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The Brave New World of Regulated Overdraft Fees: Will Your Bank be Prepared?

December 10, 2009

Mandatory Compliance Date is July 1, 2010

Currently, financial institutions may charge consumers a fee for overdraft protection services for ATM and debit card transactions without having to obtain their written agreement or consent to do so. In mid-November the Federal Reserve released a Final Rule and official staff commentary (the "Final Rule") under Regulation E prohibiting the collection by banks of any fees from consumers in connection with certain overdraft protection services unless consumers affirmatively opt-in and consent to the bank's overdraft service and associated fees. Industry experts have estimated that this change may result in a loss of fee revenue of more than $15 billion annually to the financial services industry. The Final Rule applies to all consumers, including existing account holders, but excludes business or commercial accounts. Financial Institutions must comply with the Final Rule by July 1, 2010.

Opt-In Consent Requirement
The Final Rule requires banks to provide consumers with the right to opt-in, or affirmatively consent, to the bank's overdraft services for ATM and one-time, non-recurring debit card transactions. No fee for these overdraft services may be assessed without the consumer's affirmative consent.

As a result, after July 1, 2010, before assessing any fees for ATM and debit card overdraft services, banks will be required to:

  1. provide written notice describing the bank's overdraft service, fees and charges in detail (this notice must be segregated and separate from all other account disclosures);
  2. provide a reasonable opportunity for the consumer to opt-in;
  3. obtain the consumer's affirmative consent; and
  4. provide the consumer with written confirmation of the consumer's consent including a statement informing the consumer of the right to revoke such consent.

To provide a safe harbor form of notice, the Federal Reserve has provided a model opt-in notice for banks to use entitled What You Need to Know about Overdrafts and Overdraft Fees.

The opt-in requirement in the Final Rule applies only to situations in which a bank would charge a fee for paying an overdraft on any ATM or one-time debit card transaction. This would include both ATM cash withdrawals and other transactions involving ATMs, such as bill payments, postage stamp purchases and inter-bank account payments and transfers. For one-time debit card transactions, the Final Rule applies whether the transaction is originated at a point-of-sale terminal, online or by telephone transfer.

Significantly, overdrafts that are created by checks, ACH transactions, or recurring debits (such as automatic bill payments) are not covered by the Final Rule, meaning that banks will still be able to charge fees for honoring overdrafts in these situations without first obtaining the consumer's affirmative consent. The Federal Reserve was sensitive to consumer comments that distinguished between having to pay fees for overdrafts created by checks or recurring automatic payments (consumers apparently don't mind paying fees for overdrafts in these cases) versus paying for such fees for overdrafts initiated at ATM or point-of-sale terminals.

In addition, overdrafts that are paid directly by charging an overdraft line of credit account, or a credit card account or home equity line, are not covered by the Final Rule.

The opt-in notice required under the Final Rule must be segregated from all other account disclosures given to the consumer. For example, the notice cannot be contained or buried within deposit account rules or other agreements presented to a consumer at account opening. Consumers must be given a reasonable opportunity to consent to the overdraft services once they are presented with an opt-in notice. Consent may be obtained by utilizing written consent, electronic consent, or consent by a toll-free phone number.

Upon receiving consumer consent, the institution must provide written or electronic confirmation to the consumer that the consent has been received. This confirmation must disclose consumer'scontinuing right to revoke the consent. Consumers have the unilateral right to revoke their opt-in consent at any time, and banks must comply with such revocation as soon as reasonably practical. After a consumer has revoked consent, banks may no longer charge that consumer for any overdraft fees for ATM and one-time debit card transactions.

Same Account Terms, Conditions, and Features
Banks are prohibited under the Final Rule from varying account terms, conditions and features (other than the overdraft service for ATM and debit card transactions) for consumers who do not opt-in. These terms, conditions, and features include, but are not limited to, interest rates, minimum balance requirements, account features, such as online bill payment services, and the type of ATM or debit card provided to the account holder.

Exception to Opt-in Requirement
Banks do not have to comply with the notice and opt-in requirements if they have a policy and practice of declining to authorize and pay ATM and debit card transactions when the bank has a reasonable belief at the time of authorization that the consumer does not have sufficient funds available to cover the transaction. Where only some of the bank's products qualify for this exception, a bank may apply it on an account-by-account basis. Thus, banks can choose to, in effect, "opt-out" of the Final Rule by eliminating its overdraft protection services on ATM and one-time debit card transactions.

Mandatory Compliance
The new opt-in rule applies to all consumer accounts, even those existing before the Final Rule's implementation date. For accounts opened after July 1, 2010, banks must obtain a consumer's "opt-in" before assessing any fee for ATM or debit card overdraft services. However, banks will have until August 15, 2010 to obtain an existing account holders' "opt-in."

Godfrey & Kahn Commentary
It is important to note that this revision to Regulation E is only one of several developments currently being considered by the Federal Reserve and Congress relating to checking account overdraft fees. Proposals range from limiting account overdraft fees to mandating that all debits and checks be processed in low-to-high amount order to reduce the aggregate number of overdrafts. The revisions to Regulation E affecting overdraft fees and practices, which become effective in just over six months, will present significant and costly operational and compliance challenges for banks.

New systems must be put into place to ensure that all new and existing consumers are given opt-in notices, should your bank decide to continue to pay ATM and other overdrafts and charge fees for this service. Consumers' overdraft service preferences must then be continuously monitored. Processors and banks will be forced to invest significant resources to ensure that they are able to distinguish between overdrafts caused by differing types of transactions (e.g. ACH, check, ATM, debit cards, etc.). Many industry commenters have complained that their current operations and systems could not even distinguish between the various types of transactions (e.g., a one-time payment versus an automatically recurring debit) creating an account overdraft.

Overdraft fees often constitute a significant percentage of a bank's total deposit service charges. The opt-in approach mandated in the Final Rule undoubtedly will result in decreased future overdraft income for banks. Organizations are likely to respond by reducing their number of free account services, and fees for overdrafts may increase.

Practical Tools
Because the Final Rule will impact relationships with every retail consumer, banks should take care now to understand the changes to Regulation E and be prepared for implementation and compliance with the Final Rule by July 1, 2010. We have compiled a list of action items and discussion topics to help banks begin determining how they will comply with the new overdraft rules.

Action Items:

  1. Appoint a committee or individual to be responsible for compliance with the new Final Rule.
  2. Review the Final Rule and Model Notice What You Need to Know about Overdrafts and Overdraft Fees.
  3. Review account opening procedures and current overdraft policies and fees.
  4. Contact key processing vendors to determine what changes they are making to address the changes in overdraft requirements.
  5. Review overdraft fee revenues related to ATM and debit card transactions, and plan for reduced revenues in connection with these fees.
  6. Develop new systems for providing opt-in notices, obtaining consent to charge overdraft fees, providing confirmation of consent, and tracking revocations of consent.

Important Questions:

  1. How will you respond to customer questions about payment and transaction denials?
  2. How will you track consumers who have opted-in or failed to opt-in?
  3. How will you track revocations of consent?
  4. What format is best for receiving consent and for confirming receipt of consent (e.g. written, electronic, etc.)?
  5. Are revenues received from overdraft fees for ATM and one-time debit card transactions outweighed by the new compliance burden, expense and risk? Is it worth it to your bank to continue offering overdraft protection for your customers' ATM and debit card transactions?

Our experienced banking attorneys can help you develop the systems required by these significant regulatory changes, as well as review systems, materials, and practices for compliance. If you have any questions about the Final Rule, please contact:

Jim Sheriff: 414.287.9390, jsheriff@gklaw.com
Peter Wilder: 414.287.9609, pwilder@gklaw.com

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