I. INTRODUCTION
The Truth-in-Savings Act (TISA) was enacted in 1991 as part of the Federal Deposit Insurance Corporation Improvement Act. The Federal Reserve Board adopted Regulation DD to implement the law. Although the original effective date of the implementing regulation was September 21, 1992, with compliance optional until March 21, 1993, the 1992 Congress enacted legislation, signed by President Bush, to extend the effective date for compliance to June 21, 1993. The Official Staff Commentary (OSC) was first published in August, 1994.
II. GENERAL REQUIREMENTS
Regulation DD requires depository institutions to disclose to consumers, prior to opening a deposit account and upon a consumer’s request, any fees imposed in connection with the account, the interest rate, the annual percentage yield (APY) and any other terms concerning the account. The regulation also requires depository institutions to provide periodic statements to consumers which include information about fees imposed, interest earned and annual percentage yield earned. In addition, the regulation places limitations on the methods by which depository institutions may determine the balance on which interest is calculated and establishes rules for advertisements of deposit accounts.
III. COVERAGE
Regulation DD applies to deposit accounts offered by all depository institutions except for credit unions (who are subject to separate regulation issued by the National Credit Union Administration). Advertising rules established under Regulation DD apply to any person who advertises a deposit account offered by a depository institution, including deposit brokers.
IV. DEFINITIONS – SECTION 230.2
To fully comprehend the impact and application of Regulation DD, a complete understanding of the definitions contained within the regulation is helpful. The following is a listing of the primary definitions contained within Regulation DD:
V. GENERAL DISCLOSURE REQUIREMENTS – SECTION 230.3
Regulation DD specifies the style, format, timing and delivery of account disclosures. The account disclosures must be made clearly and conspicuously in writing and in a form the consumer may keep.
Disclosures for each account offered by an institution may be presented separately or combined with disclosures for the institution’s other accounts, as long as it is clear which disclosures are applicable to the consumer’s account. The disclosures must reflect the terms of the legal obligation of the account agreement between the consumer and the institution and must be presented in a format allowing consumers to readily understand the terms of their own accounts.
The disclosures do not have to be provided in any particular order or segregated from other disclosures or account terms. The disclosures may be combined with contract terms and with disclosures required by other regulations (such as Regulation E and Regulation CC). They may be made on more than one page and may appear on the front and reverse sides. You may use inserts to a document or fill in blanks to show current rates or fees. However, if more than one document is used for a single account (or if more than one account is described in a brochure), consumers must be able to understand from the several documents (or multiple account disclosures) which terms apply to their particular account (e.g.,See, Appendix B, Form B-4).
The disclosures may be provided to consumers in one or more of the following documents: a signature card, a rate sheet, a fee schedule and a brochure that describes other terms of the account. If the disclosures consist of more than one document, all relevant documents must be provided at the same time, and it must be clear to which account each document relates. E.g., the regulation does not permit you to hand a consumer a brochure that describes some terms of the account when an account is opened and later mail a rate sheet and fee schedule to the consumer.
A. Multiple Consumers
In the case of an account held, or to be held by more than one consumer, the institution may provide the account disclosures to any one of the co-owners. Similarly, if the account is held by a group or organization, the institution may provide the disclosures to any one individual who represents or acts on behalf of the group.
B. Oral Response to Inquiries
If an institution chooses to respond to an oral inquiry requesting interest rate information on accounts, the institution must state the APY. The institution may also state the interest rate in addition to the APY, but is not allowed to state any other rate. While the Federal Reserve Board expects that banks will use the terms “annual percentage yield” and interest rate, the regulation does not require this terminology in responding to oral requests for interest rate information.
C. Rounding and Accuracy Rules for Rates and Yields
The APY and APY earned must be rounded to the nearest one-hundredth of 1 percent (.01%) and expressed to two decimal points. The regulation allows a tolerance of one-twentieth of 1 percentage point (.05%) above or below the actual APY or APY earned, determined in accordance with the rules contained in Appendix A.
VI. ACCOUNT DISCLOSURES – SECTION 230.4
A. Delivery
Account disclosures must be provided to a consumer before an account is opened or before a service is provided, whichever is earlier. An institution is deemed to have provided a service when a fee required to be disclosed is assessed.
If the consumer is not present when the account is opened or the service is provided and has not previously received the disclosures, the institution must mail or deliver the required disclosures no later than 10 business days after the account is opened or the service is provided, whichever is earlier.
B. Requests
Account disclosures must also be provided to a consumer upon request. If the request is made at a time when the consumer is not present at the institution when a request is made, the disclosures must be mailed or delivered within a reasonable time after receipt of the request. The regulation suggests that 10 business days, consistent with the timing rule for disclosures associated with opening accounts, would be considered a reasonable time within which to respond to a request for account disclosures.
In determining if a particular contact by a consumer triggers the account disclosure requirements, it should be noted that a mere inquiry about rates for an account does not require an institution to provide account disclosures. For example, telephone inquiries about rates and yields on certificates of deposit or about fees and charges for an account do not trigger an institution’s duty to send disclosures to the caller. However, the duty is triggered if, in the course of inquiring about an account, a consumer asks for written information to be provided.
An institution must provide disclosures to consumers for each account for which the consumer requests information. If the consumer makes the request in person, disclosures must be provided at that time. If a consumer expresses a general interest in a type of account (e.g., NOW accounts) of which an institution offers several versions, an institution may comply by sending disclosures for any one of the products. E.g., if the institution offers three different NOW account, and a consumer requests general information about NOW accounts, disclosures covering all three types of NOW accounts are not required, but a disclosure for any one of the accounts may be provided.
Disclosures provided upon request must specify an interest rate and annual percentage yield that were offered within the most recent 7 calendar days; state that the rate and yield are accurate as of an identified date; and give a telephone number which consumers may call to obtain current rate information.
The regulation further allows institutions to describe a time account’s maturity as a term such a “one year” or “six months,” rather than stating a specific date, such as, “January 10, 1994” since the actual date of maturity will not be known.
C. Content of Account Disclosures
Regulation DD requires the following information be included in the account disclosures:
1. Rate Information
a. Annual Percentage Yield and Interest Rate Institutions are required to disclose the APY and the interest rate, using those terms. If the account is a fixed rate account, the institution must disclose the period of time that the interest rate will be in effect after the fixed rate account is opened.
In connection with stepped-rate accounts, a single APY must be disclosed. (See Appendix A, Part 1, Paragraph B) However, each interest rate and the period of time each will be in effect must be provided in the disclosures. For example, if an institution offers a one-year certificate of deposit with daily compounding and an interest rate of 5% for the first 180 days and 5.50% for the remaining 185 days, the disclosure might say something like the following: “The interest rate on your account is 5% for the first 180 days and 5.5% for the remaining 185 days, with an annual percentage yield of 5.39%” (See Model Clause B-1(a)(iii) in Appendix B).
An institution offering tiered-rate accounts must disclose each interest rate along with the corresponding annual percentage yield (or range of annual percentage yields if appropriate) for the specified balance level. For example, if an institution pays a 5% interest rate for balances below $5,000 and a 5.5% interest rate for balances $5,000 or above, both rates must be provided as well as the annual percentage yields that would apply to the two tiers in the account (See Appendix A, Part 1 for the calculation of the annual percentage yields for stepped-rate and tiered-rate accounts).
b. Variable Rate Accounts In connection with variable rate accounts, the institution must disclose the following:
(1) The fact that the interest rate and annual percentage yield may change;
(2) How the interest rate is determined. For example, if the interest rate is tied to an index, (e.g., the one year Treasury Bill) plus or minus a specified margin, the index must be clearly identified and the specific margin stated;
(3) The frequency of interest rate changes; and
(4) Any limits on the amount the interest rate may change. For example, if the institution places a floor or ceiling on rates or provides that a rate may not decrease or increase more than a specified amount during any time period, that must be disclosed.
2. Compounding and Crediting
a. Frequency Institutions must disclose the frequency with which interest is compounded and credited. If the frequency of either would change if the consumer does not meet a minimum time requirement, then the institution must disclose the alternate frequency that would be triggered. Descriptions such as “quarterly” or “monthly” adequately disclose the institution’s practices regarding crediting and compounding.
Compounding is defined as the number of days in each compounding period. For example, quarterly compounding is to be expressed as 91.25 days in the compounding period. Semiannual compounding is to be expressed as 182.5 days in the compounding period, and annual compounding should be expressed as 365 days (assuming other than a leap year).
b. Effect of Closing an Account If a consumer forfeits interest upon account closure before accrued interest is credited, a disclosure that such interest will not be paid must be given.
3. Balance Information
a. Minimum Balance Requirements The regulation requires institutions to disclose any minimum balance required to open the account, to avoid the imposition of fees, or to obtain the annual percentage yield (e.g., if a $3.00 fee is imposed if the average daily balance in the account drops below $500, this minimum balance requirement must be disclosed).
If fees on one account are tied to the balance in another account, the institution must also provide disclosures regarding these provisions [e.g., if an institution ties fees payable on a NOW account to a minimum balance maintained in a savings account (or a combination of the two), the NOW account disclosures must explain that fact and how the balance in the savings account (or in both accounts) is determined]. The fee need not be disclosed in the savings account disclosures if the fee is not imposed on that account.
b. Balance Computation Method Institutions must describe the balance computation method used to determine the balance on which interest is paid (note that § 230.7 requires the use of either the daily balance or average daily method).
c. When Interest Begins to Accrue A statement of when interest begins to accrue on noncash deposits also must be provided. Section 230.7(c) requires an institution to begin paying interest no later than the business day specified in § 606 of the Expedited Funds Availability Act and its implementing Regulation CC, however institutions may begin to pay interest earlier, such as the day a noncash deposit (typically a check) is received by the institution. If an institution follows this practice, the disclosure should provide that interest begins to accrue on the day a noncash deposit is received [See, Appendix B, Model Clause B-1(e)]. On the other hand, if an institution does not start accruing interest immediately, then the disclosure should provide that interest begins to accrue no later than the business day when the institution receives credit for the deposit.
4. Fees
The amount of any fee that may be imposed in connection with an account and conditions under which the fee may be imposed must be disclosed. Regulation DD gives examples of the types of fees that may be assessed in connection with an account, including: maintenance fees (e.g., service fees and dormant account fees); fees related to deposits or withdrawals, whether by check or electronic transfer (e.g., per check fees, fees for use of the institution’s automated teller machines, fees to stop payment on a check previously issued and fees associated with checks returned due to insufficient funds); fees for special account services (e.g., fees for balance inquiries and fees to certify checks); and fees to open or to close accounts (other than early withdrawal penalties for time accounts).
Check-printing fees must also be disclosed, however, since institutions have no control over price increases for these fees, institutions may: disclose the lowest price at which checks could be purchased and indicate that higher prices may apply for the initial order and when checks are reordered; give a range of prices; or state that prices vary (See, Appendix B, Forms B-4 and B-5). Furthermore, the regulation has an exception from the change-in-terms requirements so that an institution does not have to provide advance notice of change-in-terms for check printing fees. A change in terms notice is not required for any increase in fees for printing checks, regardless of whether the fee is assessed by a third party or by the institution itself, even if the institution adds a “mark-up” to the price charged by the vendor before passing the fee onto the customer.
Check printing fees are not considered maintenance or activity fees, even if they are imposed in whole or in part by the institution. This is important since the regulation prohibits an institution from advertising an account as “free” or “no cost” if any maintenance or activity fee might be imposed. If check printing fees had been considered maintenance or activity fees, the institution could not advertise an account as “free” or “no cost” if it imposed a fee for checks.
5. Transaction Limitations
The account disclosures must identify any limitation on the number or dollar amount of deposits to, withdrawals from, or checks written on an account for any time period. If withdrawals or deposits are not permitted on a time account, that fact must also be disclosed.
6. Features of Time Accounts
a. Time Requirements The institution must disclose the actual maturity date to consumers who open new accounts to ensure that they know the exact date the account matures. However, institutions may state a term (for example, “six months”) rather than a specific date when providing disclosures in response to requests by consumers.
b. Early Withdrawal Penalties The disclosure must identify whether the account is subject to an early withdrawal penalty. If it is, it must disclose how the penalty is calculated when the penalty will be imposed.
c. Withdrawal of Interest Prior to Maturity If the account compounds interest and interest may be withdrawn prior to maturity, the institution must disclose the fact that the APY assumes interest remains on deposit until maturity and that an early withdrawal will serve to reduce earnings.
For accounts that do not compound interest on an annual or more frequent basis, with a stated maturity greater than one year that require interest payouts at least annually and that disclose an APY determined in accordance with Appendix A, § E, the institution must disclose the fact that interest cannot remain on deposit and that payout of interest is mandatory.
d. Renewal Policies The institution must also disclose whether or not the account will renew automatically at maturity. If it will, the disclosures must also state whether or not a grace period will be provided, and if so, the length of the grace period. In addition, if the account will not automatically renew, the disclosures must state whether interest will be paid after maturity if the consumer does not renew the account. If the agreement provides that the time account may be redeemed at the institution’s option, then the disclosure must state the date or the circumstances under which the institution may redeem the deposit [See, Appendix B, Model Clause B-1(h)(i)].
e. Bonuses If an institution offers a bonus in connection with an account, it must identify the amount or type of bonus, when the bonus will be provided, and any minimum balance and time requirements necessary to obtain the bonus.
D. Notice to Existing Account Holders
Institutions are required to provide notice of availability of disclosures to account holders who receive periodic statements. This notice must be included on or with the first periodic statement sent on or after June 21, 1993, (or on or with the first periodic statement for a statement cycle beginning on or after that date). The notice must state that consumers may request account disclosures containing terms, fees and rate information for their account. Alternatively, an institution may simply provide the required account disclosures to consumers either with a periodic statement or separately, but in either event this notice must be sent out no later than when the notice of availability is required to be sent after the mandatory compliance date of March 21, 1993.
E. Overdraft Protection Programs
Effective July 1, 2006, § 230.4 requires disclosures that specify the types of transactions which may result in overdraft fees, although an exhaustive list is not be required. It is sufficient to disclose that a fee is imposed for overdrafts that are created by checks or by in-person, ATM or other electronic withdrawals. The initial account disclosures are applicable regardless of whether the financial institution actively promotes the overdraft protection program.
VII. SUBSEQUENT DISCLOSURES – SECTION 230.5
A. Advance Notice of Change in Terms
The institution must provide advance notice of any change in a term required to be disclosed in the account disclosures, if the change may reduce the APY or adversely affect the consumer. The advance notice of change in terms required must include the effective date of the change and must be mailed or delivered at least 30 calendar days prior to the effective date of the change.
While the regulation does not specifically define the types of changes which may be “adverse to the consumer,” the regulation attempts to provide some guidance in this regard. For example, if an institution increases the minimum balance required to earn interest or to avoid imposition of a fee or increases the fee it charges for stop payment orders, an advance notice must be provided. Similarly, if the interest rate on a fixed-rate account decreases, the institution must send a notice in advance of the scheduled rate change. However, an advance notice of an increase in the interest rate is not required by the regulation.
Institutions may include the change in terms disclosure on a regular periodic statement or in a special mailing, and may combine information concerning the changed term with other information on the same or separate pages. Institution wishing to provide an entire updated account disclosure may do so as long as the changes are specifically brought to the consumer’s attention. For example, institutions may state that “X” fee has been changed (including, of course, the amount of the new fee), or the institution may use an accompanying letter that alerts the consumer to the new fee, or which highlights the changed term in some fashion.
To ensure that consumers fully understand when the change may affect their accounts, institutions must disclose the effective date, for example, “as of July 15, 1993.” Words similar to “in 30 days” cannot be used unless the notice clearly indicates the starting date.
A change in terms notice is not triggered if changes are specifically identified in the initial account disclosures. For example, if a NOW account disclosure states that the monthly service fee is waived for employee account holders during their employment, but will be assessed when the account holder is no longer employed by the institution, no advance notice is required to begin assessing the monthly service account fee once the consumer leaves the employment of institution.
B. No Notice Required
The regulation specifically provides that no advance notice of change in terms is required for changes in (1) APY’s and interest rates for variable rate accounts; (2) check printing fees assessed by either third parties or the institutions itself; or (3) any term of a time account with a maturity of one month or less.
VIII. RENEWAL OF TIME DEPOSITS
In considering change in terms notice requirement, automatically renewable time accounts have been broken up into the following three categories:
As indicated above, short term time accounts with a term of one month or less do not trigger any renewal notice.
A. Automatically Renewable Time Deposits Greater Than One Year
If an automatically renewable time account has a maturity longer than one year, the institution must provide a new set of account disclosures, along with the date that the existing account matures. If the interest rate and APY that will be paid for new account are unknown when disclosures are provided, the institution must state that the interest rate and the annual percentage yield for the account have not yet been determined, the date when they will be determined, and a telephone number the consumer can call to obtain the interest rate and the annual percentage yield that will be paid if the account renews. The disclosure must be mailed or delivered at least 30 calendar days before the account matures. Alternatively, the disclosure may be mailed or delivered at least 20 calendar days before the end of the grace period on the existing account, provided that a grace period of at least 5 calendar days is allowed.
B. Maturity of One Year or Less But Longer Than One Month
If an account has a maturity of one year or less but longer than one month, the institution may either provide the disclosures required for automatically renewable time deposits with a term greater than one year or may provide an alternative disclosure.
Under the alternative disclosure, the institution must disclose (1) the date the existing account matures and the maturity date if the account is renewed; (2) the interest rate and the APY for the new account if they are known (or, if they are not known, the fact that they have not yet been determined, the date when they will be determined, and a telephone number that the consumer can call to obtain that information); and (3) any difference in the terms of the new account as compared to the terms required to be disclosed under the account disclosure rules for the existing account.
Once again, this disclosure must be mailed or delivered at least 30 calendar days before the account matures. Alternatively, the disclosure may be mailed or delivered at least 20 calendar days before the end of the grace period on the existing account, provided a grace period of least 5 calendar days is allowed.
C. Accounts with Maturity of One Month or Less
For time accounts with a maturity of one month or less that renew automatically at maturity, the subsequent disclosure requirement (any difference in the terms of the new account as compared to the terms required to be disclosed in the account disclosure for the existing account, other than a change in the interest rate and corresponding change in the APY) has been removed. There is no longer a requirement to deliver subsequent disclosures on these types of accounts.
D. Non-Automatically Renewable Deposits with Maturity Longer Than One Year
For time accounts with a maturity longer than one year that do not renew automatically at maturity, the institution must disclose to consumers the maturity date and whether interest will be paid after maturity. These disclosures must be mailed or delivered at least 10 calendar days before the account matures.
IX. PERIODIC ACCOUNT STATEMENTS – SECTION 230.6
Regulation DD does not require an institution to provide a periodic statement in connection with a deposit account. However, if an institution provides a periodic statement, certain information must be included.
A. General
Periodic statement information includes the following:
1. Annual Percentage Yield Earned– The “APY earned” during statement period, using that term, calculated according to the rules in Appendix A;
2. Amount of Interest– The dollar amount of interest earned during the statement period;
3. Fees Imposed– Fees required to be disclosed in the account disclosure that were debited to the account during the statement period, itemized by type and dollar amounts; and
4. Length of Period– The total number of days in the statement period, or the beginning and ending dates of the period.
In making these disclosures, if an institution uses the average daily balance method and calculates interest for a period other than the statement period, it must calculate and disclose the APY earned and the amount of interest earned based on that period rather than the statement period. The institution must also give the length of both periods.
B. Electronic Disclosures Are Allowed
Section 230.6 provides that an institution and a consumer may agree to electronic communication periodic statement disclosures, but such disclosures must comply with general disclosure requirements found in § 230.6 and must comply with § 230.3 and any applicable timing requirements of Regulation DD. Under the Electronic Signatures in Global and National Commerce Act (the E-Sign Act), a bank is required to obtain a consumer’s affirmative consent when providing disclosures related to a transaction. “Electronic communication” means “a message transmitted electronically between a consumer and a depository institution in a format that allows visual text to be displayed on equipment such as a personal computer monitor” (e.g., consumers may agree to access and retain periodic disclosures posted on an institution’s Internet website).
An institution that uses electronic communication to provide disclosures must: (1) send the disclosure to the consumer’s electronic address; or (2) make the disclosure available at another location such as an Internet web site; and (i) alert the consumer of the disclosure’s availability by sending a notice to the consumer’s electronic address (or to a postal address, at the institution’s option). The notice must identify the account involved (if applicable) and the address of the internet web site or other location where the disclosure is available; and (ii) make the disclosure available for at least 90 days from the date the disclosure first becomes available or from the date of the notice alerting the consumer of the disclosure, whichever comes later. If a disclosure provided by electronic communication is returned to an institution undelivered, the institution must take reasonable steps to attempt redelivery using information in its files.
C. Regulation E Accounts
If an institution provides quarterly statements on an account pursuant to Regulation E, the institution may, but is not required, to treat any monthly Regulation E statements as periodic statements for Regulation DD periodic statement disclosure purposes.
For banks that choose not to do so, the quarterly statement must reflect the APY earned and interest earned for the full quarter (unless the institution uses the average daily balance method and calculates interest for a period other than the statement period in which case it must choose the special rule in § 230.6(b) of the regulation). If the institution elects to provide either interest or rate information on these interim statements, however, the statement would be deemed a Regulation DD statement and will be subject to the periodic statement disclosure rules. If an institution treats Regulation E interim statements as Regulation DD periodic statements, it must provide information from the period since the last statement was issued. In addition, if the institution discloses fees on a monthly statement to comply with Regulation E, it does not have to repeat those fees on the quarterly periodic statement.
D. Account Balance Information
Currently, many institutions may include on the periodic statement for one account “status information” for other accounts held by the same customer and the same institutions. For example, a monthly statement for a consumer’s checking account may also provide the account number and balance of the consumer’s savings account. Under such circumstance, the account number, the type of account, and balance information for an account may be
included on a periodic statement given for another account without triggering full periodic statement disclosure requirements. However, providing information other than the balance in an account on another account statement would require the institution to give full disclosures.
E. APY Calculation
Regulation DD provides an additional formula to calculate the APY earned on the periodic statement for accounts when an institution uses the daily balance method to accrue interest and when a periodic statement is sent more frequently than the period for which interest is compounded. The need for this additional formula arose because in these situations, the APY earned could be higher than the APY provided in advertisements and opening account disclosures.
Appendix A to the regulation contains an alternate formula which must be used when an institution uses the daily balance method to accrue interest and when a periodic statement is sent more often than the period for which interest is compounded.
F. Use of “Ledger” or “Collected” Balance to Calculate APY Earned
The regulation allows banks that accrue interest using the collected balance method to use either the ledger balance or the collected balance in determining the APY earned. On the other hand, if an institution accrues interest using a ledger balance method, it must use the ledger balance to determine the APY earned.
X. PAYMENT OF INTEREST – SECTION 230.7
Interest must be calculated on the full amount of principal in an account for each day by using either the daily balance or the average daily balance method. The legislative history to TISA states that this provision is intended to prohibit institutions from using certain balance computation methods, such as the “low balance” or “investable balance” method of computing interest. In addition, an institution is required to use the same method to determine any minimum balance required to earn interest as it uses to determine the balance on which interest is calculated.
Since interest must be paid each day that funds remain on deposit, institutions must apply a daily rate of at least 1/365 of the interest rate to the balance. In a leap year, a daily rate of 1/366 may be used. A daily periodic rate of 1/360 of the interest rate may be used, as long as it is applied 365 days a year. However, the 360/360 method is not permitted because it fails to apply the disclosed rate for each day of the year.
Banks are not required to pay interest during a grace period for an automatically renewable time account if the consumer decides during the grace period not to roll over funds. In addition, banks are not required to pay interest after a non- rollover time account has matured.
The regulation does not require banks to compound or credit interest at any particular frequency. As a result, an institution may compound annually, biannually, quarterly, monthly, daily, continuously, or on any other basis. Interest earned on the account may be credited on any basis as well.
Interest must begin to accrue on the account not later than the business day specified for interest-bearing accounts in § 606 of the Expedited Funds Availability Act and Regulation CC. Interest must continue to accrue until the funds are withdrawn.
XI. ADVERTISING
A. Misleading and Inaccurate Advertisements
An advertisement may not refer to or describe an account as “free” or “no cost” (or contain a similar term) if any maintenance or activity fee may be imposed on the account. In addition, the word “profit” shall not be used in referring to interest paid on an account. Note: Check printing fees, whether imposed on whole or in part by the institution or third parties, is not considered either a maintenance or activity fee.
In regard to overdraft protection plans, misleading advertising includes: describing an overdraft plan that is not subject to Regulation Z as a line of credit; stating that “all checks will be paid” even within a certain range or dollar amount if the financial institution has discretion to pay or return items; stating that consumers may allow accounts to stay overdrawn, since such plans typically require a relatively short period for return to a positive balance; describing only one trigger (e.g., a non sufficient check) that applies to an overdraft program if the program is accessed by other means (e.g., ATM transactions); or advertising any account-related service for which there is a fee in an advertisement that also describes an account as “free” or “no cost,” unless the advertisement clearly and conspicuously indicates there is a cost for the service.
B. Permissible Rates
If an advertisement states a rate of return, it shall state the rate as an “annual percentage yield” using that term. (The abbreviation “APY” may be used provided the term “annual percentage yield” is stated at least once in the advertisement.) The advertisement shall not state any other rate, except that the “interest rate” using that term, may be stated in conjunction with, but not more conspicuously than, the annual percentage yield to which it relates.
C. Trigger Terms
1. Annual Percentage Yield
If the annual percentage yield is stated in an advertisement, additional disclosures are required. In such cases, the advertisement shall state the following information, to the extent applicable, clearly and conspicuously:
a. If the account is a variable rate account, a statement that the rate may change after the account is opened;
b. The period of time the APY will be offered, or a statement that the APY is accurate as of a specified date;
c. The minimum balance required to earn the advertised APY. For tiered rate accounts, the institution must also disclose the minimum balance required for each tier in close proximity and with equal prominence to the applicable APY;
d. The minimum deposit required to open the account if it is greater than the minimum balance necessary to obtain the advertised APY;
e. A statement that fees could reduce the earnings on the account; and
f. In the case of time deposits, the term of the account (time requirements) and a statement that a penalty will or may be imposed for early withdrawals (early withdrawal penalties). In the case of noncompounding time accounts with a stated maturity greater than one year that do not compound interest on an annual or more frequent basis, that require interest payouts at least annually, and that disclose an APY determined in accordance with Appendix A, Section E, a statement that interest cannot remain on deposit and that payout of interest is mandatory.
2. Bonuses
If a bonus is stated in an advertisement, the advertisement shall state the following information, to the extent applicable, clearly and conspicuously:
a. The “annual percentage yield,” using that term;
b. The time requirement to obtain the bonus;
c. The minimum balance required to obtain the bonus;
d. The minimum balance required to open the account, if it is greater than the minimum balance necessary to obtain the bonus; and
e. When the bonus will be provided.
D. Exemptions
Certain disclosures need not be included if an advertisement is made through:
1. Certain Media
a. Broadcast or electronic media, such as television or radio;
b. Outdoor media, such as billboards; or
c. Telephone response machines.
2. Indoor Signs
Signs inside the premises of a depository institution (or the premises of a deposit broker).
3. Telephone Response Machines; or
4. Indoor Media at the institutions, Subject to the Following:
Lobby boards inside a branch, or if a rate is displayed on a sign designed to be viewed only from the interior of an institution, the sign need only include the annual percentage yield (APY) and a statement advising consumers to ask employees about fees and terms applicable to the advertised account. The signs need not provide other information required under the advertising section of TISA, such as the statement that fees could reduce earnings on the account.
Under the regulation, any sign inside the premises of the institution is exempt unless the sign faces outside and reasonably may be viewed by a consumer only from the outside and reasonably may be viewed by a consumer only from the outside. The regulation exempts indoor advertisements, however they are displayed, such as banners, preprinted posters, and chalk or pegboards, whether they are affixed to a wall or displayed on one or both sides of an easel. Indoor advertisements on computer screens and electronic media are also exempted.
Any sign or notice inside the premises that can be retained by a consumer (such as a brochure or a computer printout) will be subject to the general advertising rules, not the less onerous rule outlined above for signs designed to be viewed only from inside the institution.
XII. RECORD RETENTION – SECTION 230.9
In connection with record retention responsibilities, institutions must retain evidence of compliance with Regulation DD for a minimum of 2 years after the date the disclosures are required to be made or action is required to be taken.
XIII. ADDITIONAL DISCLOSURE REQUIREMENTS FOR OVERDRAFT_SERVICES – SECTION 230.11 (EFFECTIVE JANUARY 1, 2010)
Beginning on January 1, 2010, Regulation DD required all depository institutions to disclose aggregate overdraft fees on periodic statements, and not solely institutions that promote the payment of overdrafts, as had previously been the case.
A. Disclosure of Total Fees on Periodic Statements
Recent revisions to § 230.11 expanded the requirement to disclose overdraft fees on periodic statements to apply to all institutions, not solely to institutions that promote the payment of overdrafts. Although periodic statements are not required under TISA, institutions that provide such statements are required to disclose fees or charges imposed on the account during the statement period. Under the final rule, all institutions will be required to provide on periodic statements the aggregate dollar amount totals for overdraft fees and for returned item fees, both for the statement period as well as for the calendar year-to-date. The Board has adopted commentary clarifying that the aggregate fee total does not include fees for transferring funds from another account of a consumer to avoid an overdraft, or fees charged under a service subject to the Board’s Regulation Z.
Pursuant to § 230.11, a depository institution must separately make the fee disclosures on each periodic statement, as applicable. Thus, if a consumer has not incurred fees since the beginning of the year (or statement period), the institution is not required to provide a “$0” aggregate total for the year-to-date (or statement period). However, institutions may, at their option, provide aggregate fee disclosures even if a consumer has not been charged fees since the beginning of the year or for a particular statement period.
1. Format of Aggregate Fee Disclosures
The final rule also adds proximity and format requirements which are intended to enhance the effectiveness of the disclosures and to make them more noticeable to consumers. The aggregate fee disclosures must be provided in close proximity to the transaction history.
For example, the aggregate fee totals could appear immediately after the transaction history on the periodic statement reflecting the fees that have been imposed on the account during the statement period. Sample Form B-10, attached as Exhibit A, illustrates how an institution should provide the aggregate cost data. Aggregate fee disclosures must be provided using a format substantially similar to Sample Form B-10.
The Board has revised it commentary to clarify that institutions must use the term “total overdraft fees” in the periodic statement aggregate fee disclosure to describe the total amount of all fees or charges imposed on the account for paying overdrafts. Further clarification has also been provided for an institution that provides a statement for the current period reflecting that fees imposed during a previous period were waived and credited to the account. In such a circumstance, the institution may, but is not required to, reflect the adjustment in the total for the calendar year-to-date and in the applicable statement period. For example, if an institution assesses a fee in January and refunds the fee in February, the institution could disclose a year-to-date total reflecting the amount credited but it should not affect the total disclosed for the February statement period, because the fee was not assessed in the February statement period. However, because some institutions may assess and then waive and credit a fee within the same statement cycle, the institution may reflect the adjustment in the total disclosed fees imposed during the current statement period and for the total for the calendar year-to-date. In this case, if the institution assesses and waives the fee in February, the February fee total could reflect the total net of the waived fee.
2. Advertising Disclosures for Overdraft Services
If a financial institution promotes the payment of overdrafts, § 230.11 provides the following specific requirements for advertisements:
NOTE: Bullet points 2 and 4 (listed above) are not required for an advertisement made on an ATM screen or using a telephone response machine.
Section 230.11(b)(2) includes a detailed list of actions that are not considered “promotion of the payment of overdrafts” and which do not trigger the additional periodic statement information:
3. Disclosures Provided Through Automated Systems
a. Disclosure of Account balances
If an institution discloses balance information through an automated system, it must disclose an account balance that excludes funds the institution may provide to cover an overdraft in its discretion, funds that will be paid by the institution under a service subject to the Board’s Regulation Z, or funds transferred from another account of the consumer. For example, although an institution may add a $500 cushion to the consumer’s account balance when determining when to pay an overdrawn item, under the final rule, the additional $500 could not be included in the balance provided to the consumer through an automated system.
b. Application to Retail Sweep Programs/Investment Sweep Programs
After publication of the Regulation DD final rule, questions were raised about the application of the rule to retail sweep programs. In a retail sweep program, an institution establishes two legally distinct subaccounts, a transaction subaccount and a savings subaccount, which together make up the consumer’s account. The institution allocates and transfers funds between the two subaccounts in order to maximize the balance in the savings subaccount while complying with the monthly limitations on transfers out of savings accounts.
Certain characteristics distinguish retail sweep programs from overdraft services. As a result, the Board has revised its commentary to clarify that, when disclosing a transaction account balance, the final rule does not require an institution to exclude from the consumer’s balance funds that may be transferred from another account pursuant to a retail sweep program. The Board has also revised its commentary to clarify that institutions may include in the disclosed balance funds in investment products linked to transaction accounts pursuant to investment sweep programs. In an investment sweep program, a consumer links the transaction account at a depository institution with an investment product at a broker-dealer, investment institution, or the depository institution.
4. Funds Included and Excluded from Balance
The Board’s commentary has been revised to clarify that an institution may, but need not, include in the balance disclosed funds that are deposited in the consumer’s account, such as from a check, but are not yet made available for withdrawal in accordance with the funds availability rules under Regulation CC.
Similarly, the comment provides that the balance may, but need not, include any funds that are held by the bank to satisfy a prior obligation of the consumer (for example, to cover a hold for an ATM or debit card transaction that has been authorized but for which the bank has not settled).
Regulation DD does not require institutions to provide a “real-time” balance, but only prohibits institutions for including additional overdraft funds such as a discretionary overdraft cushion in the disclosed balance.
a. Additional Balances
Regulation DD permits, but does not require, disclosure of an additional balance that includes the additional overdraft funds, that may be useful to some consumers. For example, consumers may wish to receive a balance disclosure that indicates how much overdraft coverage they have available, so that they can make an informed decision as to whether or not to go forward with the transaction. Regulation DD thus permits an additional balance to be disclosed so long as the institution prominently states that the balance contains additional overdraft funds. As a result, an institution may not simply state, for instance, that the second balance is the consumer’s “available balance,” or contains “available funds.” Rather, the institution should provide enough information to convey that the second balance includes these overdraft amounts. For example, the institution may state that the balance includes “overdraft funds.”
Regulation DD acknowledges that some institutions may provide the consumers the availability to opt-out of overdraft services for ATM and debit card transactions. In this instance, the institution would continue to offer the overdraft service for other transactions, such as check transactions. Because the institution’s overdraft service would be available for some, but not all transactions, the Board’s commentary states that if an institution discloses an additional balance where a consumer has opted-out of some, but not all of the institution’s overdraft services, the institution may choose whether or not to include the overdraft funds in the balance. However, if the institution chooses to include the overdraft funds in the additional balance, it must indicate that the additional overdraft funds are not available for all transactions.
5. Automated Systems
The balance disclosure requirements apply to account balances and institution disclosures through any ATM (“foreign” ATMs or “proprietary” ATMs).
Because account-holding institutions have discretion with respect to the balances they provide to an ATM network, they ultimately determine what additional funds (whether from the institution’s discretionary overdraft service, an overdraft line of credit, or a linked account) are included in those balances (i.e., the institution has the discretion to provide to the network only balances that exclude overdraft funds). Regulation DD applies only to the extent balance information is offered on an automated system; it does not require financial institutions or other automated system owners to provide balance information on automated systems available to consumers.
B. Bank Overdraft Protection Programs Guidance
In response to concerns over the marketing of overdraft protection programs, sometimes referred to as “bounce protection programs,” the federal banking agencies issued guidance on safety and soundness considerations, legal risks, and best practices associated with such programs. The agencies express concern where a program is presented in a manner that appears to encourage consumers to overdraw their accounts and lead them to believe that overdrafts will always be paid when, in reality, the institution reserves the right not to pay some overdrafts. The guidance is intended to assist insured depository institutions in the responsible disclosure and administration of overdraft protection services.
The joint guidance identifies concerns raised by institutions, financial supervisors, and the public about the marketing, disclosure, and implementation of overdraft protection programs. The guidance contains three primary sections: Safety and Soundness Considerations; Legal Risks; and Best Practices.
The safety and soundness discussion seeks to ensure that financial institutions offering overdraft protection programs adopt adequate policies and procedures to address credit, operational, and other associated risks.
The legal risks discussion alerts institutions of the need to comply with applicable laws and advises institutions to have their overdraft protection programs reviewed by legal counsel to ensure compliance prior to implementation. Several federal consumer compliance laws are described in the guidance that can be relevant to these programs.
The best practices section addresses the marketing and communications with consumers about overdraft protection programs, as well as features and operations of the programs. Some of these best practices include: clearly disclosing fees; explaining the impact of transaction-clearing policies on the overdraft fees consumers may incur; disclosing the types of consumer banking transactions covered by the program; and monitoring program usage. The agencies also advise insured depository institutions to alert consumers before a transaction triggers any fees; to provide consumers the opportunity either to opt-in or opt-out of the program; and to promptly notify consumers of overdraft protection program usage each time it is used.
The FDIC, OCC, Federal Reserve Board, and NCUA joint guidance is available at the Federal Reserve Board’s website at: http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20050218/attachment.pdf.
1. Overdraft Protection Programs
The introduction to the Guidance acknowledges that overdrafts paid on a discretionary basis as an accommodation to the account holder, where the accommodation is not promoted, do not raise significant concerns. Some depository institutions have offered “overdraft protection” programs that, unlike the discretionary accommodation traditionally provided to those lacking a line of credit or other type of overdraft service (e.g., linked accounts), are marketed to consumers essentially as short-term credit facilities. These marketed programs typically provide consumers with an express overdraft “limit” that applies to their accounts.
Programs that the Guidance appear to target are those that affect consumers and incorporate “some or all” of a list of seven characteristics, only one of which is that overdraft privileges are promoted as a feature of the account. The characteristics of an overdraft protection program noted in the Guidance are: (a) it is promoted as a service; (b) coverage is automatic for accounts that meet certain criteria; (c) an overdraft limit is set; (d) payment by the bank is discretionary; (e) the service may extend to transactions other than just checks; (f) a flat fee is charged; and (g) some banks offer closed-end loans to consumers to repay balances.
Institutions should weigh carefully the risks presented by the programs including the credit, legal, reputation, safety and soundness, and other risks. Further, institutions should carefully review their programs to ensure that marketing and other communications concerning the programs do not mislead consumers to believe that the program is a traditional line of credit or that payment of overdrafts is guaranteed, do not mislead consumers about their account balance or the costs and scope of the overdraft protection offered, and do not encourage irresponsible consumer financial behavior that potentially may increase risk to the institution.
2. Safety and Soundness Considerations
When overdrafts are paid, credit is extended. Overdraft protection programs may expose an institution to more credit risk (e.g., higher delinquencies and losses) than overdraft lines of credit and other traditional overdraft protection options to the extent these programs lack individual account underwriting. Regardless of whether an institution promotes its overdraft protection program, the institution must adopt written policies and procedures adequate to address the credit, operational, and other risks associated with these types of programs. Prudent risk management practices include the establishment of express account eligibility standards and well-defined and properly documented dollar limit decision criteria.
Institutions also should monitor these accounts on an ongoing basis and be able to identify consumers who may represent an undue credit risk to the institution.
Overdraft protection programs should be administered and adjusted, as needed, to ensure that credit risk remains in line with expectations. This may include, where appropriate, disqualification of a consumer from future overdraft protection. Reports sufficient to enable management to identify, measure, and manage overdraft volume, profitability, and credit performance should be provided to management on a regular basis.
Institutions are also expected to incorporate prudent risk management practices related to account repayment and suspension of overdraft protection services. These include the establishment of specific timeframes for when consumers must pay off their overdraft balances. For example, there should be established procedures for the suspension of overdraft services when the account holder no longer meets the eligibility criteria (such as when the account holder has declared bankruptcy or defaulted on another loan at the bank) as well as for when there is a lack of repayment of an overdraft. In addition, overdraft balances should generally be charged off when considered uncollectible, but no later than 60 days from the date first overdrawn.
With respect to the reporting of income and loss recognition on overdraft protection programs, institutions should follow generally accepted accounting principles (GAAP) and the instructions for the Reports of Condition and Income (Call Report). Overdraft balances should be reported on regulatory reports as loans. Accordingly, overdraft losses should be charged off against the allowance for loan and lease losses. The Agencies expect all institutions to adopt rigorous loss estimation processes to ensure that overdraft fee income is accurately measured. Such methods may include providing loss allowances for uncollectible fees or, alternatively, only recognizing that portion of earned fees estimated to be collectible. The procedures for estimating an adequate allowance should be documented in accordance with the Policy Statement on the Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions.
If an institution advises account holders of the available amount of overdraft protection, for example, when accounts are opened or on depositors’ account statements or ATM receipts, the institution should report the available amount of overdraft protection with legally binding commitments for Call Report purposes. These available amounts, therefore, should be reported as “unused commitments” in regulatory reports.
3. Legal Risks
Overdraft protection programs must comply with all applicable federal laws and regulations, some of which are outlined below. The Guidance discusses the potential application of a number of federal laws, including: (a) the provisions of the Federal Trade Commission Act prohibiting unfair or deceptive acts or practices; (b) the Truth and Lending Act (Regulation Z); (c) the Equal Credit Opportunity Act (Regulation B); (d) the Truth and Savings Act (Regulation DD); and (e) the Electronic Funds Transfer Act (Regulation E). The Guidance provides that neither Regulation Z nor Regulation B applies to discretionary overdrafts per se, but Regulation B may apply if any aspect of a program is administered in a discriminatory manner.
Pricing policies that have a discriminatory impact on a prohibited basis and steering of certain classes of customers but not others to more favorable lines of credit programs are examples.
4. Best Practices
The Guidance includes a series of “best practices” aimed primarily at promoted programs, but which can be “useful” for other methods of covering overdrafts. At the top of the “best practices” list is that institutions must not market programs in a way that encourages intentional overdrafts (and account mismanagement). Institutions may present the services and means of covering inadvertent overdrafts and should go no further. Accordingly, the institution may want to insert protective disclaimers, such as “always manage your account wisely” with ads or promotional statements regarding the institutions overdraft protection program. If the institution offers more than one type of product, such as an overdraft line of credit, the best practice, when “informing” consumers about its discretionary program, is to inform them about those other services as well. Accordingly, advertisement should be reviewed and staff should be trained to provide this information.
Clear disclosures and explanations to consumers of the operation, costs, and limitations of an overdraft protection program and appropriate management oversight of the program are fundamental to enabling responsible use of overdraft protection. Institutions that establish overdraft protection programs should, as applicable, take into consideration the following “best practices,” many of which have been recommended or implemented by financial institutions and others, as well as practices that may otherwise be required by applicable law. These best practices currently observed in or recommended by the industry include:
5. Marketing and Communications with Consumers
a. Avoid promoting poor account management. Institutions should not market the program in a manner that encourages routine or intentional overdrafts, but they should present the program as a customer service that may cover inadvertent consumer overdrafts.
b. Fairly represent overdraft protection programs and alternatives. When informing consumers about an overdraft protection program, institutions should disclose other available overdraft services or credit products and how the terms, including fees, for these services or products differ. Institutions should identify for consumers the consequences of extensively using the overdraft protection program.
c. Train staff to explain program features and other choices. Train customer service or consumer complaint-processing staff to explain their overdraft protection program’s features, costs, and terms, including how to opt out of the service. Staff also should be able to explain other available overdraft products offered by the institution and how consumers may qualify for them.
(1) Clearly explain the discretionary nature of program. If payment of an overdraft is discretionary, make this clear. If discretionary, institutions should not represent that the payment of overdrafts is guaranteed or assured.
(2) Distinguish overdraft protection services from “free” account features. Institutions should not promote “free” accounts and overdraft protection services in the same advertisement in a manner that suggests the overdraft protection service is free of charges.
(3) Clearly disclose program fees. In communications about overdraft protection programs, clearly disclose the dollar amount of the fee for each overdraft and any interest rate or other fees that may apply. For example, rather than merely stating that the institution’s standard NSF fee will apply, institutions should restate the dollar amount of any applicable fees or interest charges.
(4) Clarify that fees count against the disclosed overdraft protection dollar limit. Consumers should be alerted that the fees charged for covering overdrafts, as well as the amount of the overdraft item, will be subtracted from any overdraft protection limit disclosed.
(5) Demonstrate when multiple fees will be charged. If promoting an overdraft protection program, clearly disclose, where applicable, that more than one overdraft fee may be charged against the account per day, depending on the number of checks presented and other withdrawals made from the consumer’s account.
(6) Explain the impact of transaction-clearing policies. Clearly explain to consumers that transactions may not be processed in the order in which they occurred and that the order in which they are received by the institution and processed can affect the total amount of overdraft fees incurred by the consumer.
(7) Illustrate the type of transactions covered. Clearly disclose that overdraft protection fees may be imposed on transactions such as ATM withdrawals, debit card transactions, preauthorized automatic debits, telephone-initiated transfers or other electronic transfers, if applicable, to avoid implying that check transactions are the only transactions covered.
NOTE: The OTS Guidance additionally provides that savings associations may not administer transaction-clearing rules (including check-clearing and batch debit processing) unfairly or manipulate them to inflate fees.
6. Program Features and Operation
a. Alert consumers before a transaction triggers any fees. When consumers attempt to withdraw, transfer, or otherwise access funds made available through an overdraft protection program (other than by check), institutions should alert them that completing the transaction may trigger an overdraft protection fee. Institutions should also give consumers an opportunity to cancel the attempted transaction. If this is not feasible for a particular type of transaction, then institutions should allow consumers the choice to make access to the overdraft protection program unavailable by transaction type, even if this results in limiting the overdraft protection coverage only to check transactions.
b. Prominently distinguish balances from overdraft protection funds availability. When disclosing a single balance for an account by any means, institutions should not include overdraft protection funds in that account balance. The disclosure should instead represent the consumer’s own funds available without the overdraft protection funds included. If more than one balance is provided, separately and prominently identify the balance without the inclusion of overdraft protection.
c. Promptly notify consumers each time the overdraft protection program is used. In addition to any alert at the time of a transaction, promptly notify consumers when overdraft protection has been accessed, for example, by sending a notice the day the overdraft protection program has been accessed. The notification should identify the date of the transaction, the type of transaction, the overdraft amount, the fee associated with the overdraft, the amount necessary to return the account to a positive balance, the amount of time consumers have to return their accounts to a positive balance, and the consequences of not returning the account to a positive balance within the given timeframe. Notify consumers if the institution terminates or suspends the consumer’s access to the service, for example, if the consumer is no longer in good standing.
d. Consider daily limits on fees imposed. Consider providing a daily cap on overdraft fees charged against any one account, while continuing to provide coverage for overdrafts up to the overdraft limit.
e. Monitor overdraft protection program usage. Monitor excessive consumer usage, which may indicate a need for alternative arrangements or other services, and inform consumers of these available options.
f. Fairly report program usage. Institutions should not report negative information to consumer reporting agencies when the overdrafts are paid under the terms of the overdraft protection programs that have been promoted by the institution.
7. Differences Between Agencies
The differences between the OTS Guidance and the Guidance issued by the other federal banking agencies lies in the way the agencies view the relationship between overdraft protection plans and the Truth and Lending Act. The OTS explicitly declined to consider whether overdraft protection plans constituted extensions of credit that were covered by the Truth and Lending Act and its implementing Regulation Z. The other agencies, however, specifically classify courtesy overdrafts as credit, but exempt them from the Truth and Lending Act disclosures under an existing exception for overdrafts, while noting that overdraft protection programs may be covered by the Truth and Lending Act and its implementing Regulation Z if the institution has a written agreement to pay overdrafts or offers a consumer a closed-end loan for that purpose.
8. Conclusion
All financial institutions should review their policies and procedures for the operation of discretionary overdraft protection programs to identify what changes may be necessary to implement the best practices issued by their respective regulators. Institutions should continue with efforts to help their customers better manage their finances and avoid overdraft situations. Customers who regularly overdraw their accounts and access overdraft protection services should understand the true costs of their ongoing inability to balance
XIV. UPDATE ON FDIC POTENTIAL UDAAP CITATIONS (BANK OVERDRAFT PROGRAMS)
A. Introduction
The FDIC has been citing banks for violations of the Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) law as a result of the 2010 changes to Regulation E with respect to customers opting-in or opting-out of fees for overdrafts caused by electronic debit card transactions.
In 2012, the NBA participated in a conference call with the FDIC and other state bankers associations in the region. FDIC officials reported that they have spent a lot of time discussing this issue with the respective regional offices, FDIC-regulated banks and banking trade groups. They have also talked to senior policy officials from the other banking regulators and the new Consumer Financial Protection Bureau.
During the conference call with representatives of the state bankers associations, the FDIC indicated that they will only cite banks for a UDAAP violation in a very narrow set of circumstances. As a result, concerns that a large number of Nebraska banks will be subject to citations for these potential violations has significantly decreased. In addition, the FDIC has modified their view on enforcement and its position on whether banks that are cited for violations will be required to refund overdraft fees to its customers.
B. Current FDIC Position
The FDIC has significantly narrowed the circumstances under which a bank may be cited for a UDAAP violation relating to bank overdraft practices. The only banks that need to be concerned about UDAAP violations relating to this issue are banks that have a stated policy of never allowing customers to overdraft their accounts via electronic transactions. The FDIC refers to these banks as “no-pay” banks. The FDIC assumes that there should be relatively few of these “no-pay” banks, since the vast majority of banks pay overdrafts through either a formal overdraft program or an ad hoc program. If your bank has a formal overdraft program or an ad hoc program for honoring overdrafts, the FDIC indicates that this UDAAP issue will not apply to your bank.
If your bank is a “no-pay” bank as described above, you could be subject to a potential UDAAP violation. The potential for problems arise for “no-pay” banks if they have conducted an opt-in program that charges customers for what the FDIC refers to as “force-pay” overdrafts. “Force-pay” overdraft transactions occur if a network: (1) is offline and uses a stand-in balance; (2) does not operate in real-time and works from the prior days balance; or (3) the merchant does not seek authorization for the full amount of the transaction -i.e. when a point of sale transaction sends through a trial balance that is different from the final transaction amount. If the trial balance goes through, the payment systems require the bank to honor the final transaction. “Force-pay” transactions include, for example, gasoline pay-at-the-pump transactions where the authorization might be for $1, but the ultimate purchase is for a higher amount. When the $1 authorization amount is approved, the bank must pay the final transaction amount. The UDAAP issue arises because the “force-pay” transaction results in an overdraft, despite the fact that the bank's policy is to not honor any transactions that cause an overdraft.
The FDIC, in the conference call, clarified that the UDAAP violation in these narrow circumstances for a “no-pay” bank occurs because the banks practices are inconsistent with their stated policy and with the language in the Regulation E disclosures and opt-in forms, as discussed in more detail below.
C. Basis for Potential UDAAP Violations
Prior to the Federal Reserve Board’s amendment of Regulation E, when presented with a “force-pay” debit card transaction that overdrew an account, many “no-pay” banks charged the customer an overdraft fee. However, despite its name, this fee was not intended to be a true “overdraft” fee; rather, it was intended to discourage and penalize using the card contrary to bank policy. Accordingly, following the Board’s amendment of Regulation E, many banks with limited debit card processing capabilities wanted to continue to apply a “no-pay” overdraft policy and charge customers for “force-pay” overdraft transactions. Many of these banks, based on the Regulation E commentary issued in 2010, believed they were required to obtain the customer’s opt-in, in order to continue this practice, using the Board’s model notice.
The FDIC has asserted that this constituted a deceptive practice because the opt-in notice provided to consumers did not explain that the bank did not operate an overdraft program (as noted, the bank policy is not to pay ATM or debit card transactions into overdraft) and did not explain “force-pay” transactions. Therefore, the FDIC believes that the bank has unfairly deceived its customer into thinking they were opting into an overdraft service that provides coverage that would not be available unless they opted-in. Since there is no bank discretion involved in these “force-pay” cases, the FDIC has concluded that no benefit has been provided; customers who opted-in paid a fee for the same results as those who did not opt-in and paid no fee. In some cases, prior to the evolution of the FDIC position on this issue some banks have been ordered to refund all overdraft fees charged since the compliance date of the opt-in rule.
Under the FDIC’s original interpretation of this issue, the potential pool of banks that could have been subject to UDAAP violations was much larger. The FDIC has also modified their enforcement position. If a “no-pay” bank addresses this problem on its own prior to the end of a pending examination or before its next FDIC examination, the FDIC will not cite the bank for a UDAAP violation. The FDIC has also indicated that they will not automatically require “no-pay” banks to refund fees collected from customers who opted-in. They will continue to recommend to these banks that refunds should be made, but will not treat banks electing not to refund fees any differently from how they treat banks that make refunds.
D. Conclusion
In summary, at this time, the FDIC recommends the following for “no-pay” banks.
1. Do not maintain a list of customers who have opted-in to electronic overdraft charges;
2. Going forward, prior to completion of a pending examination or before your next exam, discontinue charging overdraft fees for “force-pay” situations, described above; and
3. Consider communicating with customers who did opt-in that they will no longer be charged a fee for “force-pay,” electronic overdrafts.
We are hopeful that the FDIC will soon issue a written guidance document regarding these issues, either in the form of an inter-agency document or an FDIC financial institution letter. We have indicated to the FDIC that our bank members need clear guidance on this issue, as well as on other regulatory matters.
The FDIC’s new, “kinder and gentler” approach to this issue is welcome news. The NBA’s advocacy efforts on behalf of our members have provided positive results on this matter. We wish to thank Jim LaPierre and all of the FDIC officials who have diligently worked on this issue.
XV. MOST COMMON VIOLATIONS
The following is a list of Regulation DD requirements where banks were cited for the most frequent violations:
1. Failure to properly disclose “APY earned” on periodic statements, using that term and properly calculating the number.
2. Failure to issue proper prematurity disclosures for time accounts of greater than one-year’s maturity.
3. Failure to disclose minimum balance requirements in the course of making initial account disclosures or to state method of computing the balance.
4. Inaccurately computing the APY or the APY earned – beyond the five-basis-point tolerance built into Reg. DD.
5. Failure to disclose the frequency of compounding and the institution’s policy on crediting of interest.
6. Failure to include APY and interest rate in initial account disclosures.
7. Not providing prematurity notices on automatically renewing time accounts of longer than one-month’s maturity on a timely basis.
8. Failure to properly provide written disclosures requested by consumers over the phone.
9. Failure to provide account disclosures in advertising that are required when the institution uses certain “triggering terms” (e.g., “APY”).
10. When the institution uses one common sheet or booklet for all Reg. DD disclosures, failure to make it clear to the customer which sections apply to his or her account.
11. Failure to properly disclose account fees or the circumstances in which they apply.
XVI. CONCLUSION
There are obviously a great number of evolving rules with which bank personnel must be familiar. Each institution must carefully review the types of accounts offered and determine the steps which must be taken internally in complying with Regulation D.