[Federal Register Volume 75, Number 107 (Friday, June 4, 2010)]
[Rules and Regulations]
[Pages 31665-31673]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-13280]
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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: Final rule.
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SUMMARY: On November 17, 2009, the Board published a final rule
amending Regulation E, which implements the Electronic Fund Transfer
Act, and the official staff commentary to the regulation (Regulation E
final rule). The Regulation E final rule limited the ability of
financial institutions to assess overdraft fees for paying automated
teller machine (ATM) and one-time debit card transactions that overdraw
a consumer's account, unless the consumer affirmatively consents, or
opts in, to the institution's payment of overdrafts for those
transactions. The Board is amending Regulation E and the official staff
commentary to clarify certain aspects of the Regulation E final rule.
DATES: This rule is effective July 6, 2010.
FOR FURTHER INFORMATION CONTACT: Dana E. Miller or Vivian W. Wong,
Senior Attorneys, or Ky Tran-Trong, Counsel, Division of Consumer and
Community Affairs, at (202) 452-3667 or (202) 452-2412, Board of
Governors of the Federal Reserve System, 20th and C Streets, NW.,
Washington, DC 20551. For users of Telecommunications Device for the
Deaf (TDD) only, contact (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Background
In November 2009, the Board adopted a final rule under Regulation
E, which implements the Electronic Fund Transfer Act (EFTA), limiting a
financial institution's ability to assess fees for paying ATM and one-
time debit card transactions pursuant to the institution's overdraft
service without the consumer's affirmative consent. The rule was
published in the Federal Register in November 2009 and has a mandatory
compliance date of July 1, 2010. See 74 FR 59033 (November 17, 2009)
(Regulation E final rule).
[[Page 31666]]
Since publication of the Regulation E final rule, institutions have
requested clarification of particular aspects of the rule and further
guidance regarding compliance with the rule. In addition, certain
technical corrections are necessary. Accordingly, the Board proposed to
amend Regulation E and the official staff commentary. See 75 FR 9120
(March 1, 2010).
The Board received approximately 90 comments on the proposal,
including from financial institutions and their trade associations, as
well as consumer groups. As described in Part III of this SUPPLEMENTARY
INFORMATION, the final rule adopts the proposal largely as proposed,
with additional commentary. Separately, the Board is also amending
Regulation DD elsewhere in today's Federal Register to make certain
clarifications and conforming amendments in light of provisions adopted
in the Regulation E final rule.
II. Statutory Authority
The EFTA, 15 U.S.C. 1693 et seq., is implemented by the Board's
Regulation E (12 CFR part 205). The purpose of the act and regulation
is to provide a framework establishing the rights, liabilities, and
responsibilities of participants in electronic fund transfer systems.
An official staff commentary interprets the requirements of Regulation
E (12 CFR part 205 (Supp. I)). In the SUPPLEMENTARY INFORMATION to the
Regulation E final rule, the Board described its statutory authority
and applied that authority to the requirements of the rule. For
purposes of this rulemaking, the Board continues to rely on the
description of its legal authority and analysis in the Regulation E
final rule.
III. Section-by-Section Analysis
A. Section 205.17(a)--Definition
Section 205.17(a) of the Regulation E final rule defines the term
``overdraft service'' for purposes of Sec. 205.17. In particular,
Sec. 205.17(a)(3) of the final rule explains that the term does not
include payments of overdrafts pursuant to, among other things, credit
exempt from Regulation Z pursuant to 12 CFR 226.3(d), which is credit
secured by margin securities in brokerage accounts extended by
Securities and Exchange Commission or Commodity Futures Trading
Commission-registered broker-dealers. Comment 17(a)-1 provided further
guidance on this exception. However, comment 17(a)-1 inadvertently
stated that ``Sec. 205.17(a)(3) does not apply'' to margin credit
transactions. As adopted, this would mean that the exception to the
definition of ``overdraft service'' in Sec. 205.17(a)(3) does not
apply to margin credit. The Board proposed to revise comment 17(a)-1 to
eliminate the incorrect reference. The Board did not receive comment on
this provision, which is adopted as proposed.
B. Section 205.17(b)--Opt-In Requirement
17(b)(1), 17(b)(4)--General Rule and Scope of Opt-In; Notice and Opt-In
Requirements
Section 205.17(b)(1) of the Regulation E final rule prohibits an
account-holding financial institution from assessing a fee or charge on
a consumer's account for paying an ATM or one-time debit card
transaction that overdraws the account, unless the institution
satisfies several requirements, including providing consumers notice
and obtaining the consumer's affirmative consent to the overdraft
service. Section 205.17(b)(4) provides an exception from the notice and
opt-in requirements of Sec. 205.17(b)(1) for institutions that have a
policy and practice of declining ATM and one-time debit card
transactions for which authorization is requested, when the institution
has a reasonable belief that the consumer's account has insufficient
funds at the time of the authorization request.
Since the issuance of the Regulation E final rule, questions have
been raised as to whether the Sec. 205.17(b)(4) exception would permit
institutions with such a policy and practice to assess an overdraft fee
without the consumer's affirmative consent if a transaction, authorized
on the belief that there are sufficient funds, settles on insufficient
funds. To clarify the intended scope of this provision, the Board
proposed to amend Sec. Sec. 205.17(b)(1), (b)(4), and the related
commentary to explain that the fee prohibition in Sec. 205.17(b)(1)
applies to all institutions, and that Sec. 205.17(b)(4) provides
relief only from the requirements of Sec. Sec. 205.17(b)(1)(i)-(iv),
including the notice and opt-in requirements. The proposal thus
clarified the Board's intent that institutions cannot assess a fee for
the payment of ATM and one-time debit card overdrafts if the consumer
does not opt in, even if the institution has a policy and practice of
declining ATM and one-time debit card transactions upon a reasonable
belief that an account has insufficient funds.
Many industry commenters argued that the Board should interpret
Sec. 205.17(b)(4) to exempt institutions with a policy and practice of
declining ATM and one-time debit card transactions upon a reasonable
belief that an account has insufficient funds from the fee prohibition,
as well as from the notice and opt-in requirements of the rule. These
commenters argued that for those institutions without formal overdraft
programs, overdrafts will occur only in circumstances outside the
institution's control, and that consumers should retain the
responsibility to balance their checking accounts. For example, an
institution may authorize a one-time debit card transaction on the
reasonable belief that there are sufficient funds in the account, but
intervening transactions, such as checks, may reduce the available
funds in the checking account before the transaction is presented for
settlement, causing an overdraft. Thus, these commenters stated that
Sec. 205.17(b)(4) should be revised to permit such institutions to
charge overdraft fees without the consumer's affirmative consent. Other
industry commenters disagreed with the Board's position, but supported
the Board's effort to clarify the scope of the provision. For further
clarity, these commenters suggested revisions to the language of Sec.
205.17(b)(4), or removal of that provision as superfluous. Consumer
group commenters strongly supported the proposed clarification for the
reasons expressed by the Board in its proposal.
The final rule does not provide any exceptions for allowing
overdraft fees for ATM and one-time debit card transactions to be
imposed without consumer consent. For clarity, however, the Board is
deleting Sec. 205.17(b)(4) and instead incorporating its content into
a revised comment to Sec. 205.17(b)(1). For the reasons explained in
the SUPPLEMENTARY INFORMATION to the Regulation E final rule, as well
as the March 2010 proposed rule, the Board believes that adopting
exceptions to the fee prohibition would undermine the consumer's
ability to understand the institution's overdraft practices and to make
an informed choice. 74 FR 59045; 75 FR 9121. Moreover, permitting fees
on transactions that are authorized on sufficient funds but settle on
insufficient funds would create a disincentive to resolve
inefficiencies in payment systems and in processing procedures, which
would not benefit consumers.
The final rule clarifies that the prohibition on assessing
overdraft fees under Sec. 205.17(b)(1) applies to all institutions,
including those institutions that have a policy and practice of
declining to authorize and pay any ATM or one-time debit card
transactions when they have a reasonable belief at the time of the
authorization request
[[Page 31667]]
that the consumer does not have sufficient funds available to cover the
transaction.\1\ Section 205.17(b)(4) of the Regulation E final rule and
the proposed amendments to that section in the March 2010 proposal were
designed to clarify the obligations of institutions with such a policy
and practice. However, because Sec. 205.17(b)(1) contains a general
prohibition on charging overdraft fees unless certain requirements are
fulfilled, the Board concludes that it is unnecessary to include a
separate section with respect to those institutions. Accordingly, the
final rule deletes Sec. 205.17(b)(4) and instead addresses this issue
by adding a comment to Sec. 205.17(b)(1). The placement of this
provision in new comment 17(b)(1)-1.iv does not, however, alter the
substance of the rule.
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\1\ The Board is also adopting conforming revisions to Sec.
205.17(b)(1).
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The Regulation E final rule (and in a slightly revised iteration,
the March 2010 proposed rule) also included language in Sec.
205.17(b)(4), and related comment 17(b)(4)-1, explaining the
application of Sec. 205.17(b)(4) to accounts on an account type-by-
account type basis. These provisions were designed to provide guidance
where institutions may follow different practices for different types
of accounts. A few commenters suggested that the Board revise or delete
these provisions as unnecessary because, if a financial institution
does not charge overdraft fees on a given account for ATM or one-time
debit card transactions, there should be no obligation to comply with
the requirements of Sec. 205.17(b)(1)(i)-(iv). The Board agrees, and
for simplicity has deleted the language and accompanying comment.
17(b)(1)(iv)--Confirmation
Section 205.17(b)(1)(iv) states that an institution must provide
the consumer a confirmation of his or her opt-in choice in writing, or
electronically if the consumer agrees, before charging overdraft fees.
The confirmation helps ensure that a consumer intended to opt into an
institution's overdraft service, particularly where a consumer has
opted in by telephone, by providing the consumer with a record of that
choice. Some institutions have asked whether the confirmation required
by Sec. 205.17(b)(1)(iv) must be provided to the consumer before the
institution may assess overdraft fees.
The Board proposed to revise comment 17(b)-7 to clarify that an
institution may not assess any overdraft fees or charges on the
consumer's account until the institution has sent the written
confirmation. To address concerns about operational and litigation
risks related to tracking compliance with the confirmation requirement,
the proposed comment also stated that an institution complies with
Sec. 205.17(b)(1)(iv) if it has adopted reasonable procedures designed
to ensure that the written confirmation is sent before fees are
assessed.
Consumer group commenters argued that fees should not be charged
until five business days after the institution sends the customer the
written confirmation. This time frame, they argued, would provide
sufficient time for a consumer to receive the confirmation and to
affirm his or her choice. Industry commenters argued that institutions
should be permitted to charge fees as soon as the consumer has provided
consent and before the written confirmation is provided to the
consumer. These commenters also stated that the rule should permit the
written confirmation to be provided promptly or by the end of the
business day following the consumer's opt-in. The Board is adopting the
comment substantially as proposed, with revisions designed to prevent
evasion of the confirmation requirement.
The rule does not require receipt of the confirmation by the
consumer before an institution may impose a fee because a consumer may
not opt into an institution's overdraft service until the time the
service is needed. Requiring receipt of the confirmation would delay
the consumer's access to overdraft funds. By contrast, permitting fees
to be charged once the confirmation is provided allows institutions to
pay the transaction with minimal delay to the consumer, in accordance
with the consumer's direction. At the same time, if fees cannot be
charged until the confirmation has been provided, institutions would be
incented to mail or deliver the written confirmation promptly. This
would alert consumers to their choice quickly and enable them to revoke
their choice if they did not intend to opt in. The requirement to
provide the confirmation before charging overdraft fees thus balances
the objective of ensuring that consumers understand their choice with
the objective of providing consumers access to overdraft services
expeditiously when requested.
Some industry commenters argued that consumers may have an
emergency during non-bank hours, and need immediate access to funds.
Such instances would presumably be rare. Moreover, the rule does not
prohibit institutions from paying the overdraft, so long as an
overdraft fee is not charged.
Several commenters asked the Board to clarify what is meant by
``sent'' when a confirmation notice is provided in person (for
instance, at a branch). In response, the final comment has been revised
to indicate that the confirmation notice must be ``mailed or
delivered'' (for example, by handing the consumer the confirmation in a
branch). In addition, a few commenters suggested that the Board revise
the comment, which references a written confirmation, to recognize that
the confirmation may also be provided electronically if the consumer
agrees, consistent with Sec. 205.17(b)(1)(iv). The final comment has
been revised by eliminating the references to ``written confirmation''
and replacing them with the more generic term ``confirmation.''
The Board has also received questions as to whether the
confirmation, as well as the opt-in notice required by Sec.
205.17(b)(1)(i), may be provided orally. As specified in the Regulation
E final rule, these disclosures must be provided in writing, or
electronically if the consumer agrees, before the institution assesses
any overdraft fees for ATM and one-time debit card transactions that
overdraw the consumer's account. Further, Sec. 205.4(a) of Regulation
E generally requires disclosures to be clear and readily
understandable, and in a form the consumer may keep. Oral disclosures
would not comply with the requirements of Sec. Sec. 205.17(b)(1)(i) or
(b)(1)(iv).
Upon further analysis, the Board is concerned about possible
circumvention of the fee prohibition. The proposed comment stated that
the institution may not assess overdraft fees until the confirmation is
sent, but it did not expressly tie the mailing or delivery of the
confirmation to the payment of the transaction. Therefore, the proposal
might arguably be read to permit institutions to pay a transaction into
overdraft before the confirmation is sent and simply wait to assess a
fee on an account until after the confirmation is sent. As discussed
below, final comment 17(b)-7 has been revised to clarify that fees or
charges may generally be assessed only on transactions paid after the
confirmation has been mailed or delivered. An interpretation tying the
confirmation with the payment of transactions is consistent with
comment 17(c)-2, adopted in the Regulation E final rule, which
clarified that institutions may only assess overdraft fees on
[[Page 31668]]
transactions paid after obtaining the consumer's affirmative
consent.\2\
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\2\ For ease of reference, a cross-reference to comment 17(b)-7
has been added to comment 17(c)-2.
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The Board recognizes the operational and litigation risks related
to compliance with the confirmation requirement. Final comment 17(b)-7
therefore provides that an institution complies with the confirmation
requirement if it has adopted reasonable procedures designed to ensure
that overdraft fees are assessed only in connection with transactions
paid after the confirmation has been mailed or delivered to the
consumer. Thus, an institution that adopts and follows such procedures
complies with the rule even if on rare occasion, notwithstanding such
procedures, it assesses a fee before the confirmation is mailed or
delivered. For example, an institution complies with the rule if a
computer error results in the confirmation being mailed after an
overdraft fee is assessed.
Comment 17(b)-8--Outstanding Negative Balance
While many institutions charge the same per-item overdraft fee
regardless of the amount of the consumer's negative balance, some
institutions impose tiered fees based on the amount of the consumer's
outstanding negative balance at the end of the day. For example, an
institution may impose a $10 per-item overdraft fee if the consumer's
account is overdrawn by less than $20, and a $25 per-item overdraft fee
if the account is overdrawn by $20 or more. Questions have been raised
as to how overdraft fees may be assessed in these circumstances if a
consumer has not opted into the payment of ATM and one-time debit card
transactions, but if overdrafts may be paid and fees assessed for other
types of transactions, such as checks and ACH.
Proposed comment 17(b)-8 addressed how institutions may impose
tiered fees based on the amount of the consumer's outstanding negative
balance if a consumer has not opted into the payment of ATM or one-time
debit card overdrafts. In such circumstances, the proposal stated that
the fee or charge must be based on the amount of the negative balance
attributable solely to check, ACH, or other types of transactions not
subject to the fee prohibition. An industry commenter observed that the
proposed treatment of tiered fees under the comment was inconsistent
with the treatment of flat per-item overdraft fees (that is, fees that
do not vary from transaction to transaction) under the rule. For
example, if a consumer who has not opted in has a beginning balance of
$10, and the institution pays a $30 point-of-sale transaction and a $20
check, resulting in a negative balance of $40, an institution would be
permitted to charge a flat per-item fee on the check transaction
without regard to the point-of-sale transaction. Under proposed comment
17(b)-8, however, the institution would be required to disregard the
$30 point-of-sale transaction in determining the applicable fee tier.
The commenter also argued that the treatment of tiered fees under
proposed comment 17(b)-8 differed from the treatment of daily or
sustained, negative balance, or other similar fees or charges under
proposed comment 17(b)-9. Thus, the commenter argued that proposed
comment 17(b)-8 should be revised, consistent with the treatment of
flat per-item overdraft fees and sustained overdraft fees under comment
17(b)-9. By contrast, consumer group commenters argued that comment
17(b)-9 should instead be modeled after proposed comment 17(b)-8, such
that sustained overdraft fees could only be charged if the negative
balance was attributable solely to a type of transaction not subject to
the opt-in right.
Upon further analysis, the Board believes that proposed comment
17(b)-8, if adopted, could result in unfavorable consequences for
consumers. Section 205.17(b)(1) does not prohibit institutions from
charging flat per-item overdraft fees on checks, ACH, and other types
of transactions not subject to the fee prohibition when a negative
balance is attributable in part to such transactions, and in part to
ATM or one-time debit card transactions. However, if a consumer does
not opt in and an institution charges tiered fees, proposed comment
17(b)-8 would require the institution to program its systems to
disregard any ATM or debit card transaction that creates in part a
negative balance for purposes of determining the appropriate fee tier.
There are significant operational costs associated with disregarding
amounts overdrawn by ATM and one-time debit card transactions under the
proposed approach to tiered fees. Therefore, institutions may decide to
charge a flat per-item fee rather than a tiered fee. Elimination of
tiered-fee structures could result in higher overall costs to
consumers.\3\ Under a tiered-fee approach that is based on the total
amount overdrawn, consumers who overdraw their account by a small
amount are typically assessed a reduced fee, or fees may be waived
altogether. For example, in a tiered-fee structure, an $8 overdraft may
result in a lower-tier $5 or $10 fee--or no fee at all--instead of a
flat $25 or $30 per-item fee. In many cases, the lower-tier fee is more
proportional to the amount overdrawn than the flat per-item fee, which
may substantially exceed the amount overdrawn. In such cases, consumers
benefit from the lower costs associated with lower-tier fees.
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\3\ Because Sec. 205.17(b)(3) prohibits variations in account
terms, any increases in overdraft fees resulting from the
elimination of a tiered-fee structure would also apply to consumers
who have opted in.
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Therefore, final comment 17(b)-8 has been revised for consistency
with the treatment of flat per-item fees under the rule. Comment 17(b)-
8 states that if a fee or charge is based on the amount of the
outstanding negative balance, the rule prohibits the assessment of any
such fee if the negative balance is solely attributable to an ATM or
one-time debit card transaction, unless the consumer has opted into the
institution's overdraft service for ATM or one-time debit card
transactions. However, the comment explains that the rule does not
prohibit an institution from assessing such a fee if the negative
balance is attributable in whole or in part to a check, ACH, or other
type of transaction not subject to the fee prohibition in Sec.
205.17(b)(1).
Comment 17(b)-9--Daily or Sustained Overdraft, Negative Balance, or
Similar Fees or Charges
Some institutions assess daily or sustained overdraft, negative
balance, or similar fees or charges when a consumer has overdrawn an
account and has not repaid the amount overdrawn within a specified
period of time. For example, if a consumer overdraws his or her account
by $30, the institution may assess an overdraft fee of $20. If the
consumer does not repay the resulting negative $50 balance by the fifth
day, the institution may assess an additional $20 sustained overdraft
fee.
In certain circumstances, as discussed above, an ATM or one-time
debit card transaction may overdraw a consumer's account, even if the
consumer has not opted into the payment of such overdrafts. The
proposal addressed whether the prohibition in Sec. 205.17(b)(1)
against assessing overdraft fees on ATM and one-time debit card
transactions where the consumer has not opted in applies to fees for
daily or sustained overdrafts or negative balances.
[[Page 31669]]
A consumer who has not opted into the payment of ATM and one-time
debit card overdrafts may sometimes overdraw his or her account as a
consequence of the payment both of these transactions and of check,
ACH, or other types of transactions not subject to the fee prohibition
in Sec. 205.17(b)(1). The proposal also addressed whether a daily or
sustained overdraft, negative balance, or similar fee or charge may be
assessed if an account is overdrawn based in part on an ATM or one-time
debit card transaction and in part to a check, ACH, or other type of
transaction not subject to the fee prohibition.
Proposed comment 17(b)-9 explained that for consumers who do not
opt into the payment of ATM and one-time debit card overdrafts, where a
negative balance is attributable solely to an ATM or one-time debit
card transaction, the rule prohibits the assessment of such sustained
overdraft fees. However, where the consumer's negative balance is
attributable in part to a check, ACH, or other type of transaction not
subject to the fee prohibition in Sec. 205.17(b)(1), and in part to an
ATM or one-time debit card transaction, the proposed comment explained
that an institution is not prohibited from assessing a daily or
sustained overdraft, negative balance, or similar fee or charge, even
if the consumer has not opted in. The proposed comment included three
examples illustrating how fees may be applied when a negative balance
is attributable in part to a check, ACH, or other type of transaction
not subject to the fee prohibition. These examples were based on
certain assumptions, including assumptions regarding the posting order
of debits from the account and the allocation of subsequent deposits to
those debits.
Consumer group commenters objected to the proposed comment, arguing
that sustained overdraft and negative balance fees should be prohibited
unless the negative balance is attributable solely to check, ACH or
other transactions not subject to the fee prohibition. Industry
commenters supported the proposed clarification as consistent with the
final rule. However, these commenters objected to the proposed
examples, arguing that because institutions generally do not have a
posting order policy for deposits, the examples should not address
deposit allocation.
The final rule adopts the proposed clarification substantively as
proposed. However, the rule also adds a new comment 17(b)-9.iii
containing an alternative approach for compliance with the fee
prohibition in Sec. 205.17(b)(1) that does not require the institution
to consider allocation of deposits to debits. This approach, discussed
in more detail below, facilitates compliance for institutions that do
not have deposit allocation policies, while potentially resulting in
fewer fees for consumers.
Under the Regulation E final rule, consumers who do not opt in may
not be assessed overdraft fees for paying ATM or one-time debit card
transactions, including daily or sustained overdraft, negative balance,
or similar fees or charges. Consumers who do not opt in may reasonably
expect not to incur per-item overdraft fees for ATM and one-time debit
card transactions, even if such transactions overdraw their accounts.
Similarly, such consumers would reasonably expect not to incur daily or
sustained overdraft, negative balance, or similar fees or charges due
to these transactions. Comment 17(b)-9.i explains that if a consumer
has not opted into the institution's overdraft service for ATM and one-
time debit card transactions, the fee prohibition in Sec. 205.17(b)(1)
applies to all overdraft fees or charges for paying those transactions,
including but not limited to daily or sustained overdraft, negative
balance, or similar fees or charges. Thus, where a consumer's negative
balance is attributable solely to an ATM or one-time debit card
transaction, the rule prohibits the assessment of such sustained
overdraft fees if the consumer has not opted in. For example, if a
consumer who has not opted in has a $50 account balance, and the
institution nonetheless pays a $60 debit card transaction (and no other
transactions occur), the institution may not charge any overdraft fees,
including a daily or sustained overdraft, negative balance, or similar
fee or charge, for paying that debit card transaction.
The Regulation E final rule applies solely to overdraft fees
imposed in connection with ATM and one-time debit card transactions. It
does not apply to overdraft fees imposed in connection with other types
of transactions, including check, ACH, and recurring debit card
transactions. As a result, the rule does not prohibit institutions from
imposing daily or sustained overdraft, negative balance, or similar
fees or charges associated with paying overdrafts for transactions not
covered by the final rule. For example, where a consumer has a $50
account balance, and the institution pays a $60 check, the rule does
not prohibit the institution from charging a per-item overdraft fee, as
well as a daily or sustained, negative balance, or similar fee or
charge if a negative balance remains outstanding.
Comment 17(b)-9.i clarifies that where the consumer's negative
balance is attributable in part to a check, ACH, or other type of
transaction not subject to the fee prohibition in Sec. 205.17(b)(1),
and in part to an ATM or one-time debit card transaction, an
institution is not prohibited from assessing a daily or sustained
overdraft, negative balance, or similar fee or charge, even if a
consumer has not opted in.
The Board believes this result is consistent with the general scope
of the Regulation E final rule, which prohibits fees only with respect
to ATM and one-time debit card transactions. For example, if a consumer
has a $50 account balance, and the institution posts a one-time debit
card transaction of $60 and a check transaction of $40 that same day,
the institution may charge a per-item fee for the check overdraft (but
cannot assess any overdraft fees for the debit card transaction if the
consumer has not opted in). Using the same example, the Board believes
the institution may also charge a sustained overdraft fee when
permitted by the account agreement because the consumer's negative
balance is attributable in part to the $40 check, assuming no other
transactions occur or deposits are made to the account.
The comment also provides guidance on the date on which such a fee
may be assessed. Specifically, comment 17(b)-9.i states that the date
is based on the date on which the check, ACH, or other type of
transaction not subject to the fee prohibition is paid into overdraft.
Because the rule does not cover checks, ACH, or recurring debit card
transactions, the Board believes institutions may charge per-item
overdraft fees, or sustained or other similar fees. Nonetheless, the
Board believes it is appropriate to base the date on which fees may be
charged on the date that the transaction not subject to the rule is
paid.
Proposed comment 17(b)-9.ii included three examples illustrating
how fees may be applied when a negative balance is attributable in part
to a check, ACH, or other type of transaction not subject to the fee
prohibition in Sec. 205.17(b)(1). The first example demonstrated the
general application of the rule. The second example addressed the
circumstance where a consumer with an outstanding negative balance
makes a deposit that reduces the amount of the negative balance, but
does not bring the account current. The third example demonstrated how
to determine the date when fees may apply when the check, ACH, or other
type of transaction is paid
[[Page 31670]]
on a different date than the ATM or one-time debit card transaction
that overdraws the account.
The proposed examples set out certain assumptions in order to
provide clear guidance. Among the assumptions made were that the
institution posts ATM and debit card transactions before it posts other
transactions, and that it allocates deposits to debits in the same
order in which it posts debits. Thus, the examples assumed that
deposits made to the account are allocated first to debit card
transactions, then to checks. However, the rule does not require
transactions to be posted or deposits to be allocated in the manner set
forth in the example. Institutions may post transactions or allocate
deposits as permitted by applicable law.
As noted above, industry commenters argued that the assumption
relating to deposit allocation order, as well as the example in
proposed comment 17(b)-9.ii(b) that takes the allocation of deposits
into account, should be eliminated. These commenters argued that
institutions generally do not have a posting order policy for deposits.
Instead, commenters stated that the examples should permit sustained
fees to be charged once the consumer has overdrawn the account (when
permitted by the account agreement), until such time the account is
brought current.
The final rule prohibits overdraft fees with respect to ATM and
one-time debit card transactions if the consumer has not opted in.
Therefore, institutions must be able to determine whether a negative
balance is attributable solely to these types of transactions, or to
transactions on which overdraft fees are permitted. This inquiry is not
a static one, however; when the amount of the negative balance is
reduced by a deposit but not eliminated, institutions must be able to
determine whether they can continue charging fees and still comply with
the fee prohibition. Otherwise, if a small-dollar check overdraft
occurs at the same time as a larger ATM or one-time debit card
overdraft, a consumer would potentially be subject to sustained
overdraft fees on the small-dollar check for an extended period of
time, even where a deposit would have been sufficient to pay off the
amount of the check. The examples demonstrate how an institution can
make a determination about the permissibility of charging overdraft
fees on an ongoing basis, and are adopted generally as proposed.
The Board recognizes, however, that many institutions do not have
specific deposit allocation policies or practices. Accordingly, the
commentary to the final rule includes an alternative approach that
institutions may use to comply with the fee prohibition in Sec.
205.17(b)(1) that does not require an institution to consider the
allocation of deposits. Specifically, comment 17(b)-9.iii provides
that, where a consumer has not opted into the payment of ATM or one-
time debit card transaction overdrafts, an institution may comply with
Sec. 205.17(b)(1) by not assessing daily or sustained overdraft,
negative balance, or similar fees or charges unless a consumer's
negative balance is attributable solely to checks, ACH or other types
of transactions not subject to the fee prohibition, while that negative
balance remains outstanding. Under this approach, the institution would
not have to consider how to allocate subsequent deposits that reduce
but do not eliminate the negative balance. For example, if a consumer
has a negative balance of $30, of which $10 is attributable to a one-
time debit card transaction, an institution complies with Sec.
205.17(b)(1) if it does not assess a sustained overdraft fee while that
negative balance remains outstanding. The Board believes such an
approach will facilitate compliance for institutions. In addition, this
approach may result in fewer fees for consumers, because institutions
would not assess fees while that negative balance is outstanding even
if they would otherwise be permitted to under the examples in comment
17(b)-9.ii.
Some industry commenters requested additional time to implement the
clarifications in proposed comment 17(b)-9. The Board recognizes that
programming systems to conform to the final rule may raise operational
and cost concerns, and could be challenging to implement by July 1,
2010. However, the Board believes that by adopting the alternative
approach set forth in comment 17(b)-9.iii, many institutions will be
able to comply by July 1, 2010. As explained above, the final rule only
permits daily or sustained, negative balance, or similar overdraft fees
or charges where the negative balance is attributable in whole or in
part to a type of transaction not subject to the fee prohibition.
17(b)(3)--Same Account Terms, Conditions, and Features
Comment 17(b)(3)-2 provides guidance on limited-feature deposit
account products in light of the requirement under Sec. 205.17(b)(3)
to offer consumers the same account terms, conditions, and features
regardless of their opt-in choice. This comment inadvertently included
an incorrect cross-reference. The proposal revises the comment to omit
the cross-reference. No comments were received on the revision, which
is adopted as proposed.
17(d)--Content and Format
The Board did not propose revisions to Sec. 205.17(d) and the
related commentary regarding content and format of the opt-in notice.
However, many industry commenters asked the Board to add commentary to
clarify certain aspects of Model Form A-9, particularly because Sec.
205.17(d) requires institutions to use an opt-in notice that is
substantially similar to the model form and that contains any
applicable content required by Sec. 205.17(d). The Board is adding new
comments 17(d)-3 through 17(d)-5 to address a number of these
questions. In particular, several commenters had questions about
modifications to the tear-off form on Model Form A-9.
Section 205.17(d)(4) requires that the opt-in notice include the
methods by which the consumer may consent to the overdraft service for
ATM and one-time debit card transactions. New comment 17(d)-3 explains
that institutions may tailor Model Form A-9 to the methods offered by
the institution. The comment explains that an institution need not
provide the tear-off portion of Model Form A-9, for example, if it is
only permitting consumers to opt in telephonically or electronically.
In the SUPPLEMENTARY INFORMATION to the Regulation E final rule,
the Board stated that institutions may, but are not required, to
provide a signature line or check box where the consumer can indicate
that they decline to opt in (as shown in the model form). Several
industry commenters requested that the Board include this statement as
a comment. For clarity, the statement has been included in comment
17(d)-3.
New comment 17(d)-4 states an institution may use any reasonable
method to identify the account for which the consumer submits the opt-
in notice. For example, the institution may include a line for a
printed name and an account number, as shown in Model Form A-9. Or, the
institution may print a bar code or use other tracking information.
(The comment cross-references comment 17(b)-6, which describes how an
institution obtains a consumer's affirmative consent.)
Section Sec. 205.17(d)(5) requires institutions that offer a line
of credit subject to the Board's Regulation Z or a service that
transfers funds from another account of the consumer held at the
institution to cover overdrafts to state that fact in the opt-in
notice. Because Model Form A-9 includes only a reference to a transfer
from a savings account, two commenters suggested that
[[Page 31671]]
the Board clarify the Sec. 205.17(d)(5) requirement. Section 205.17(d)
states that the notice required by Sec. 205.17(b)(1)(i) must ``include
all applicable items in this paragraph.'' Thus, if an institution
offers both a line of credit subject to the Board's Regulation Z and a
service that transfers funds from another account of the consumer held
at the institution to cover overdrafts, the institution must state in
its opt-in notice that both alternative plans are offered. If the
institution offers one, but not the other, it must state in its opt-in
notice the alternative plan that it offers. If the institution does not
offer either plan, it should omit the reference to the alternative
plans. For clarity, the Board is addressing the issue in a new comment
17(d)-5.
Marketing of Opt-Ins
Commenters also raised questions about how institutions may
communicate with their customers about consumers' opt-in choices. Some
institutions have asked whether they may provide supplemental materials
with the opt-in notices that describe their overdraft services. In
footnote 39 to the Regulation E final rule, the Board explained that
institutions may provide consumers other information about their
overdraft services and other overdraft protection plans in a separate
document outside of the opt-in notice. See 74 FR at 59047. However, to
the extent such additional materials promote the payment of overdrafts
under Regulation DD, they may be subject to additional disclosure
requirements under 12 CFR 230.11(b). The Board also notes that the opt-
in notice may be combined with other materials (e.g., in the same
mailing), but that the rule requires the notice to be segregated from
all other information. See Sec. 205.17(b)(1)(i).
Industry commenters also asked whether opt-ins for multiple
accounts may be obtained on one consent form (or in the course of
obtaining opt-ins through any other method, such as over the phone or
on-line). Any determination as to whether an opt-in has been obtained
from a consumer in compliance with the rule depends on the facts and
circumstances. However, whether or not a single form is used to obtain
consumers' opt-ins, a separate opt-in decision must be made for each
account, and the choices must be presented in a clear and readily
understandable manner. Thus, a statement on the form that the
consumer's signature acts as an opt-in for all of the consumer's
accounts is not permissible under the final rule.
In addition, consumer group commenters expressed concern regarding
certain marketing tactics that may be used by institutions to provide
the required opt-in notices and to obtain consumers' opt-ins. For
example, one commenter raised concerns that institutions may be using
Short Message Service (``SMS'') text messages as a means to provide the
opt-in notice. Under the Regulation E final rule, the opt-in notice
must be in a form substantially similar to Model Form A-9 and include
all of the information specified in the rule. The notice must also be
clear and readily understandable, and in a form the consumer may keep.
The font size, screen size and character limitations inherent in SMS
text messaging raise significant doubts about the ability of SMS text
messages to satisfy the Regulation E disclosure requirements.
The Board shares commenters' concerns about the marketing of
overdraft services, and is continuing to monitor how institutions are
marketing opt-ins. The Board notes that under Regulation DD,
advertisements may not be misleading or inaccurate. See 12 CFR
230.8(a). Similarly, institutions must not market their overdraft
services in a manner that constitutes an unfair or deceptive practice
within the meaning of the Federal Trade Commission Act, 15 U.S.C. 41 et
seq.
The Board also reminds institutions that the 2005 Joint Guidance on
Overdraft Protection Programs,\4\ discussed in the Regulation E final
rule, provides guidance on marketing and communication of overdraft
services, as well as guidance regarding the disclosure and operation of
program features. In addition to these best practices, the Joint
Guidance addresses safety and soundness considerations and legal risks
related to offering overdraft services to consumers. While certain
aspects of the Joint Guidance have been superseded by subsequent
regulatory changes, institutions should consider other aspects of the
Joint Guidance that have not been addressed in regulations.
---------------------------------------------------------------------------
\4\ See Interagency Guidance on Overdraft Protection Programs,
70 FR 9127, Feb. 24, 2005.
---------------------------------------------------------------------------
IV. Regulatory Analysis
Sections VII and VIII of the SUPPLEMENTARY INFORMATION to the
Regulation E final rule set forth the Board's analyses under the
Regulatory Flexibility Act (5 U.S.C. 601 et seq.) and the Paperwork
Reduction Act of 1995 (44 U.S.C. 3506; 5 CFR part 1320 Appendix A.1).
See 74 FR 59050-59052. Because the final amendments are clarifications
and do not alter the substance of the analyses and determinations
accompanying the Regulation E final rule, the Board continues to rely
on those analyses and determinations for purposes of this rulemaking.
List of Subjects in 12 CFR Part 205
Consumer protection, Electronic fund transfers, Federal Reserve
System, Reporting and recordkeeping requirements.
Authority and Issuance
0
For the reasons set forth above, the Board amends 12 CFR part 205 and
the Official Staff Commentary, as follows:
PART 205--ELECTRONIC FUND TRANSFERS (REGULATION E)
0
1. The authority citation for part 205 continues to read as follows:
Authority: 15 U.S.C. 1693b.
0
2. Section 205.17 is amended by revising paragraph (b)(1) and removing
paragraph (b)(4) to read as follows:
Sec. 205.17 Requirements for overdraft services.
* * * * *
(b) Opt-in requirement. (1) General. Except as provided under
paragraph (c) 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 or one-time debit card transaction pursuant
to the institution's overdraft service, unless the institution:
* * * * *
0
3. In Supplement I to part 205,
0
a. In Section 205.17(a), paragraph 1. is revised.
0
b. In Section 205.17(b), paragraph 7. is revised.
0
c. In Section 205.17(b), new paragraphs 1.iv., 8. and 9. are added.
0
d. In Section 205.17(b)(3), paragraph 2. is revised.
0
e. In Section 205.17(b)(4), paragraph 1. is removed.
0
f. In Section 205.17(c), paragraph 2. is revised.
0
g. In Section 205.17(d), new paragraphs 3. through 5. are added.
Supplement I to Part 205--Official Staff Interpretations
* * * * *
Section 205.17(a)--Requirements for Overdraft Services
17(a) Definition
1. Exempt securities- and commodities-related lines of credit.
The definition of ``overdraft service'' does not include the payment
of transactions in a securities or
[[Page 31672]]
commodities account pursuant to which credit is extended by a
broker-dealer registered with the Securities and Exchange Commission
or the Commodity Futures Trading Commission.
17(b) Opt-in Requirement
* * * * *
1. Scope.
* * * * *
iv. Application of fee prohibition. The prohibition on assessing
overdraft fees under Sec. 205.17(b)(1) applies to all institutions.
For example, the prohibition applies to an institution that has a
policy and practice of declining to authorize and pay any ATM or
one-time debit card transactions when the institution has a
reasonable belief at the time of the authorization request that the
consumer does not have sufficient funds available to cover the
transaction. However, the institution is not required to comply with
Sec. Sec. 205.17(b)(1)(i)-(iv), including the notice and opt-in
requirements, if it does not assess overdraft fees for paying ATM or
one-time debit card transactions that overdraw the consumer's
account. Assume an institution does not provide an opt-in notice,
but authorizes an ATM or one-time debit card transaction on the
reasonable belief that the consumer has sufficient funds in the
account to cover the transaction. If, at settlement, the consumer
has insufficient funds in the account (for example, due to
intervening transactions that post to the consumer's account), the
institution is not permitted to assess an overdraft fee or charge
for paying that transaction.
* * * * *
7. Confirmation. A financial institution may comply with the
requirement in Sec. 205.17(b)(1)(iv) to provide confirmation of the
consumer's affirmative consent by mailing or delivering to the
consumer a copy of the consumer's completed opt-in notice, or by
mailing or delivering a letter or notice to the consumer
acknowledging that the consumer has elected to opt into the
institution's service. The confirmation, which must be provided in
writing, or electronically if the consumer agrees, must include a
statement informing the consumer of the right to revoke the opt-in
at any time. See Sec. 205.17(d)(6), which permits institutions to
include the revocation statement on the initial opt-in notice. An
institution complies with the confirmation requirement if it has
adopted reasonable procedures designed to ensure that overdraft fees
are assessed only in connection with transactions paid after the
confirmation has been mailed or delivered to the consumer.
8. Outstanding Negative Balance. If a fee or charge is based on
the amount of the outstanding negative balance, an institution is
prohibited from assessing any such fee if the negative balance is
solely attributable to an ATM or one-time debit card transaction,
unless the consumer has opted into the institution's overdraft
service for ATM or one-time debit card transactions. However, the
rule does not prohibit an institution from assessing such a fee if
the negative balance is attributable in whole or in part to a check,
ACH, or other type of transaction not subject to the prohibition on
assessing overdraft fees in Sec. 205.17(b)(1).
9. Daily or Sustained Overdraft, Negative Balance, or Similar
Fee or Charge
i. Daily or sustained overdraft, negative balance, or similar
fees or charges. If a consumer has not opted into the institution's
overdraft service for ATM or one-time debit card transactions, the
fee prohibition in Sec. 205.17(b)(1) applies to all overdraft fees
or charges for paying those transactions, including but not limited
to daily or sustained overdraft, negative balance, or similar fees
or charges. Thus, where a consumer's negative balance is solely
attributable to an ATM or one-time debit card transaction, the rule
prohibits the assessment of such fees unless the consumer has opted
in. However, the rule does not prohibit an institution from
assessing daily or sustained overdraft, negative balance, or similar
fees or charges if a negative balance is attributable in whole or in
part to a check, ACH, or other type of transaction not subject to
the fee prohibition. When the negative balance is attributable in
part to an ATM or one-time debit card transaction, and in part to a
check, ACH, or other type of transaction not subject to the fee
prohibition, the date on which such a fee may be assessed is based
on the date on which the check, ACH, or other type of transaction is
paid into overdraft.
ii. Examples. The following examples illustrate how an
institution complies with the fee prohibition. For each example,
assume the following: (a) The consumer has not opted into the
payment of ATM or one-time debit card overdrafts; (b) these
transactions are paid into overdraft because the amount of the
transaction at settlement exceeded the amount authorized or the
amount was not submitted for authorization; (c) under the account
agreement, the institution may charge a per-item fee of $20 for each
overdraft, and a one-time sustained overdraft fee of $20 on the
fifth consecutive day the consumer's account remains overdrawn; (d)
the institution posts ATM and debit card transactions before other
transactions; and (e) the institution allocates deposits to account
debits in the same order in which it posts debits.
a. Assume that a consumer has a $50 account balance on March 1.
That day, the institution posts a one-time debit card transaction of
$60 and a check transaction of $40. The institution charges an
overdraft fee of $20 for the check overdraft but cannot assess an
overdraft fee for the debit card transaction. At the end of the day,
the consumer has an account balance of negative $70. The consumer
does not make any deposits to the account, and no other transactions
occur between March 2 and March 6. Because the consumer's negative
balance is attributable in part to the $40 check (and associated
overdraft fee), the institution may charge a sustained overdraft fee
on March 6 in connection with the check.
b. Same facts as in a., except that on March 3, the consumer
deposits $40 in the account. The institution allocates the $40 to
the debit card transaction first, consistent with its posting order
policy. At the end of the day on March 3, the consumer has an
account balance of negative $30, which is attributable to the check
transaction (and associated overdraft fee). The consumer does not
make any further deposits to the account, and no other transactions
occur between March 4 and March 6. Because the remaining negative
balance is attributable to the March 1 check transaction, the
institution may charge a sustained overdraft fee on March 6 in
connection with the check.
c. Assume that a consumer has a $50 account balance on March 1.
That day, the institution posts a one-time debit card transaction of
$60. At the end of that day, the consumer has an account balance of
negative $10. The institution may not assess an overdraft fee for
the debit card transaction. On March 3, the institution pays a check
transaction of $100 and charges an overdraft fee of $20. At the end
of that day, the consumer has an account balance of negative $130.
The consumer does not make any deposits to the account, and no other
transactions occur between March 4 and March 8. Because the
consumer's negative balance is attributable in part to the check,
the institution may assess a $20 sustained overdraft fee. However,
because the check was paid on March 3, the institution must use
March 3 as the start date for determining the date on which the
sustained overdraft fee may be assessed. Thus, the institution may
charge a $20 sustained overdraft fee on March 8.
iii. Alternative approach. For a consumer who does not opt into
the institution's overdraft service for ATM and one-time debit card
transactions, an institution may also comply with the fee
prohibition in Sec. 205.17(b)(1) by not assessing daily or
sustained overdraft, negative balance, or similar fees or charges
unless a consumer's negative balance is attributable solely to
check, ACH or other types of transactions not subject to the fee
prohibition while that negative balance remains outstanding. In such
case, the institution would not have to determine how to allocate
subsequent deposits that reduce but do not eliminate the negative
balance. For example, if a consumer has a negative balance of $30,
of which $10 is attributable to a one-time debit card transaction,
an institution complies with the fee prohibition if it does not
assess a sustained overdraft fee while that negative balance remains
outstanding.
* * * * *
Paragraph 17(b)(3)--Same Account Terms, Conditions, and Features
* * * * *
2. Limited-feature bank accounts. Section 205.17(b)(3) does not
prohibit institutions from offering deposit account products with
limited features, provided that a consumer is not required to open
such an account because the consumer did not opt in. For example,
Sec. 205.17(b)(3) does not prohibit an institution from offering a
checking account designed to comply with state basic banking laws,
or designed for consumers who are not eligible for a checking
account because of their credit or checking account history, which
may include features limiting the payment of overdrafts. However, a
consumer who applies, and is otherwise eligible, for a full-service
or other particular deposit account
[[Page 31673]]
product may not be provided instead with the account with more
limited features because the consumer has declined to opt in.
* * * * *
Paragraph 17(c) Timing
* * * * *
2. Permitted fees or charges. Fees or charges for ATM and one-
time debit card overdrafts may be assessed only for overdrafts paid
on or after the date the financial institution receives the
consumer's affirmative consent to the institution's overdraft
service. See also comment 17(b)-7.
Paragraph 17(d) Content and Format
* * * * *
3. Opt-in methods. The opt-in notice must include the methods by
which the consumer may consent to the overdraft service for ATM and
one-time debit card transactions. Institutions may tailor Model Form
A-9 to the methods offered to consumers for affirmatively consenting
to the service. For example, an institution need not provide the
tear-off portion of Model Form A-9 if it is only permitting
consumers to opt-in telephonically or electronically. Institutions
may, but are not required, to provide a signature line or check box
where the consumer can indicate that he or she declines to opt in.
4. Identification of consumer's account. An institution may use
any reasonable method to identify the account for which the consumer
submits the opt-in notice. For example, the institution may include
a line for a printed name and an account number, as shown in Model
Form A-9. Or, the institution may print a bar code or use other
tracking information. See also comment 17(b)-6, which describes how
an institution obtains a consumer's affirmative consent.
5. Alternative plans for covering overdrafts. If the institution
offers both a line of credit subject to the Board's Regulation Z (12
CFR part 226) and a service that transfers funds from another
account of the consumer held at the institution to cover overdrafts,
the institution must state in its opt-in notice that both
alternative plans are offered. For example, the notice might state
``We also offer overdraft protection plans, such as a link to a
savings account or to an overdraft line of credit, which may be less
expensive than our standard overdraft practices.'' If the
institution offers one, but not the other, it must state in its opt-
in notice the alternative plan that it offers. If the institution
does not offer either plan, it should omit the reference to the
alternative plans.
By order of the Board of Governors of the Federal Reserve
System, May 27, 2010.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2010-13280 Filed 6-3-10; 8:45 am]
BILLING CODE 6210-01-P