board requests comment on whether the consumer's choice is
implemented at the account level (i.e., within the same type of
account) or at the product level (i.e., by placing the consumer in a
different type of account). The Board also requests comment on whether
institutions that currently require an opt-in for overdraft services,
or that offer accounts to certain subsets of consumers (such as high-
risk consumers) that limit the consumer's ability to overdraw the
account, vary any other terms, conditions, or features of the account
depending upon whether the consumer opts in or not. If so, comment is
solicited on which terms, conditions or features are varied and why.
Exception to the notice and opt-in requirements. Proposed Sec.
205.17(b)(4) creates an exception to the proposed notice and opt-in
requirement. Specifically, no notice would be required (nor affirmative
consent obtained) when the institution has a policy and practice of
declining to pay any ATM withdrawals or one-time debit card
transactions for which authorization is requested if the institution
has a reasonable belief that if the consumer's account does not have
sufficient funds available to cover the transaction at the time of the
authorization request.
Exceptions to the fee prohibition. Proposed Sec. 205.17(b)(5)
contains two exceptions to the fee prohibition that are identical to
the exceptions proposed under the opt-out approach. These exceptions
would allow institutions to assess a fee or charge for paying an ATM or
debit card overdraft in certain circumstances even if the consumer has
not affirmatively consented to the overdraft service.
Under the first exception, an institution would be permitted to
assess an overdraft fee or charge for paying an ATM withdrawal or one-
time debit card transaction, notwithstanding the absence of the
consumer's affirmative consent, if the institution has a reasonable
belief that there are sufficient funds available in the consumer's
account at the time it authorizes a transaction. See proposed Sec.
205.17(b)(5)(i). Under the second exception, an institution would be
permitted to assess an overdraft fee or charge, notwithstanding the
absence of the consumer's affirmative consent, where a merchant or
payee presents a debit card transaction for payment by paper-based
means, rather than electronically using a card terminal, and the
institution has not previously authorized the transaction. See proposed
Sec. 205.17(b)(5)(ii). These exceptions, and the reasons for proposing
them, are discussed in greater detail in the section regarding the
proposed opt-out approach. Proposed comments 17(b)(5)-1 through -3
contain examples illustrating the proposed exceptions for the opt-in
approach.
C. Timing--Sec. 205.17(c)
Proposed Sec. 205.17(c) would generally require that a financial
institution provide an opt-in notice to the consumer about the
institution's overdraft service before the institution assesses any fee
or charge on the consumer's account for paying an ATM withdrawal or
one-time debit card transaction pursuant to the institution's overdraft
service. However, once a consumer has opted in, financial institutions
would not be required to provide a notice regarding the institution's
overdraft service following the assessment of any overdraft fees or
charges to the consumer's account. The Board believes such a
requirement is not necessary when the consumer has affirmatively
elected to enroll in the overdraft service.
The proposed provision would apply differently depending on when
the account is opened. For new accounts opened on or after the
effective date of the final rule, the opt-in notice must be provided
prior to the assessment of any fee or charge on the consumer's account
for paying an ATM withdrawal or one-time debit card transaction
pursuant to the institution's overdraft service.
In contrast to the opt-out approach, the opt-in rule would not
require institutions to provide a notice after a consumer has been
assessed an overdraft fee or charge. Thus, existing
[[Page 5228]]
consumers may be unaware of their right to determine whether to enroll
in their institution's overdraft service for ATM withdrawals and one-
time debit card transactions, absent being given an ``initial'' opt-in
notice. Accordingly, the proposed opt-in approach would require
institutions to provide notices regarding their opt-in right to
existing customers.
For existing accounts, that is, accounts opened prior to the
effective date of the final rule, an institution may elect to provide
an opt-in notice to all of its account holders on or with the first
periodic statement sent after the effective date of the final rule.
Alternatively, the institution may provide an opt-out notice to
existing consumers following the first assessment of an overdraft fee
or charge to the consumer's account on or after the effective date of
the final rule.
The notice requirements for existing accounts would apply only for
accounts for which overdraft services are provided as of the effective
date of the final rule. Thus, institutions would not be required to
provide notices to consumers that have previously opted out of, or, for
those institutions that require an opt-in, to consumers that have not
affirmatively consented to, the service. Institutions that elect to
provide notices to consumers prior to the effective date of the final
rule also would not be required to provide new notices once the rule
becomes effective for consumers that have not affirmatively consented
to the service (provided that the consumer was given a reasonable
amount of time to opt in).
As discussed below under proposed Sec. 205.17(g), if an existing
consumer has not opted in within 60 days of receiving the opt-in
notice, the institution must cease assessing any fees or charges to
existing consumer accounts for paying an ATM withdrawal or one-time
debit card transaction pursuant to the institution's overdraft service,
except for fees that are permitted by the exceptions in Sec.
205.17(b)(5).
The Board solicits comment on whether another approach may be more
appropriate for existing customers. Specifically, the Board requests
comment on whether it should adopt a hybrid approach consisting of an
opt-out rule for existing accounts and an opt-in rule for new accounts.
Under this approach, an institution could continue to pay overdrafts
(and assess fees) for ATM withdrawals and one-time debit card
transactions for existing consumers who have not opted out, but would
be prohibited from paying such overdrafts and assessing an overdraft
fee or charge on new consumers who have not affirmatively consented to
the institution's overdraft service.
D. Content and Format--Sec. 205.17(d)
Proposed Sec. 205.17(d) sets forth content requirements for the
notice that must be provided to the consumer before the consumer may
affirmatively consent to the institution's overdraft service. In
addition, proposed Sec. 205.17(d) requires that the opt-in notice be
in a form substantially similar to Model Form A-9 in Appendix A. The
content requirements are discussed in greater detail in the section
regarding the proposed opt-out approach. However, the Board has
modified these content requirements (and the accompanying proposed
commentary) from the proposed opt-out approach to reflect the
requirement to obtain the consumer's affirmative consent. See proposed
Sec. 205.17(d) and proposed comments 17(d)-1 and -2.
The Board expects to conduct consumer testing of this proposed
model form (and the proposed model forms for the opt-out) following
issuance of this proposal.
E. Additional Provisions Addressing Consumer Opt-in Right--Sec.
205.17(e)-(g)
Joint accounts. Proposed Sec. 205.17(e) requires a financial
institution to treat affirmative consent provided by any joint consumer
of an account as affirmative consent for the account from all of the
joint consumers. As also discussed above with regard to the opt-out
approach, this provision takes into account the operational
difficulties that would otherwise arise if an institution had to
determine which account holder was responsible for a particular
transaction and then make an authorization decision based on whether
the consumer had affirmatively consented to the institution's overdraft
service. Thus, if one joint consumer opts in to the institution's
overdraft service, the institution must treat the consent as applying
to all overdrafts triggered by an ATM withdrawal or debit card
transaction for that account.
Continuing right to opt-in. Proposed Sec. 205.17(f) provides that
a consumer may affirmatively consent to a financial institution's
overdraft service at any time in the manner described in the opt-in
notice. This provision allows consumers to decide later in the account
relationship that they wish to have overdrafts paid for ATM withdrawals
and one-time debit card transactions.
Time to comply for existing customers. As discussed above under
Sec. 205.17(c), institutions would have the option of implementing the
opt-in requirement for existing accounts either by providing a notice
to all existing accounts on or with the first periodic statement sent
on or after the effective date of the final rule. Alternatively, an
institution could provide an opt-in notice to existing accounts after
the first assessment of an overdraft fee or charge for an ATM or one-
time debit card overdraft on or after the effective date of the final
rule. In either case, under proposed Sec. 205.17(g), if a consumer has
not affirmatively consented to the service within 60 days after the
institution sends the opt-in notice, the institution shall cease
assessing any fees or charges on the consumer's account for paying such
overdrafts, except if permitted by the exceptions in Sec.
205.17(b)(5).
The 60-day period is intended to provide sufficient time for the
consumer to respond to the opt-in notice, and for the institution to
implement the consumer's decision. During this time, an institution may
continue to assess overdraft fees for paying ATM withdrawals and one-
time debit card transactions. Comment is requested on the 60-day
period, and whether the period should be longer or shorter.
Duration of opt-in. Proposed Sec. 205.17(h) provides that a
consumer's affirmative consent to the institution's overdraft service
is generally effective until revoked by the consumer. An institution
may also terminate the consumer's access to the overdraft service at
its discretion, for example, if the institution determines that there
is excessive usage of the service by the consumer.
F. Request for Comment
The Board requests comment on all aspects of the opt-in proposal,
including the various alternatives set forth in the proposal. Comment
is requested on the costs and benefits of the proposed opt-in rule to
consumers and financial institutions. Comment is also solicited on
which approach (opt-out or opt-in) may be optimal for both consumers,
and whether one approach may present unique operational or cost issues
that would not be associated with the other approach.
Section 205.19 Debit Holds
Background
When a consumer uses a debit card to make a purchase, a block, or
hold, may be placed on funds in the consumer's account to ensure that
the consumer has sufficient funds in his or her account when the
transaction is presented for settlement. This type of block or hold is
commonly referred to as a ``debit hold.'' During the time the debit
hold remains
[[Page 5229]]
in place, which may be up to three days after authorization, those
funds may be unavailable for the consumer's use in other transactions.
In some cases, the actual purchase amount is not known at the time
the transaction is authorized, such as when a consumer uses a debit
card to pay for gas at the pump, check into a hotel room, or pay for a
meal at a restaurant. Consequently, the debit hold may be placed for an
estimated amount that exceeds the actual transaction amount. The
consumer may engage in subsequent transactions reasonably assuming that
his or her account has only been debited for the actual transaction
amount. Or, prior transactions may be presented for settlement after
the hold is placed. Because of the excess hold, however, the consumer
may incur overdraft fees for those transactions.
For example, a consumer with $100 in a deposit account may swipe
his or her debit card at a pay-at-the-pump dispenser to purchase $20
worth of fuel. When this transaction is authorized, the consumer's
financial institution may increase the merchant's $1 pre-authorization
hold \37\ to $75 to cover the maximum amount the institution guarantees
to pay the gas station under card network rules.\38\ Because the final
$20 transaction amount is not settled immediately, the $75 debit hold
amount may remain in place for some period of time, up to three days
for signature-based debit card transactions.\39\ However, the consumer
would be unaware that $55 more than the purchase amount has been
temporarily made unavailable for use until the merchant presents the
transaction for settlement. Thus, prior to settlement of the
transaction, the consumer may make subsequent purchases assuming that
his or her account has been debited by only $20, and inadvertently
spend more than the available amount in his or her account. As a
result, the consumer could be charged an overdraft fee even though the
account contained sufficient funds to pay for all of the consumer's
purchases.
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\37\ Pre-authorization describes the dollar amount of funds that
are held on a consumer's account when a card is swiped to initiate a
transaction.
\38\ In a signature-based debit card transaction at a pay-at-
the-pump dispenser, the merchant typically obtains a $1 pre-
authorization to activate the pump. The card issuer may increase
this amount to the maximum amount guaranteed to the merchant
(currently $75 in most cases under card network rules) to protect
itself against risk of loss. In contrast, in a PIN-based debit card
transaction where the cardholder enters his or her personal
identification number (PIN) to complete the transaction, the
merchant obtains pre-authorization for an estimated transaction
amount, which under current card network rules generally may not
exceed $75.
\39\ Unlike signature-based debit card transactions, PIN-based
debit card transactions that take place before the processing cut-
off time for that day will typically settle soon after completion of
the transaction.
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May 2008 FTC Act Proposal. The Agencies proposed in the May 2008
FTC Act Proposal to prohibit institutions from assessing an overdraft
fee where the overdraft would not have occurred but for the placement
of an excess debit hold. While consumer groups endorsed the Agencies'
proposal, industry commenters expressed strong opposition, stating that
it would present significant operational difficulties.
Several industry commenters asserted the rule would require banks
to monitor retroactively, and manually adjust, transactions and fees
that have posted to the account. A few of these commenters believed
that the proposal would have a disproportionate cost impact on smaller
institutions that do not have the systems or staff to handle the
research and manual adjustments necessary to correct the consumer's
account. Alternatively, institutions would have to stop placing debit
holds altogether which, industry commenters argued, would raise
potential safety and soundness concerns. Nonetheless, a few financial
institution commenters stated that they either do not currently place
holds on authorizations from gas stations, hotels, or rental car
companies, or do not increase the $1 merchant pre-authorization amount
in connection with fuel purchases.
Rather than adopting a substantive FTC Act rule, industry
commenters urged the Agencies to use other existing regulatory
authority. For example, industry commenters recommended that the Board
exercise its authority under Regulation E to require merchants to
disclose at the point-of-sale when holds may be placed on debit card
transactions. Many industry commenters also stated that the Agencies'
concerns were already largely addressed by recent card network
initiatives intended to reduce the length of the hold time for debit
holds. For example, one payment card network has recently implemented
changes intended to reduce the hold times for pay-at-the-pump fuel
dispensers. Under these new rules, fuel merchants would be encouraged
to transmit a transaction for settlement within two hours of
authorization. If the merchant does so, the card-issuing institution
will be required to drop the hold within the two-hour time frame, thus
reducing the hold times to a matter of hours, instead of days.
Discussion
A. General Rule--Sec. 205.19(a)
After reviewing the comments received on the May 2008 FTC Act
Proposal and based on its own analysis, the Board is proposing to
address debit holds under the EFTA and Regulation E. Proposed Sec.
205.19(a) generally would prohibit financial institutions from
assessing a fee or charge for paying an overdraft pursuant to the
institution's overdraft service if the overdraft would not have
occurred but for a debit hold placed in a consumer's account if the
amount of the hold exceeds the actual transaction amount. The proposed
rule would not apply to transactions in which the amount of the hold
equals or is less than the actual amount of the transaction. Similarly,
the proposed rule would not apply if the actual amount of the
transaction would also have caused the overdraft to occur.
Under the proposal, the scope of the debit hold provision would be
limited to debit card transactions in which the actual transaction
amount generally can be determined by the merchant or other payee
within a short period of time after the institution authorizes the
transaction. For example, in pay-at-the-pump fuel purchases, the actual
transaction amount can be calculated once the consumer has finished
pumping fuel. Similarly, when a consumer uses a debit card to pay a
restaurant bill, the actual transaction amount can be determined once
the consumer has signed the receipt and added a service tip. According
to data submitted by one card network on the Board's May 2008 FTC Act
Proposal, restaurant and fuel purchases comprise over 95 percent of all
transactions in which the settlement amount typically does not match
the authorization amount.\40\
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\40\ See Visa comment letter at 8.
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The proposed rule would not apply, however, to debit holds in other
retail environments where the actual transaction amount generally
cannot be determined for a considerable period of time after the
merchant has submitted a transaction for authorization. For example,
when a consumer provides his or her debit card at check-in for a multi-
night hotel stay, the transaction will not be submitted for settlement
until the end of the consumer's stay. In this case, a hold may be
placed on funds in the consumer's account at check-in, but will not be
released until the consumer completes his or her stay (or when the hold
is required to be released under card network rules, whichever comes
first). Similarly, if a consumer uses his
[[Page 5230]]
or her debit card to reserve or pick up a rental car, the actual amount
of the transaction will not be known until the car is returned. In
these circumstances, the general rule would not apply because the
actual amount of the transaction generally cannot be determined within
a short period of time after. It seems impracticable to craft a rule in
such cases because it would be impossible to determine a reasonable
hold period in all such circumstances.
Moreover, the Board believes that overdraft fees are less likely to
occur for hotel and car rental transactions because consumers tend to
use credit cards for these transactions. In addition, data provided by
one commenter indicates that even where debit cards are used in hotel
and car rental transactions, they comprise a very small proportion of
transactions overall involving a debit hold. The Board has received few
complaints regarding overdraft fees incurred as a result of debit holds
placed in connection with hotel and car rental transactions.
For these reasons, the Board is proposing a targeted rule for debit
holds that would apply only in circumstances when the actual
transaction amount can be determined within a short period of time
after the institution authorizes the transaction. As stated above, the
proposed rule would appear to cover approximately 95 percent of all
transactions (pay-at-the-pump and restaurants) in which the actual
transaction amount and the authorization amount do not match. Thus, the
proposed rule would cover the areas of greatest concern regarding
overdraft fees incurred because of a debit hold. Proposed comment
19(a)-1 provides examples of transactions covered by the proposed rule.
The prohibition against assessing an overdraft fee in connection
with a debit hold applies only if the overdraft is caused solely by the
existence of the hold. Proposed comment 19(a)-2 provides that an
institution may assess an overdraft fee or charge if the consumer's
account is overdrawn for other reasons. These reasons may include prior
debit card transactions that may have been authorized but not yet
presented for settlement, or when a deposited check in the consumer's
account is returned.
Proposed comment 19(a)-3 clarifies that a financial institution
does not violate the prohibition in Sec. 205.19 if it promptly waives
or refunds any overdraft fees assessed on a consumer's account caused
by a debit hold placed on funds in the consumer's account that is in
excess of the actual amount of the transaction. However, the
institution may not require the consumer to provide notice or other
information that an overdraft fee was caused by a debit hold on funds
in the consumer's account before waiving or refunding the fee. Proposed
comment 19(a)-3 includes an example illustrating this provision.
Proposed comments 19(a)-4 through -7 set forth examples to
illustrate application of the rule.
B. Safe Harbor--Sec. 205.19(b)
The proposed rule provides a safe harbor that would allow a
financial institution to assess a fee or charge for paying an overdraft
that is caused solely by a debit hold in certain cases. Specifically,
proposed Sec. 205.19(b) permits an institution to assess an overdraft
fee or charge to the consumer's account in connection with a debit hold
if the institution has adopted procedures and practices designed to
remove the hold within a reasonable period of time. This safe harbor is
intended to mitigate the potential compliance burden on institutions.
Thus, an institution would not be required to recalculate each
transaction which may appear to be overdrawn due to an excess hold to
determine whether an overdraft fee was properly assessed if the hold is
removed within a reasonable period of time following authorization.
Proposed Sec. 205.19(b) provides that an institution has procedures
and practices designed to release the hold within a reasonable period
of time if the institution releases debit holds for the transactions
covered by the proposed rule within two hours of authorization.\41\
Proposed comment 19(b)-1 illustrates the safe harbor.
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\41\ Where an institution has released a debit hold before the
transaction is presented for payment in order to take advantage of
the safe harbor, it would be permitted to assess an overdraft fee if
the actual transaction amount presented for settlement causes the
consumer to overdraw his or her account.
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The two-hour time period for removing a hold is consistent with
industry efforts to minimize current hold times in certain retail
environments. As discussed above, one payment card network has recently
implemented changes designed to significantly reduce the hold times at
pay-at-the-pump fuel dispensers. This industry initiative, however, is
voluntary and, by itself, may not be sufficient to protect consumers
from being assessed overdraft fees caused by an excess hold. In
addition, this initiative is currently limited to pay-at-the-pump debit
card transactions, and would not apply in other circumstances in which
the actual transaction amount can be determined within a short period
of time after authorization was obtained, such as at restaurants.
Nonetheless, the introduction of a two-hour hold period, even on a
voluntary basis, suggests that such a standard is feasible.
The Board recognizes that the proposed safe harbor in Sec.
205.19(b) would not prevent in all cases the assessment of overdraft
fees caused by a debit hold even though the consumer had sufficient
funds in the account. For example, a consumer may use his or her debit
card to purchase groceries an hour after completing a fuel purchase.
The proposed safe harbor would not preclude the consumer's financial
institution from assessing an overdraft fee or charge for the grocery
purchase where an excess hold placed in connection with the fuel
purchase causes the consumer to have insufficient funds at the time of
authorization for the grocery purchase. (However, if the consumer has
opted out under Sec. 205.17 (or not opted in), the institution would
not be permitted to assess a fee or charge for paying the debit card
overdraft. See proposed comment 19(b)-2, discussed below.) The Board
nonetheless believes that in the vast majority of cases, consumers
would not be assessed a fee for an overdraft that was caused by an
excess debit hold in light of the short time period (2 hours) that the
hold would be in place before it would be released by institutions that
follow the safe harbor. However, the Board solicits comment on this
approach.
Proposed comment 19(b)-2 illustrates the interaction between the
debit hold provision in Sec. 205.19 and the opt-out (or opt-in)
requirements in Sec. 205.17. Specifically, if a consumer is not
enrolled in the institution's overdraft service for ATM withdrawals and
one-time debit card transactions (because the consumer has opted out or
not opted in), the institution may not assess any overdraft fees
incurred in connection with a debit hold even if the institution
otherwise is not prohibited from doing so by the debit hold provision.
For example, assume a consumer has $100 in his or her deposit account
and has opted out of the institution's overdraft service. The consumer
uses his or her debit card to purchase $30 of fuel at a pay-at-the-pump
fuel dispenser. At the time of authorization, the financial institution
increased the gas station's $1 preauthorization hold to $75. One hour
after completing the fuel purchase, the consumer makes a $60 debit card
purchase at a grocery store. Notwithstanding the fact that the consumer
made the purchase within the two-hour safe harbor, the institution
would not be permitted to assess an
[[Page 5231]]
overdraft fee because the consumer had opted out of (or not opted in
to) the institution's overdraft service.
C. Other Potential Approaches
The proposal does not require merchants to disclose debit holds as
a substitute for a substantive rule, as some industry commenters had
suggested. The Board does not believe that a disclosure-based approach
would be effective in pay-at-the-pump and restaurant transactions. For
example, a notice posted at a gas pump or in a restaurant is unlikely
to be noticed by the consumer. Even if the consumer were to notice a
point-of-sale disclosure about debit holds, the consumer would not know
how long the hold will remain in place. Moreover, for signature-based
pay-at-the-pump debit card purchases, the merchant does not know
whether the financial institution will increase the $1 pre-
authorization hold. Therefore, merchant disclosures at point-of-sale
regarding debit holds do not appear to provide a workable solution in
most circumstances.
D. Request for Comment
The Board requests comment on all aspects of the debit hold
proposal, including whether additional guidance is necessary regarding
transactions in which the actual purchase amount is determined within
``a short period of time.'' Comment is also requested on the costs and
benefits of the proposed rule to consumers and financial institutions.
Comment is requested on the appropriateness of the proposed safe
harbor, including whether other time periods may be more appropriate in
light of operational constraints at smaller institutions which may only
receive authorization and settlement information periodically during
the day.
In addition, comment is requested whether the Board should exercise
its authority under Section 904 of the EFTA to also require merchants
(or their acquirers or processors) to promptly submit transactions
covered by this rule for settlement. Specifically, the Board seeks
comment on whether the final rule should also require merchants (or
their acquirers or processors) to submit such transactions for
settlement within the safe harbor period.
VI. Initial Regulatory Flexibility Analysis
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA)
generally requires an agency to perform an assessment of the impact a
rule is expected to have on small entities.
However, under section 605(b) of the RFA, 5 U.S.C. 605(b), the
regulatory flexibility analysis otherwise required under section 604 of
the RFA is not required if an agency certifies, along with a statement
providing the factual basis for such certification, that the rule will
not have a significant economic impact on a substantial number of small
entities. Based on its analysis and for the reasons stated below, the
Board believes that this proposed rule is likely to have a significant
economic impact on a substantial number of small entities. A final
regulatory flexibility analysis will be conducted after consideration
of comments received during the public comment period.
1. Statement of the need for, and objectives of, the proposed rule.
The Board is proposing revisions to Regulation E to prohibit financial
institutions that hold a consumer's account from assessing a fee or
charge for paying ATM withdrawals and one-time debit card transactions
pursuant to the institution's overdraft service, unless the consumer is
given the right to opt out of the service, and the consumer does not
opt out. The proposal also sets forth an alternative approach that
would require that a consumer affirmatively consent to the
institution's overdraft service before overdraft fees could be assessed
for these transactions. Under the proposal, financial institutions
would be prohibited from assessing a fee or charge for certain debit
card transactions that overdraw the consumer's account if the overdraft
would not have occurred but for a hold placed on funds in the
consumer's account in excess of the actual transaction, unless the
institution has adopted procedures and practices designed to release
the hold within a reasonable period of time. A safe harbor is provided
if an institution has adopted procedures to release the hold within two
hours after the institution authorized the transaction.
The EFTA was enacted to provide a basic framework establishing the
rights, liabilities, and responsibilities of participants in electronic
fund transfer systems. The primary objective of the EFTA is the
provision of individual consumer rights. 15 U.S.C. 1693. The EFTA
authorizes the Board to prescribe regulations to carry out the purpose
and provisions of the statute. 15 U.S.C. 1693b(a). The Act expressly
states that the Board's regulations may contain ``such classifications,
differentiations, or other provisions, . . . as, in the judgment of the
Board, are necessary or proper to effectuate the purposes of [the Act],
to prevent circumvention or evasion [of the Act], or to facilitate
compliance [with the Act].'' 15 U.S.C. 1693b(c). The Board believes
that the revisions to Regulation E discussed above are within
Congress's broad grant of authority to the Board to adopt provisions
that carry out the purposes of the statute. These revisions facilitate
a consumer's ability to avoid overdrawing his or her account in
connection with an electronic fund transfer the consumer has requested.
2. Small entities affected by the proposed rule. The number of
small entities affected by this proposal is unknown. Account-holding
institutions would be required to provide consumers with a notice of
their right to opt out of the payment of overdrafts at ATMs and for
one-time debit transactions, and a reasonable opportunity to opt out,
before assessing any overdraft fee. These institutions would also be
required to provide notice of the opt-out right subsequent to any
overdraft fee assessment, whether on the consumer's periodic statement
or on a notice provided promptly after the occurrence of the overdraft.
Under the alternative proposed approach, account-holding institutions
would be required to obtain affirmative consent to the institution's
overdraft service before assessing overdraft fees for ATM withdrawals
and one-time debit card transactions. According to the FDIC's Study of
Bank Overdraft Programs, 75.1 percent of banks with an automated
overdraft program currently provide some form of an opt-out right to
consumers, and 11.1 percent provide an opt-in right.\42\ Thus,
institutions that already have an opt-out or an opt-in process in place
would have to reprogram their systems to provide the notices required
by the proposal. Institutions would also have to reprogram their
systems to differentiate between overdrafts for different transaction
types. As some industry commenters noted, some systems are not
currently set up to pay overdrafts for certain transaction types (e.g.,
checks and ACH), but not others (e.g., ATM and one-time debit card
transactions).
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\42\ See FDIC Study at 27.
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The Board is aware that some small institutions do not pay
overdrafts at ATMs or for one-time debit card transactions.\43\ These
institutions would not be subject to the proposed opt-out (or opt-in)
requirements. With respect to the opt-out approach, the Board believes
that many institutions are already providing customers a method to opt
out of their overdraft service, or an affirmative opt-in. These
institutions would need to conform their opt-out (or
[[Page 5232]]
opt-in) procedures to the proposal. Also, those institutions that
currently provide a form of opt-out or opt-in notice would need to
review and revise this disclosure. Further, the Board believes that
many institutions currently notify consumers who have incurred
overdrafts promptly following an overdraft. Under the proposed opt-out
approach, these institutions may need to review and perhaps revise this
notification to add the opt-out notice.
---------------------------------------------------------------------------
\43\ See FDIC Study at 10 (reporting that 81 percent of
institutions surveyed provide overdraft services for ATM and POS/
debit card transactions).
---------------------------------------------------------------------------
In addition, financial institutions would be prohibited from
assessing a fee or charge for certain debit card transactions that
overdraw the consumer's account if the overdraft would not have
occurred but for a hold placed on funds in the consumer's account in
excess of the actual transaction, unless they have adopted procedures
designed to release the hold within a reasonable period of time. A safe
harbor is provided if an institution has adopted procedures to release
the hold within two hours after the institution authorized the
transaction. The Board believes the proposed safe harbor will
significantly decrease the burden of compliance with the rule.
3. Other federal rules. The Board has not identified any federal
rules that duplicate, overlap, or conflict with the proposed revisions
to Regulation E.
4. Significant alternatives to the proposed revisions. The Board
solicits comment on any significant alternatives that would reduce
regulatory burden associated with this proposed rule on small entities.
VII. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed the rule
under the authority delegated to the Board by the Office of Management
and Budget (OMB). The collection of information that is subject to the
PRA by this proposed rule is found in 12 CFR part 205. The Federal
Reserve may not conduct or sponsor, and an organization is not required
to respond to, this information collection unless the information
collection displays a currently valid OMB control number. The OMB
control number is 7100-0200.
This information collection is required to provide benefits for
consumers and is mandatory (15 U.S.C. 1693 et seq.). Since the Board
does not collect any information, no issue of confidentiality arises.
The respondents/recordkeepers are for-profit financial institutions,
including small businesses. Institutions are required to retain records
for 24 months, but this regulation does not specify types of records
that must be retained.
The EFTA and Regulation E are designed to ensure adequate
disclosure of basic terms, costs, and rights relating to electronic
fund transfer (EFT) services debiting or crediting a consumer's
account. The disclosures required by the EFTA and Regulation E are
triggered by certain specified events. The disclosures inform consumers
about the terms of the electronic fund transfer service, activity on
the account, potential liability for unauthorized transfers, and the
process for resolving errors. To ease institutions' burden and cost of
complying with the disclosure requirements of Regulation E
(particularly for small entities), the Board publishes model forms and
disclosure clauses.
Regulation E applies to all financial institutions, not just state
member banks (SMBs). In addition, certain provisions in Regulation E
apply to entities that are not financial institutions, including those
that act as service providers or ATM operators, as well as merchants
and other payees that engage in electronic check conversion
transactions, the electronic collection of returned item fees, or
preauthorized transfers. The Federal Reserve accounts for the paperwork
burden associated with Regulation E only for the financial institutions
it supervises \44\ and that meet the criteria set forth in the
regulation. Other federal agencies account for the paperwork burden
imposed on the entities for which they have regulatory enforcement
authority.
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\44\ State member banks, branches and agencies of foreign banks
(other than Federal branches, Federal agencies, and insured state
branches of foreign banks), commercial lending companies owned or
controlled by foreign banks, and Edge and agreement corporations,
organizations operating under section 25 or 25(a) of the Federal
Reserve Act.
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As mentioned in the SUPPLEMENTARY INFORMATION above, under
Alternative 1, the proposed rule (Sec. 205.17) would prohibit account-
holding financial institutions from assessing a fee or charge for
paying ATM withdrawals and one-time debit card transactions pursuant to
the institution's overdraft service, unless the consumer is given the
right to opt out of the service, and the consumer does not opt out.
Alternative 1 would also require these institutions to provide notice
of the opt-out right subsequent to any overdraft fee assessment,
whether on the consumer's periodic statement or on a notice provided
promptly after the occurrence of the overdraft. The proposal also sets
forth an alternative approach, Alternative 2, that would require that a
consumer affirmatively consent, or opt-in, to the institution's
overdraft service before overdraft fees could be assessed for these
transactions.
Under alternative 1 the Federal Reserve estimates that, to comply
with the proposed opt-out notice requirement, 1,205 respondents
regulated by the Federal Reserve would take, on average, 16 hours (two
business days) to revise and update initial disclosures (Sec.
205.7(b)) for new customers and that 327 respondents \45\ regulated by
the Federal Reserve would take, on average, 16 hours (two business
days) to revise and update periodic statements (Sec. 205.9(b)) for
existing customers.
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\45\ To avoid double counting and to be consistent with the
current burden associated with periodic statements, burden for the
878 state member banks will be taken under Regulation DD.
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The Federal Reserve estimates the total annual one-time burden for
respondents to be 24,512 hours and believes that, on a continuing
basis, there would be no additional increase in burden as the
disclosures would be sufficiently accounted for once incorporated into
the current initial account disclosure (Sec. 205.7(b)) and periodic
statements (Sec. 205.9(b)). This would increase the total annual
burden to 84,414 hours for Federal Reserve-regulated financial
institutions that are required to comply with Regulation E. To ease the
burden of compliance model forms that institutions may use are
available in Appendix A (See proposed Model Forms A-9(A) and A-9(B)).
Under alternative 2 the Federal Reserve estimates that, to comply
with the proposed opt-in notice requirement, 1,205 respondents
regulated by the Federal Reserve would again take, on average, 16 hours
(two business days) to revise and update initial disclosures (Sec.
205.7(b)) for new customers. The Federal Reserve estimates that 1,205
respondents regulated by the Federal Reserve would take, on average, 16
hours (two business days) to prepare and send new opt-in notices for
existing customers.
The Federal Reserve estimates the total annual one-time burden for
respondents to be 38,560 hours and believes that, on a continuing
basis, there would be no additional increase in burden as the
disclosure would be sufficiently accounted for once incorporated into
the current initial account disclosure (Sec. 205.7(b)). This would
increase the total annual burden to 98,462 hours for Federal Reserve-
regulated financial institutions that are required to comply with
Regulation E. To ease the burden of compliance a
[[Page 5233]]
model form that institutions may use is available in Appendix A (See
proposed Model Forms A-9).
The Federal Reserve estimates that on average 5,136,693 consumers
would spend as much as 5 minutes reviewing and responding to an opt-in
or opt-out notice. This would increase the total annual burden for this
information collection by 428,058 hours.
Overall, the burden could increase, depending on the alternative
implemented, between 452,570 hours for alternative 1 and 466,618 hours
for alternative 2 (for 512,472 hours or 526,520 hours total,
respectively).
The other federal financial agencies are responsible for estimating
and reporting to OMB the total paperwork burden for the institutions
for which they have administrative enforcement authority. They may, but
are not required to, use the Federal Reserve's burden estimation
methodology. Using the Federal Reserve's method, the total estimated
annual burden for all financial institutions subject to Regulation E,
including Federal Reserve-supervised institutions, would be
approximately 1,041,011 hours.\46\ The above estimates represent an
average across all respondents and reflect variations between
institutions based on their size, complexity, and practices. All
covered institutions, including depository institutions (of which there
are approximately 17,200), potentially are affected by this collection
of information, and thus are respondents for purposes of the PRA.
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\46\ This estimate does not include consumer burden.
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Comments are invited on: a. whether the proposed collection of
information is necessary for the proper performance of the Federal
Reserve's functions including (a) Whether the information has practical
utility; (b) the accuracy of the Federal Reserve's estimate of the
burden of the proposed information collection, including the cost of
compliance; (c) ways to enhance the quality, utility, and clarity of
the information to be collected; and (d) ways to minimize the burden of
information collection on respondents, including through the use of
automated collection techniques or other forms of information
technology. Comments on the collection of information should be sent to
Michelle Shore, Federal Reserve Board Clearance Officer, Division of
Research and Statistics, Mail Stop 151-A, Board of Governors of the
Federal Reserve System, Washington, DC 20551, with copies of such
comments sent to the Office of Management and Budget, Paperwork
Reduction Project (7100-0200), Washington, DC 20503.
Text of Proposed Revisions
Certain conventions have been used to highlight the proposed
changes to the text of the regulation and staff commentary. New
language is shown inside bold-faced arrows, while language that would
be deleted is set off with bold-faced brackets.
List of Subjects in 12 CFR Part 205
Consumer protection, Electronic fund transfers, Federal Reserve
System, Reporting and recordkeeping requirements.
For the reasons set forth in the preamble, the Board proposes to
amend 12 CFR part 205 and the Official Staff Commentary, as follows:
PART 205--ELECTRONIC FUND TRANSFERS (REGULATION E)
1. The authority citation for part 205 continues to read as
follows:
Authority: 15 U.S.C. 1693b.
2. Section 205.12 is amended by revising paragraph (a) to read as
follows:
Sec. 205.12 Relation to other laws.
(a) Relation to truth in lending. (1) The Electronic Fund Transfer
Act and this part govern--
(i) The addition to an accepted credit card as defined in
Regulation Z (12 CFR 226.12[lsqbb](a)(2), footnote 21[rsqbb][rtrif],
comment 12-2[ltrif]), of the capability to initiate electronic fund
transfers;
(ii) The issuance of an access device that permits credit
extensions (under a preexisting agreement between a consumer and a
financial institution [rtrif] or an overdraft service, as defined in
Sec. 205.17(a)[ltrif]) only when the consumer's account is overdrawn
or to maintain a specified minimum balance in the consumer's account;
[and]
[rtrif](iii) The addition of an overdraft service, as defined in
Sec. 205.17(a), to an accepted access device; and[ltrif]
[lsqbb](iii)[rsqbb][rtrif](iv)[ltrif] A consumer's liability for an
unauthorized electronic fund transfer and the investigation of errors
involving an extension of credit that occurs under an agreement between
the consumer and a financial institution to extend credit [rtrif]or an
overdraft service, as defined in Sec. 205.17(a),[ltrif] when the
consumer's account is overdrawn or to maintain a specified minimum
balance in the consumer's account.
(2) The Truth in Lending Act and Regulation Z (12 CFR
[rtrif]part[ltrif] 226), which prohibit the unsolicited issuance of
credit cards, govern--
(i) The addition of a credit feature to an accepted access device;
and
(ii) Except as provided in paragraph (a)(1)(ii) of this section,
the issuance of a credit card that is also an access device.
* * * * *
3. Section 205.17 is added to read as follows:
Alternative 1
[rtrif]Sec. 205.17 Requirements for overdraft services.
(a) Definition. For purposes of this section, the term ``overdraft
service'' means a service under which a financial institution assesses
a fee or charge on a consumer's account held by the institution for
paying a transaction (including a check or other item) when the
consumer has insufficient or unavailable funds in the account. The term
``overdraft service'' does not include any payment of overdrafts
pursuant to--
(1) A line of credit subject to the Federal Reserve Board's
Regulation Z (12 CFR part 226), including transfers from a credit card
account, home equity line of credit, or overdraft line of credit; or
(2) A service that transfers funds from another account held
individually or jointly by a consumer.
(b) Opt-out requirement. (1) General. Except as provided under
paragraphs (b)(4) and (b)(5) of this section, a financial institution
holding a consumer's account shall not assess a fee or charge on a
consumer's account for paying an ATM withdrawal or a one-time debit
card transaction pursuant to the institution's overdraft service,
unless:
(i) The institution provides notice to the consumer explaining that
it may pay overdrafts on such transactions pursuant to the
institution's overdraft service and assess a fee or charge on the
consumer's account for doing so;
(ii) The consumer is given a reasonable opportunity to opt out of
the institution's overdraft service for such transactions; and
(iii) The consumer has not opted out.
(2) Conditioning the opt-out. If a consumer opts out of a financial
institution's overdraft service for ATM withdrawals and one-time debit
card transactions, the institution [shall not/ may]:
(i) Condition the consumer's right to opt out of the institution's
overdraft service for ATM withdrawals and one-time debit card
transactions on the consumer also opting out of the institution's
overdraft service with respect to the payment of checks, ACH
transactions, and other types of transactions; or
[[Page 5234]]
(ii) Decline to pay checks, ACH transactions, or other types of
transactions that overdraw the consumer's account because the consumer
has opted out of the institution's overdraft service for ATM
withdrawals and one-time debit card transactions.
Alternative A--Paragraph (b)(3)
(3) Implementation of opt-out. A financial institution shall
implement the consumer's election to opt out of the institution's
overdraft service for ATM withdrawals and one-time debit card
transactions by providing to the consumer an account that has the same
terms, conditions, and features, including interest rates paid and fees
assessed, as are provided to consumers who do not opt out, except for
features that limit the institution's payment of such overdrafts as
provided in this section.
Alternative B--Paragraph (b)(3)
(3) Implementation of opt-out. A financial institution shall
implement the consumer's election to opt out of the institution's
overdraft service for ATM withdrawals and one-time debit card
transactions by providing an account on the same or reasonably
comparable terms. The institution may vary the terms, conditions, and
features for the account that does not permit the payment of overdrafts
on ATM withdrawals and one-time debit card transactions, provided that
the differences in the terms, conditions, or features are not so
substantial that they would discourage a reasonable consumer from
exercising his or her right to opt out of the payment of such
overdrafts.
(4) Exceptions to the notice and opt-out requirement. The
requirements of this section do not apply to any financial institution
that:
(i) Has a policy and practice of declining to pay any ATM
withdrawals or one-time debit card transactions for which authorization
is requested if the institution has a reasonable belief that the
consumer's account does not have sufficient funds available to cover
the transaction at the time of the authorization request; or
(ii) Requires consumers to affirmatively consent to the
institution's overdraft service for the payment of any ATM withdrawals
or one-time debit card transactions before the institution assesses any
fees or charges to the consumer's account for paying such overdrafts.
(5) Exceptions to the fee prohibition. Notwithstanding a consumer's
election to opt out, a financial institution may assess a fee or charge
on a consumer's account for paying an ATM withdrawal or a one-time
debit card transaction pursuant to the institution's overdraft service
if:
(i) The institution has a reasonable belief that there are
sufficient funds available in the consumer's account at the time the
institution authorizes the transaction; or
(ii) In the case of a debit card transaction, the transaction is
presented for payment by the merchant through paper-based means, rather
than electronically through a card terminal, and the institution has
not previously authorized the transaction.
(c) Timing. The notice described in paragraph (b)(1)(i) of this
section shall be provided:
(1) For accounts opened on or after [the effective date of the
final rule], prior to the financial institution's assessment of any fee
or charge on the consumer's account for paying an ATM withdrawal or a
one-time debit card transaction pursuant to the institution's overdraft
service, so long as the consumer has a reasonable opportunity to
exercise the opt-out right before the assessment of any such fee or
charge; and
(2) For any account for which an opt-out has not been exercised or
for which a prior opt-out has been revoked, following the assessment of
any fee or charge assessed on the consumer's account for paying an ATM
withdrawal or a one-time debit card transaction pursuant to the
institution's overdraft service:
(i) On each periodic statement that reflects any such fee or
charge, in close proximity to the disclosures required to be disclosed
by 12 CFR 230.11(a); or
(ii) At least once per statement cycle on any notice sent promptly
after the institution's payment of an overdraft for an ATM withdrawal
or a one-time debit card transaction during that statement cycle.
(d) Content and format. (1) Initial notice. The notice required by
paragraph (c)(1) of this section shall be substantially similar to
Model Form A-9(A) set forth in Appendix A of this part, and include all
applicable items in this paragraph.
(i) Overdraft policy. A general description of the financial
institution's overdraft service, and the types of electronic fund
transfers for which a fee or charge for paying an overdraft may be
imposed, including ATM withdrawals and one-time debit card
transactions.
(ii) Fees imposed. The dollar amount of any fees or charges
assessed on the consumer's account by the financial institution for
paying an ATM withdrawal or a one-time debit card transaction, as
applicable, pursuant to the institution's overdraft service. If the
amount of the fee is determined on the basis of the number of times the
consumer has overdrawn the account, the amount of the overdraft, or
other factors, the institution must disclose the maximum fee that may
be imposed or provide a range of fees that may be imposed.
(iii) Limits on fees charged. The maximum amount of overdraft fees
or charges that may be assessed for transactions per day, or, if
applicable, that there is no limit to the fees that can be imposed.
(iv) Disclosure of opt-out right. An explanation of the consumer's
right to opt out of the financial institution's payment of overdrafts
for ATM withdrawals and one-time debit card transactions pursuant to
the institution's overdraft service, including the method(s) by which
the consumer may exercise that right and how to contact the institution
for more information.
(v) Alternative payment options. A statement that the financial
institution offers other alternatives for the payment of overdrafts, if
applicable. If the institution offers a line of credit subject to the
Board's Regulation Z (12 CFR part 226) or a service that transfers
funds from another account of the consumer (including joint accounts)
held at the institution to cover the overdraft, the institution shall
also state that fact and how to obtain more information about these
alternatives. An institution may, but is not required to, list
additional alternatives for the payment of overdrafts.
(2) Subsequent notice. The notice required by paragraph (c)(2) of
this section shall be substantially similar to either Model Form A-9(A)
in Appendix A of this part, or Model Form A-9(B) in Appendix A of this
part.
(e) Joint relationships. If two or more consumers jointly hold an
account, the financial institution shall treat an opt-out direction by
any of the joint consumers as an opt-out for that account.
(f) Continuing right to opt-out. A consumer may opt out of the
institution's future payment of overdrafts at any time in the manner
described in the notice required by paragraph (b)(1)(i) of this
section.
(g) Time to comply with opt-out. A financial institution shall
comply with a consumer's opt-out request as soon as reasonably
practicable after the institution receives it.
(h) Duration of opt-out. A consumer's opt-out is effective until
revoked by the consumer in writing or electronically.
[[Page 5235]]
Alternative 2
[rtrif]Sec. 205.17 Requirements for overdraft services.
(a) Definition. For purposes of this section, the term ``overdraft
service'' means a service under which a financial institution assesses
a fee or charge on a consumer's account held by the institution for
paying a transaction (including a check or other item) when the
consumer has insufficient or unavailable funds in the account. The term
``overdraft service'' does not include any payment of overdrafts
pursuant to--
(1) A line of credit subject to the Federal Reserve Board's
Regulation Z (12 CFR part 226), including transfers from a credit card
account, home equity line of credit, or overdraft line of credit; or
(2) A service that transfers funds from another account held
individually or jointly by a consumer.
(b) Opt-in requirement. (1) General. Except as provided under
paragraphs (b)(4) and (b)(5) of this section, a financial institution
holding a consumer's account shall not assess a fee or charge on a
consumer's account for paying an ATM withdrawal or a one-time debit
card transaction pursuant to the institution's overdraft service,
unless the institution:
(i) Provides the consumer with a notice explaining the
institution's overdraft service for such transactions that is
segregated from everything else, and does not contain any information
not specified in or otherwise permitted by paragraph (d) of this
section;
(ii) Provides a reasonable opportunity for the consumer to
affirmatively consent, or opt in, to the service for such transactions;
and
(iii) Obtains the consumer's affirmative consent, or opt-in, to the
institution's payment of ATM withdrawals or one-time debit card
transactions pursuant to the institution's overdraft service, and
provides the consumer with written confirmation of the consumer's
consent.
(2) Conditioning payment of other overdrafts on consumer's
affirmative consent. A financial institution [shall not/ may]:
(i) Condition the payment of any overdrafts for checks, ACH
transactions, and other types of transactions on the consumer also
affirmatively consenting to the institution's payment of ATM
withdrawals and one-time debit card transactions pursuant to the
institution's overdraft service; or
(ii) Decline to pay checks, ACH transactions, and other types of
transactions that overdraw the consumer's account because the consumer
has not affirmatively consented to the institution's overdraft service
for ATM withdrawals and one-time debit card transactions.
Alternative A--Paragraph (b)(3)
(3) Implementation of opt-in. A financial institution shall provide
to consumers who do not affirmatively consent to the institution's
overdraft service for ATM withdrawals and one-time debit card
transactions an account with the same terms, conditions, and features,
including interest rates paid and fees assessed, as it provides to
consumers who affirmatively consent, except for features that limit the
institution's payment of such overdrafts as provided in this section.
Alternative B--Paragraph (b)(3)
(3) Implementation of opt-in. A financial institution shall
implement the consumer's affirmative consent to the institution's
overdraft service for ATM withdrawals and one-time debit card
transactions by providing an account on the same or reasonably
comparable terms. The institution may vary the terms, conditions, and
features for the account that does not permit the payment of overdrafts
on ATM withdrawals and one-time debit card transactions, provided that
the differences in the terms, conditions, or features are not so
substantial that they would compel a reasonable consumer to
affirmatively consent to the payment of such overdrafts.
(4) Exception to the notice and opt-in requirements. The
requirements of this section do not apply to any financial institution
that has a policy and practice of declining to pay any ATM withdrawals
or a one-time debit card transactions for which authorization is
requested when the institution has a reasonable belief that the
consumer's account does not have sufficient funds available to cover
the transaction at the time of the authorization request.
(5) Exceptions to the fee prohibition. Notwithstanding the absence
of a consumer's affirmative consent, a financial institution may assess
a fee or charge on the consumer's account for paying an ATM withdrawal
or a one-time debit card transaction pursuant to the institution's
overdraft service if:
(i) The institution has a reasonable belief that there are
sufficient funds available in the consumer's account at the time the
institution authorizes the transaction; or
(ii) In the case of a debit card transaction, the transaction is
presented for payment by the merchant through paper-based means, rather
than electronically through a card terminal, and the institution has
not previously authorized the transaction.
(c) Timing. The notice required by paragraph (b)(1)(i) of this
section shall be provided:
(1) For accounts opened and for which an overdraft service is
provided prior to [the effective date of the final rule], at the
institution's option--
(i) On or with the first periodic statement sent on or after [the
effective date of the final rule]; or
(ii) Following the first assessment on or after [the effective date
of the final rule] of any fee or charge on the consumer's account for
paying an ATM withdrawal or a one-time debit card transaction pursuant
to the institution's overdraft service; or
(2) For accounts opened on or after [the effective date of the
final rule], before the financial institution assesses any fee or
charge on the consumer's account for paying an ATM withdrawal or a one-
time debit card transaction pursuant to the institution's overdraft
service.
(d) Content and format. The notice required by paragraph (b)(1)(i)
of this section shall be substantially similar to Model Form A-9 set
forth in Appendix A of this part, and include all applicable items in
this paragraph.
(1) Overdraft policy. A general description of the financial
institution's overdraft services and the types of electronic fund
transfers for which a fee or charge for paying an overdraft may be
imposed, including ATM withdrawals and one-time debit card
transactions.
(2) Fees imposed. The dollar amount of any fees or charges assessed
on the consumer's account by the financial institution for paying an
ATM withdrawal or a one-time debit card transaction pursuant to the
institution's overdraft service. If the amount of the fee is determined
on the basis of the number of times the consumer has overdrawn the
account, the amount of the overdraft, or other factors, the institution
must disclose the maximum fee that may be imposed or provide a range of
fees that may be imposed.
(3) Limits on fees charged. The maximum amount of overdraft fees or
charges that may be assessed per day, or, if applicable, that there is
no limit to the fees that can be imposed.
(4) Disclosure of opt-in right. An explanation of the consumer's
right to affirmatively consent to the financial institution's payment
of overdrafts for ATM withdrawals and one-time debit card transactions
pursuant to the institution's overdraft service, including the
method(s) by which the consumer
[[Page 5236]]
may consent to the service and how to get more information; and
(5) Alternative payment options. A statement that the financial
institution offers other alternatives for the payment of overdrafts, if
applicable. If the institution offers a line of credit subject to the
Board's Regulation Z (12 CFR part 226) or a service that transfers
funds from another account of the consumer (individual or joint) held
at the institution to cover the overdraft, the institution must also
state that fact and how to obtain more information about these
alternatives. An institution may, but is not required to, list
additional alternatives for the payment of overdrafts.
(e) Joint relationships. If two or more consumers jointly hold an
account, the financial institution shall treat the affirmative consent
of any of the joint consumers as affirmative consent for that account.
(f) Continuing right to opt-in. A consumer may affirmatively
consent to the financial institution's overdraft service at any time in
the manner described in the notice required by paragraph (b)(1)(i) of
this section.
(g) Time to comply for existing customers. For accounts opened
prior to [lsqbb]the effective date of the final rule[rsqbb], if a
consumer has not affirmatively consented to a financial institution's
overdraft service within 60 days after the institution sends the notice
required under paragraph (c)(1) of this section, the institution shall
cease assessing any fees or charges on a consumer's account for paying
an ATM withdrawal or a one-time debit card transaction pursuant to the
service.
(h) Duration of opt-in. A consumer's affirmative consent to the
institution's overdraft service is effective until revoked by the
consumer, or until the financial institution decides for any reason to
terminate the service for the consumer, such as due to the consumer's
excessive usage of the service.[ltrif]
4. Section 205.19 is added to read as follows:
[rtrif]Sec. 205.19 Debit holds.
(a) General rule. A financial institution shall not assess a fee or
charge for paying an overdraft pursuant to the institution's overdraft
service, as defined in Sec. 205.17(a), if the overdraft would not have
occurred but for a hold placed on funds in the consumer's account in
connection with a debit card transaction if the actual amount of the
transaction can be determined by the merchant or other payee within a
short period of time after the financial institution authorizes the
transaction. A financial institution may, however, assess a fee or
charge for paying an overdraft for a debit card transaction incurred in
connection with a hold placed on funds for that transaction if the
amount of the hold is less than or equal to the actual amount of the
transaction.
(b) Safe harbor. Notwithstanding paragraph (a) of this section, a
financial institution may assess an overdraft fee if the institution
has procedures and practices in place designed to release a debit hold
subject to this section within a reasonable period of time. An
institution is deemed to have procedures and practices designed to
release the hold within a reasonable period of time if the institution
releases the hold within two hours of the institution's authorization
of the transaction.[ltrif]
5. In Appendix A to Part 205, Appendix A-9 Model Forms for
Overdraft Services (Sec. 205.17) is added to read as follows:
Appendix a to Part 205--Model Disclosure Clauses and Forms
* * * * *
BILLING CODE 6210-01-P
[[Page 5237]]
[GRAPHIC] [TIFF OMITTED] TP29JA09.022
[GRAPHIC] [TIFF OMITTED] TP29JA09.023
[[Page 5238]]
[GRAPHIC] [TIFF OMITTED] TP29JA09.024
BILLING CODE 6210-01-C
6. In Supplement I to part 205,
a. Under Section 205.12 Relation to other laws, under 12(a)
Relation to truth in lending, paragraph 2. is revised, and paragraph 3.
is added.
b. Section 205.17--Requirements for Overdraft Services is added.
c. Section 205.19--Debit Holds is added.
Supplement I to Part 205--Official Staff Interpretations
* * * * *
Section 205.12--Relation to Other Laws
12(a) Relation to Truth in Lending
* * * * *
2. Issuance rules. For access devices that also constitute credit
cards, the issuance rules of Regulation E apply if the only credit
feature is a preexisting credit line attached to the asset account to
cover overdrafts (or to maintain a specified minimum balance) [rtrif]or
an overdraft service, as defined in Sec. 205.17(a)[ltrif]. Regulation
Z (12 CFR [rtrif]part[ltrif] 226) rules apply if there is another type
of credit feature, for example, one permitting direct extensions of
credit that do not involve the asset account.
[rtrif]3. Overdraft service. The addition of an overdraft service,
as that term is defined in Sec. 205.17(a), to an accepted access
device does not constitute the addition of a credit feature subject to
Regulation Z. Instead, the provisions of Regulation E apply, including
the liability limitations (Sec. 205.6) and the requirement to provide
consumers an opportunity to opt out of the service before any fees or
charges for paying an overdraft may be assessed to the account (Sec.
205.17).[ltrif]
* * * * *
[rtrif]Section 205.17--Requirements for Overdraft Services
Alternative 1
17(b) Opt-Out Requirement
1. Effect of opt-Out. A consumer's election to opt out of a
financial institution's overdraft service does not prohibit the
institution from paying overdrafts for ATM withdrawals and one-time
debit card transactions. If the institution pays such an overdraft,
however, it may not impose a fee or charge for doing so if the consumer
has opted out, except as permitted under the exceptions set forth in
Sec. 205.17(b)(5). These provisions do not limit the
[[Page 5239]]
institution's ability to debit the consumer's account for the amount of
the overdraft if permitted to do so under applicable law.
2. Examples of reasonable opportunity to opt out. A financial
institution gives a consumer a reasonable opportunity to opt out if:
i. By mail. The institution provides a form for the consumer to
fill out and mailto opt out. The consumer is given 30 days from the
date the consumer is provided the initial opt-Out notice to opt out
before an overdraft fee or charge is assessed to the consumer's
account.
ii. By telephone. The institution provides a toll-free telephone
number that consumers may call to opt out. The consumer is given 30
days from the date the consumer is provided the initial opt-out notice
to opt out before an overdraft fee or charge is assessed to the
consumer's account.
iii. By electronic means. The institution provides an electronic
means to opt out, such as a form that can be accessed and processed at
an Internet Web site, provided that the institution directs the
consumer to the specific Web site address where the form is located,
rather than solely referring to the institution's home page. The
consumer is given 30 days from the date the consumer is provided the
initial opt-out notice to opt out before an overdraft fee or charge is
assessed to the consumer's account.
iv. At the time of account-opening. The institution provides the
opt-out notice prior to or at account-opening and requires the consumer
to decide whether to opt out of the institution's payment of ATM
withdrawals and one-time debit card transactions pursuant to the
institution's overdraft service as a necessary step to opening the
account.
Paragraph 17(b)(3)--Implementation of Opt-out
Alternative B Only
1. Example of impermissible variation in account terms. A financial
institution may not vary the terms, conditions, or features of an
account that does not permit the payment of overdrafts for ATM
withdrawals and one-time debit card transactions such that the
differences in the terms, conditions, or features are so substantial
that they would discourage a reasonable consumer from opting out of the
institution's overdraft service. For example, an institution may not
decline to provide ATM and debit card services altogether because the
consumer has opted out of the institution's overdraft service for ATM
and one-time debit card transactions.
Paragraph 17(b)(4)--Exceptions to the Notice and Opt-out Requirement
1. Compliance. A financial institution that qualifies for either of
the exceptions in Sec. 205.17(b)(4) is not subject to the requirements
to provide a consumer notice and a reasonable opportunity to opt out of
the institution's payment of overdrafts for ATM withdrawals and one-
time debit card transactions.
2. Opt-in. A financial institution that requires the consumer's
affirmative consent before paying overdrafts on the consumer's behalf
need not obtain the consumer's affirmative consent prior to each
transaction that may cause the consumer to overdraw the account. It is
sufficient for the institution to require that the consumer
affirmatively consent to the institution's overdraft service prior to
the institution's assessment of any fees or charges for paying an
overdraft.
Paragraph 17(b)(5)--Exceptions to the Fee Prohibition
1. Examples of transactions authorized on an institution's
reasonable belief.
i. Balances not updated in real-time. A consumer has opted out of a
financial institution's overdraft service. The financial institution
uses a daily batch balance method for authorizing transactions, and
updates the balance used for authorization at the end of the processing
day. The consumer has $100 in her deposit account after the institution
has finished processing transactions at the end of the day. The next
day, the consumer makes two $40 debit card purchases followed by a $25
debit card purchase. Because the institution does not update the
authorization balance during the day, each transaction, including the
$25 debit card purchase, is authorized by the institution based on the
same $100 balance that was calculated at the end of the prior day's
processing. Under these circumstances, the institution may assess a fee
for paying or honoring the $25 debit card purchase because the
institution authorized the transaction on the reasonable belief that
the consumer had sufficient funds available in her account to cover the
transaction.
ii. Returned deposit. A consumer has opted out of a financial
institution's overdraft service. The consumer has $30 in his deposit
account and deposits a $100 check. The institution provides immediate
availability to the consumer for the deposited funds. Subsequently, the
consumer makes a $75 debit card purchase which is authorized by the
institution based on a balance of $130. The $100 check is later
returned on insufficient funds. Under these circumstances, the
institution may assess a fee for paying or honoring the $75 debit card
transaction because the institution authorized the transaction on the
reasonable belief that the consumer had sufficient funds available in
his account to cover the transaction.
iii. Settlement amount exceeds authorization amount. A consumer has
opted out of an institution's overdraft service. The consumer has $30
in her deposit account and uses a debit card to purchase fuel. Before
permitting the consumer to use the fuel pump, the merchant verifies the
validity of the card by requesting a pre-authorization hold from the
institution for $1. The institution does not increase the amount of the
hold. The consumer purchases $50 of fuel. If the institution pays or
honors the transaction, it may assess an overdraft fee because the
actual amount of the transaction exceeds the amount requested for
authorization and causes the consumer to overdraw her account.
iv. Intervening transactions between authorization and settlement
of a ``force pay'' debit card transaction. A consumer has opted out of
a financial institution's overdraft service. The consumer has $100 in
his deposit account and uses his debit card to make a $50 purchase at a
store, and the institution authorizes the transaction. Before the
transaction is presented for settlement, however, checks written by the
consumer totaling $75 are posted to the consumer's account. Under these
circumstances, and assuming no intervening deposits are made by the
consumer, the institution may assess a fee or charge for paying or
honoring an overdraft when the $50 is presented for settlement because
the institution authorized that transaction on the reasonable belief
that the consumer had sufficient funds available in his account to
cover the transaction.
2. Examples of transactions not submitted for authorization. The
exception under Sec. 205.17(b)(5)(i) permitting an overdraft fee to be
charged to a consumer's account when a financial institution has a
reasonable belief that the consumer has sufficient funds available for
the requested transaction does not apply where the transaction is not
submitted to the institution for authorization. Under these
circumstances, the general rule in Sec. 205.17(b)(1) prohibits the
institution from assessing a fee on the consumer's account for paying
or honoring an ATM withdrawal or one-time debit card transaction that
overdraws the consumer's account if the consumer has opted out of the
institution's overdraft service. If otherwise permitted under
[[Page 5240]]
applicable law, the institution may debit the consumer's account for
the amount of the overdraft.
i. Small-dollar transactions not submitted for authorization. A
consumer has opted out of a financial institution's overdraft service.
The consumer purchases a $3 cup of coffee using his debit card. Because
of the small dollar amount of the transaction, the merchant does not
submit the transaction to the consumer's financial institution for
authorization. At the time of the transaction, the consumer's account
does not have sufficient available funds to cover the transaction. The
institution may not assess an overdraft fee to the consumer's account
for paying or honoring the debit card transaction. If otherwise
permitted under applicable law, the institution may debit the
consumer's account for the amount of the overdraft.
ii. Stand-in processing. A consumer has opted out of a financial
institution's overdraft service. The consumer withdraws $20 from an
ATM. At the time the consumer initiates the withdrawal request, the
card network is temporarily unavailable and the request is not
submitted to the institution for authorization. Instead, the consumer's
financial institution uses a ``stand-in'' processor to authorize
transactions based on the institution's pre-determined amount, rather
than the consumer's account balance. The consumer's account does not
have sufficient available funds at settlement to cover the transaction.
The institution may not assess an overdraft fee to the consumer's
account for paying or honoring the debit card transaction. If otherwise
permitted under applicable law, the institution may debit the
consumer's account for the amount of the overdraft.
3. Example of a transaction presented by paper-based means. A
consumer has opted out of a financial institution's overdraft service.
The consumer has $50 in her deposit account and presents her debit card
to make a $60 purchase. At that time, the merchant takes an imprint of
the card but does not submit the transaction for authorization. Later
that day, the merchant submits a sales slip with the card imprint to
its processor for payment. If the transaction overdraws the consumer's
account and the consumer's institution pays the transaction, the
institution may assess a fee or charge for paying or honoring the
overdraft.
17(c) Timing
Paragraph 17(c)(1)
1. Existing customers. The requirement to provide notice before
overdraft fees are assessed for payment of an ATM withdrawal or one-
time debit card transaction pursuant to a financial institution's
overdraft service is applicable only to accounts opened on or after
[lsqbb]the effective date of the final rule[rsqbb]. However, the
requirement to provide notice of the opt-out right following the
institution's assessment of a fee or charge for paying an ATM
withdrawal or a one-time debit card transaction pursuant to the
institution's overdraft service applies on or after [the effective date
of the final rule], unless the consumer has previously opted out and
the consumer has not revoked the opt-out.
17(d) Content and Format
Paragraph 17(d)(1)--Initial Notice
1. Range of fees. If the amount of a fee will vary from transaction
to transaction, the financial institution may indicate that the
consumer may be assessed a fee ``up to'' the maximum fee or provide the
range of fees.
2. Additional opt-out notice content. Section 205.17(b)(1) requires
an opt-out notice that is substantially similar to Model Forms A-9(A)
and A-9(B). A financial institution, may, however, briefly describe in
its notice the consequences of the consumer's election to opt out of
the institution's payment of overdrafts. For example, the institution
may state that if a consumer opts out of the institution's overdraft
service for ATM withdrawals and one-time debit card transactions, the
institution may decline such transactions if the consumer's account
does not have sufficient funds. An institution may also include
language describing other types of transactions that are not subject to
the opt-out right or indicating that the institution pays overdrafts at
its discretion.
17(g) Time to Comply With Opt-Out
1. Fees or charges assessed prior to implementing opt-out. Section
205.17(g) provides that a consumer may opt out of a financial
institution's future payment of overdrafts at any time. If a consumer,
who has not initially opted out, later elects to exercise his or her
opt-out right, this provision does not require the institution to waive
or reverse any overdraft fees or charges assessed to the consumer's
account prior to the institution's implementation of the consumer's
opt-out request.
Alternative 2
17(b) Opt-In Requirement
1. No affirmative consent. A financial institution may pay
overdrafts for ATM withdrawals and one-time debit card transactions
even if a consumer has not affirmatively consented or opted in to the
institution's overdraft service. If the institution pays such an
overdraft, however, it may not impose a fee or charge for doing so
without the consumer's affirmative consent, except as permitted under
the exceptions set forth in Sec. 205.17(b)(5). These provisions do not
limit the institution's ability to debit the consumer's account for the
amount of the overdraft if the institution is permitted to do so under
applicable law.
2. Overdraft transactions not required to be paid or honored.
Section 205.17 does not require a financial institution to pay or honor
an overdraft on an ATM withdrawal or a one-time debit card transaction
even if the consumer has affirmatively consented to an institution's
overdraft service for such transactions.
3. Examples of reasonable opportunity to provide affirmative
consent. A financial institution provides a reasonable opportunity for
the consumer to affirmatively consent to the institution's overdraft
service if--
i. By mail. The institution provides a form for the consumer to
fill out and mail to affirmatively request the service.
ii. By telephone. The institution provides a toll-free telephone
number that consumers may call to provide affirmative consent.
iii. By electronic means. The institution provides an electronic
means for the consumer to affirmatively consent, such as a form that
can be accessed and processed at an Internet Web site, provided that
the institution directs the consumer to the specific Web site address
where the form is located, rather than solely referring to the
institution's home page.
4. Implementing opt-in at account-opening. A financial institution
may provide a notice regarding the institution's overdraft service
prior to or at account-opening and, as a necessary step to opening an
account, require a consumer to choose whether to opt in to the payment
of ATM withdrawals or one-time debit card transactions pursuant to the
institution's overdraft service. For example, the institution could
require the consumer at account opening to choose between an account
that does not permit the payment of ATM withdrawals or one-time debit
card transactions pursuant to the institution's overdraft service or an
[[Page 5241]]
account that permits the payment of such overdrafts.
Paragraph 17(b)(3)--Implementation of Opt-In
Alternative B Only
1. Example of impermissible variation in account terms. A financial
institution may not vary the terms, conditions, or features of an
account that does not permit the payment of overdrafts for ATM
withdrawals and one-time debit card transactions such that the
differences in the terms, conditions, or features are so substantial
that they would compel a reasonable consumer to opt in to the
institution's overdraft service. For example, an institution may not
decline to provide ATM and debit card services altogether unless the
consumer affirmatively consents to the institution's overdraft service
for ATM withdrawals and one-time debit card transactions.
Paragraph 17(b)(5)--Exceptions to the Fee Prohibition
1. Examples of transactions authorized on an institution's
reasonable belief.
i. Balances not updated in real-time. A consumer has not
affirmatively consented to a financial institution's overdraft service.
A financial institution uses a daily batch balance method for
authorizing transactions, and updates the balance used for
authorization at the end of the processing day. The consumer has $100
in her deposit account after the institution has finished processing
transactions at the end of the day. The next day, the consumer makes
two $40 debit card purchases followed by a $25 debit card purchase.
Because the institution does not update the authorization balance
during the day, each transaction, including the $25 debit card
purchase, is authorized by the institution based on the same $100
balance that was calculated at the end of the prior day's processing.
Under these circumstances, the institution may assess a fee for paying
or honoring the $25 debit card purchase because the institution
authorized the transaction on the reasonable belief that the consumer
had sufficient funds available in her account to cover the transaction.
ii. Returned deposit. A consumer has not affirmatively consented to
a financial institution's overdraft service. The consumer has $30 in
his deposit account and deposits a $100 check. The institution provides
immediate availability to the consumer for the deposited funds.
Subsequently, the consumer makes a $75 debit card purchase which is
authorized by the institution based on the $130 balance. The $100 check
is later returned on insufficient funds. Under these circumstances, the
institution may assess a fee for paying or honoring the $75 debit card
transaction because the institution authorized the transaction on the
reasonable belief that the consumer had sufficient funds available in
his account to cover the transaction.
iii. Settlement amount exceeds authorization amount. A consumer has
not affirmatively consented to a financial institution's overdraft
service. The consumer has $30 in her deposit account and uses a debit
card to purchase fuel. Before permitting the consumer to use the fuel
pump, the merchant verifies the validity of the card by requesting a
pre-authorization hold from the institution for $1. The institution
does not increase the amount of the hold. The consumer purchases $50 of
fuel. If the institution pays or honors the transaction, it may assess
an overdraft fee because the actual amount of the transaction exceeds
the amount requested for authorization and causes the consumer to
overdraw her account.
iv. Intervening transactions between authorization and settlement
of a ``force pay'' debit card transaction. A consumer has not
affirmatively consented to a financial institution's overdraft service.
The consumer has $100 in a deposit account and uses his debit card to
make a $50 purchase at a store. The institution authorizes the
transaction. Before the transaction is presented for settlement,
however, checks written by the consumer totaling $75 are posted to the
consumer's account. Under these circumstances, and assuming no
intervening deposits are made by the consumer, the institution may
assess a fee or charge for paying or honoring an overdraft when the $50
is presented for settlement because the institution authorized that
transaction on the reasonable belief that the consumer had sufficient
funds available in his account to cover the transaction.
2. Examples of transactions not submitted for authorization. The
exception under Sec. 205.17(b)(5)(i) permitting an overdraft fee to be
charged to a consumer's account when a financial institution has a
reasonable belief that the consumer has sufficient funds available for
the requested transaction does not apply where the transaction is not
submitted to the institution for authorization. Under these
circumstances, the general rule in Sec. 205.17(b)(1) prohibits an
institution from assessing a fee to the consumer's account for paying
or honoring an ATM withdrawal or one-time debit card transaction that
overdraws the consumer's account if the consumer has not affirmatively
consented to the institution's overdraft service. If otherwise
permitted under applicable law, the institution may debit the
consumer's account for the amount of the overdraft.
i. Small-dollar transactions not submitted for authorization. A
consumer has not affirmatively consented to a financial institution's
overdraft service. The consumer purchases a $3 cup of coffee using his
debit card. Because of the small dollar amount of the transaction, the
merchant does not submit the transaction to the consumer's financial
institution for authorization. At the time of the transaction, the
consumer's account does not have sufficient available funds to cover
the transaction and the consumer has not affirmatively consented to the
institution's overdraft service. The institution may not assess an
overdraft fee to the consumer's account for paying or honoring the
debit card transaction. If otherwise permitted under applicable law,
the institution may debit the consumer's account for the amount of the
overdraft.
ii. Stand-in processing. A consumer has not affirmatively consented
to a financial institution's overdraft service. The consumer withdraws
$20 from an ATM. At the time the consumer initiates the withdrawal
request, the card network is temporarily unavailable and the request is
not submitted to the consumer's financial institution for
authorization. Instead, the institution uses a ``stand-in'' processor
to authorize transactions based on the institution's pre-determined
amount, rather than the consumer's account balance. The consumer's
account does not have sufficient available funds at settlement to cover
the transaction. The institution may not assess an overdraft fee to the
consumer's account for paying or honoring the debit card transaction.
If otherwise permitted under applicable law, the institution may debit
the consumer's account for the amount of the overdraft.
3. Example of a transaction presented by paper-based means. A
consumer has not affirmatively consented to a financial institution's
overdraft service. The consumer has $50 in her deposit account and
presents her debit card to make a $60 purchase. At that time, the
merchant takes an imprint of the card but does not submit the
transaction for authorization. Later that day, the merchant submits a
sales slip with the card imprint to its processor for payment. If the
transaction overdraws the consumer's account and the
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consumer's institution pays the transaction, the institution may assess
a fee or charge for paying or honoring the overdraft.
17(d) Content and Format
1. Range of fees. If the amount of a fee may vary from transaction
to transaction, the financial institution may indicate that the
consumer may be assessed a fee ``up to'' the maximum fee or provide the
range of fees.
2. Additional consent notice content. Section 205.17(d)(1) requires
an opt-in notice that is substantially similar to Model Form A-9. A
financial institution may, however, briefly describe in its notice the
benefits of the institution's payment of ATM withdrawals or debit card
transactions. For example, the institution may state that if a consumer
does not affirmatively consent to the institution's overdraft service
in connection with ATM withdrawals and one-time debit card
transactions, the institution may decline such transactions if the
consumer's account does not have sufficient funds. An institution may
also include language describing other types of transactions that are
not subject to the opt-in right or indicating that even if the consumer
affirmatively consents to the overdraft service, the institution pays
overdrafts at its discretion.[ltrif]
* * * * *
[rtrif]Section 205.19--Debit Holds
19(a) General Rule
1. Transactions for which the actual transaction amount can be
determined shortly after authorization. Examples of transactions
involving a hold in connection with a debit card transaction for which
the actual transaction amount can be determined within a short period
of time after authorization is obtained include:
i. A fuel purchase at a pay-at-the-pump dispenser.
ii. The payment of a restaurant bill where an estimated amount is
added to the amount of the requested authorization to account for
service tips.
2. Additional reasons for overdraft. Section 205.19 does not limit
a financial institution from assessing an overdraft fee or charge for
paying a particular transaction pursuant to the institution's overdraft
service if the consumer would have incurred an overdraft for other
reasons, such as a prior debit card transaction that may have been
authorized but not yet presented for settlement or if a deposited check
is returned.
3. Waiver of overdraft fees caused by debit holds. A financial
institution does not violate Sec. 205.19 if it promptly waives or
refunds any overdraft fees or charges assessed to the consumer's
account caused by a debit hold in excess of the actual amount of the
transaction. For example, assume that a consumer has $50 in a deposit
account. An institution does not violate Sec. 205.19 if it assesses an
overdraft fee on the consumer's account as a result of a $75 hold
placed in connection with a pay-at-the-pump fuel transaction, but
promptly waives or refunds the overdraft fee after determining that the
consumer has only purchased $40 worth of fuel. The institution may not
require the consumer to provide notice or other information that an
overdraft fee was caused by a debit hold on funds in the consumer's
account before the institution waives or refunds the fee.
4. Example of prohibition in connection with a debit hold placed
for same transaction. A consumer has $50 in a deposit account and is
enrolled in a financial institution's overdraft service. The consumer
makes a fuel purchase using his debit card. Before permitting the
consumer to use the fuel pump, the merchant obtains a pre-authorization
hold for $1 to verify that the consumer's account is valid. The
institution increases the amount of the hold to $75, or the maximum
amount it guarantees to the merchant for the authorized transaction
under card network rules. The $75 hold exceeds the consumer's funds.
The consumer purchases $20 of fuel. Under these circumstances, the
financial institution is prohibited from assessing a fee or charge in
connection with the debit hold because the overdraft would not have
occurred but for the excess amount of the debit hold. However, if the
consumer had purchased $60 of fuel, the institution could assess a fee
or charge for an overdraft because the transaction exceeds the funds in
the consumer's account.
5. Example of prohibition in connection with a debit hold placed
for another transaction. A consumer has $100 in a deposit account and
is enrolled in a financial institution's overdraft service. The
consumer makes a fuel purchase using her debit card. Before permitting
the consumer to use the fuel pump, the merchant obtains a pre-
authorization hold for $1, which the institution increases to $75, or
the maximum amount it guarantees to the merchant for the authorized
transaction under card network rules. The consumer purchases $20 of
fuel, but the transaction is not presented for settlement for two days.
The next day, the consumer withdraws $75 at an ATM. Under these
circumstances, Sec. 205.19 prohibits the institution from assessing a
fee or charge for paying an overdraft with respect to the $75
withdrawal because the overdraft would not have occurred but for the
$75 hold.
6. Example of prohibition when authorization and settlement amounts
are held for the same transaction. A consumer has $100 in a deposit
account and is enrolled in a financial institution's overdraft service.
The consumer makes a $50 fuel purchase using his debit card. Before
permitting the consumer to use the fuel pump, the merchant obtains a
pre-authorization hold for $1, which the institution increases to $75,
or the maximum amount it guarantees to the merchant for the authorized
transaction. The consumer purchases $50 of fuel. When the merchant
presents the $50 transaction for settlement, it uses a different
transaction code to identify the transaction than it had used for the
pre-authorization, causing both the $75 hold and the $50 purchase
amount to be temporarily posted to the consumer's account at the same
time. As a result, the consumer's account becomes overdrawn. Under
these circumstances, and assuming no other transactions, Sec. 205.19
prohibits the institution from assessing a fee or charge for paying an
overdraft because the overdraft would not have occurred but for the $75
hold.
7. Example of permissible overdraft fees in connection with a debit
hold. A consumer has $100 in a deposit account and is enrolled in a
financial institution's overdraft service. The consumer makes a fuel
purchase using her debit card. Before permitting the consumer to use
the fuel pump, the merchant obtains a pre-authorization hold for $1,
which the institution increases to $75, or the maximum amount it
guarantees to the merchant for the authorized transaction. The consumer
purchases $35 of fuel, but the transaction is not presented for
settlement for two days. The next day, the consumer withdraws $75 at an
ATM. Notwithstanding the existence of the hold, the consumer's
financial institution may charge the consumer an overdraft fee for the
$75 ATM withdrawal because the consumer would have incurred the
overdraft even if the debit hold had been for the actual amount of the
fuel purchase.
19(b) Safe Harbor
1. Example of two-hour safe harbor. A consumer has $100 in his
deposit account and is enrolled in a financial institution's overdraft
service. The consumer makes a $35 fuel purchase using his debit card.
Before permitting the consumer to use the fuel pump, the
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merchant obtains pre-authorization hold for $1, which the institution
increases to $75, or the maximum amount it guarantees to the merchant
for the authorized transaction. One hour after the transaction is
completed, but before the transaction is presented for settlement, the
consumer withdraws $55 at an ATM. Notwithstanding the existence of the
debit hold, the consumer's financial institution may charge the
consumer an overdraft fee for the $55 ATM withdrawal even though the
overdraft was caused by the hold, because the institution has
procedures and practices to release the hold within two hours and the
ATM withdrawal occurred within the two-hour safe harbor period.
2. Relationship between Sec. 205.17 and Sec. 205.19. If a
consumer is not enrolled in the institution's overdraft service for ATM
withdrawals and one-time debit card transactions (because the consumer
has opted out or not opted in), the institution may not assess any fees
or charges to the consumer's account for paying a debit card overdraft
even if the institution is not otherwise prohibited from doing so by
the debit hold provision in Sec. 205.19. For example, assume a
consumer has $100 in her deposit account and has opted out of the
institution's overdraft service. The consumer uses her debit card to
purchase $30 of fuel at a pay-at-the-pump fuel dispenser. At the time
of authorization, the financial institution increased the gas station's
$1 preauthorization hold to $75. One hour after completing the fuel
purchase, the consumer makes a $60 debit card purchase at a grocery
store. Notwithstanding the fact that the consumer made the purchase
within the two-hour safe harbor, the institution would not be permitted
to assess an overdraft fee because the consumer had opted out of the
institution's overdraft service.[ltrif]
By order of the Board of Governors of the Federal Reserve
System, December 18, 2008.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E8-31184 Filed 1-28-09; 8:45 am]
BILLING CODE 6210-01-P