Introduction
Definition of 'Overdraft Services'
Opt-In to Overdrafts for Covered Transactions
Exception
Form of Notice and Consent
Conditioning Prohibited
Debit Holds
Implementation Schedule


Introduction

On November 12 2009 the Board of Governors of the Federal Reserve System released its final rule regarding overdraft services. The rule amends the board's Regulation E to create an opt-in rule under which financial institutions may not charge overdraft fees to consumers in connection with automated teller machine transactions and one-off debit card transactions (collectively, 'covered transactions'), unless the consumer has affirmatively consented to such fees.

The board rejected an opt-out approach to overdraft fees that had been supported by most financial institutions and largely rejected industry concerns about the operational feasibility of the new rule. The mandatory compliance date for all affected financial institutions is July 1 2010 for new accounts and August 15 2010 for existing accounts.

Definition of 'Overdraft Services'

For purposes of the rule, the term 'overdraft service' includes any service whereby a financial institution assesses a fee or charge to pay a transaction (including, without limitation, a cheque, automated clearing house or card transaction) when the consumer has insufficient available funds for the transaction. However, the term does not include payment of overdrafts from a line of credit subject to Regulation Z, a margin line of credit or another consumer asset account.

Opt-In to Overdrafts for Covered Transactions

Under the rule, a financial institution is prohibited from charging overdraft fees on a consumer's covered transactions unless:

  • it gives the consumer an opt-in notice;
  • it gives the consumer a reasonable opportunity to opt in (ie, consent affirmatively) to the overdraft service for covered transactions;
  • the consumer opts in; and
  • the institution provides the consumer with confirmation of the consumer's opt-in election.

If these requirements are not met, the financial institution must either (i) decline covered transactions when they would result in an overdraft, or (ii) permit the overdraft without charging any overdraft fee. The rule does not require financial institutions to receive a consumer's affirmative consent to apply overdraft fees to other kinds of transaction that create overdrafts, such as cheques, automated clearing house transactions and recurring debit card transactions. However, as a practical matter, if the consumer has not opted into the overdraft service for covered transactions, the financial institution will be able to charge for other types of overdraft only if its systems can differentiate the cause of the overdraft.(1) Consumers may revoke their consent at any time, in which event the financial institution must cease assessing overdraft fees on covered transactions as soon as is reasonably practicable.

Exception

The notice and opt-in requirements do not apply to an institution that has a policy and practice of declining to authorize and pay any covered transaction 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.

Form of Notice and Consent

Opt-in notices must be "substantially similar" to the model notice and consent form (Model Form A-9) provided with the rule and must be segregated from all other account information. The rule sets down the required content of the notice in detail, including:

  • a description of the overdraft service;
  • the amount of overdraft fees;
  • the limits (if any) on fees charged or a statement that there are no limits;
  • a statement of the right to opt in; and
  • a statement of the availability of alternatives (eg, an overdraft line of credit).

The required content may be modified or supplemented only in limited ways specified in the rule. Opt-in notices may be in written or electronic format, and electronic notices are not subject to the E-Sign requirements for validity. All notices must be clear and easily understandable and must be presented in a format that the consumer may keep.

The consumer may opt in via mail, telephone, electronic means or in person. However, a financial institution may not obtain a consumer's consent by including pre-printed language about the overdraft service in an account disclosure or signature card that the consumer must sign to open the account. Likewise, a financial institution may not obtain consent by providing a signature card that contains a pre-selected box indicating that the consumer is requesting the service.

Instead, a financial institution must obtain a consumer's opt-in separately from all other consents or acknowledgements that the institution obtains. The Official Staff Commentary accompanying the rule indicates that providing a blank signature line or check box that the consumer could sign or check to indicate consent is permissible if separately associated with the overdraft service opt-in. If such consent is obtained via electronic means, the commentary indicates that one method of consent would be to provide a blank check box for a consumer to click to indicate consent and a button to click that confirms that consent (ie, a two-click process). For opt-in at account opening, the rule permits the financial institution to require the consumer to choose between an account that does not allow overdraft payments of covered transactions and an account that does allow such payments, so long as all other aspects of the accounts are the same. The rule further requires that financial institutions provide confirmation of a consumer's consent in writing, or electronically if the consumer so agrees. This confirmation must include a statement informing the consumer of his or her right to revoke consent.

Conditioning Prohibited

The rule prohibits financial institutions from 'conditioning' the opt-in. In other words, financial institutions must offer consumers who elect not to opt in to an overdraft programme the same account terms, conditions and features that are available to other consumers, except for the overdraft payment features for covered transactions. For example, financial institutions may not condition the payment of overdrafts for cheques, automated clearing house transactions or other kinds of transaction on the consumer's affirmatively opting in to overdraft payments for covered transactions. However, the rule allows institutions to offer deposit account products with limited features designed, for example, to comply with state banking laws or for consumers who are ineligible for full products due to credit or chequing account histories, provided that consumers are not required to take such limited products because they did not opt in to an overdraft programme.

Debit Holds

The January 2009 Regulation E proposal preceding this rule proposed to prohibit financial institutions from assessing overdraft fees where an overdraft would not have occurred but for a hold placed on funds in an amount that exceeded the actual transaction amount and where the merchant could determine the actual transaction amount within a short period of time of authorization of the transaction. However, the rule as adopted does not implement this proposal. The board has noted that this issue calls for a more comprehensive solution involving financial institutions, card networks and merchants, and that the board may decide to take further action on the issue in the future.

Implementation Schedule

For accounts opened prior to July 1 2010, a financial institution may not charge overdraft fees for covered transactions on or after August 15 2010 unless the institution has complied with the relevant portions of the rule and received affirmative consent from the consumer. For accounts opened on or after July 1 2010, a financial institution may not charge such overdraft fees without complying with the relevant portions of the rule and obtaining consumer consent. In either event, as of the July 1 deadline, financial institutions may need to upgrade their technical systems to ensure that they can distinguish between overdrafts caused by automated teller machine or one-off debit card transactions and other kinds of overdraft discussed above, if they want to be able to charge overdraft fees for any transactions.

Additionally, the Supplementary Information accompanying the rule indicates that even before the August 15 deadline, if a consumer contacts a financial institution and states in response to the opt-in notice that he or she does not wish to opt in to overdraft payments, "the Board expects that the institution honor the consumer's choice at that time".(2) This effectively requires institutions to manage an opt-out process between the provision of the opt-in notice and August 15 unless they otherwise implement a blanket opt-in process beginning on July 1.

For further information on this topic please contact David E Teitelbaum, Karl F Kaufmann, John K Van De Weert or Joel D Feinberg at Sidley Austin LLP by telephone (+1 202 736 8000), fax (+1 202 736 8711) or email ([email protected], [email protected], [email protected] or [email protected]).

Endnotes

(1) The rule provides that a financial institution may rely upon a transaction's coding by merchants, other financial institutions or other third parties as one-off or recurring/preauthorized in determining whether an overdraft derives from a transaction that is not subject to the opt-in.

(2) Supplementary Information, p56.

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