I. INTRODUCTION
The “Electronic Fund Transfer Act” (“EFTA”) was passed by Congress in 1978 and is implemented by Federal Reserve Board Regulation E. The EFTA provides the framework in establishing the rights, duties and liabilities of both banks and users of electronic fund transfer (“EFT”) systems; however, Regulation E is primarily thought of as a consumer protection measure providing consumers with specific rights when engaging EFT services. Examples of EFT transactions include Automated Teller Machine (“ATM”) transfers (e.g., debit card transactions), telephone bill paying services, Point-of-Sale (“POS”) terminal transfers in retail establishments, and preauthorized transfers from or to consumer accounts (e.g., loan payment, payroll check deposit).
II. COVERED TRANSACTIONS – § 205.2 AND § 205.3
The EFTA and §§ 205.2(g) and 205.3(b) of Regulation E define “electronic fund transfer” to mean:
any transfer of funds that is initiated through an electronic terminal, telephone, computer, or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit an account. The term includes, but is not limited to:
An “electronic terminal” is defined to mean an electronic device, other than a telephone operated by a consumer, through which a consumer may initiate an EFT transaction, including, but not limited to POS terminals, ATMs, and cash dispensing machines. The term “consumer” means a natural person and an “account” is defined to mean “a demand deposit, savings, or other consumer asset account (other than an occasional or incidental credit balance in a credit plan) held directly or indirectly by a financial institution and established primarily for personal, family, or household purposes.”
NOTE: Business accounts are not covered by the EFTA and Regulation E, but are covered by Article 4A of the Uniform Commercial Code.
III. EXCLUSIONS FROM COVERAGE – § 205.3
Transactions not covered by the EFTA are listed in § 205.3(c) of Regulation E. The exclusions are as follows:
A. Checks
Any transfer of funds initiated by a paper instrument such as a check or draft or any payment made by a check, draft or similar paper instrument at an electronic terminal.
B. Check Guarantee or Authorization Service
Any funds transfer that guarantees payment or authorizes acceptance of a paper instrument but that does not directly result in a debit or credit to a consumer’s account.
C. Wire or Other Similar Transfer
Any funds transfer through the Fedwire or similar wire transfer system used primarily for transfers between financial institutions or between businesses.
D. Securities and Commodities Transfers
Any funds transfers for which the primary purpose is to purchase or sell a security or commodity, if the security or commodity is:
E. Automatic Transfers by Account-Holding Institution
Any funds transfer under an agreement between a consumer and a financial institution which provides that the institution will initiate individual transfers without a specific request from the consumer:
F. Telephone-Initiated Transfers
Any funds transfer that:
NOTE: “Telephone-initiated” includes a telephone call, facsimile or other telephonic communication device. “Written plans” do not include the following types of agreements in and of themselves: a signature card’s “hold-harmless” clause that protects the bank should the consumer initiate a transfer; a clause in the signature card or on a periodic statement or passbook that limits the number of telephone-initiated transfers from a consumer’s savings account; or an agreement that allows the consumer to give approval to the rollover of a time deposit or other instrument at maturity. When a telephonic or home banking plan requires the use of an entry password to initiate transactions, such is covered by Regulation E in that this constitutes a prearranged agreement subject to the regulation.
G. Small Institutions
Any preauthorized transfer to or from an account if the assets of the account-holding bank were $100 million or less on the preceding December 31 (Note: when the bank’s assets exceed $100 million, this exemption terminates one year from the end of the calendar year in which the assets exceed $100 million), subject to restrictions on compulsory use.
Other transactions not covered by Regulation E, by definition or otherwise, include:
IV. DISCLOSURE RULES – § 205.9
The EFTA and Regulation E provide for four different types of disclosures, as follows:
Initial Disclosures. Disclosures must be made at the time the consumer contracts for EFT services.
Transfer Documentation. A written receipt must be made available to the consumer when an EFT transaction is initiated at any electronic terminal.
Preauthorized Transfer Disclosures. Certain disclosures and notices must be given to the consumer, including a notification of the right to stop payment on a preauthorized EFT.
Periodic Disclosures. For accounts in which EFT transactions can be made, the consumer must be given a statement at least quarterly and a monthly statement for each cycle in which an EFT transaction has occurred.
These four disclosure requirements are covered in more detail under separate headings found below.
Annual Error Notices. In addition, for every account to which an EFT can be made, the bank is required to mail at least once in every calendar year, an annual error notice (found in either a “short” or “long” form in Appendix A (Form A-3) of Regulation E). The short form may be generally found on the reverse side of checking account or other periodic statements. Since passbook and other accounts, such as some money market deposit accounts, have transactions posted in books, the long form will be utilized for annual error notice purposes.
A. Initial Disclosures – § 205.7
The bank must disclose to the consumer, in a written and retainable form, certain information before the first EFT is made or at the time the consumer contracts for an EFT service. The following information must be fully disclosed:
B. Transfer Documentation – § 205.9(a)
The bank will make a receipt available to the consumer when an EFT is initiated from an electronic terminal. The receipt contains the following information, as applicable:
C. Preauthorized Transfer Disclosures – § 205.10
Preauthorized transfers from a consumer’s account may be authorized only by a writing signed or similarly authenticated by the consumer and the consumer must be given a copy of the authorization. See, § 205.10(b).
Unless the payor gives the consumer positive notice that a transfer has been initiated, when a person initiates preauthorized EFTs to a consumer’s account at least once every 60 days, the account-holding bank must provide notice to the consumer in one of three ways:
A bank that receives a preauthorized transfer must credit the amount of the transfer as of the date the funds for the transfer are received, but the bank does not have to make the funds available as of the day that they are credited.
The consumer has the right to stop payment of a preauthorized EFT by notifying the bank orally or in writing at least three business days before the scheduled date of the transfer. The bank may require written confirmation of an oral stop payment order to be made within 14 days of the oral notification, but only if at the time the consumer made the oral stop payment order, the bank informed the consumer of the written confirmation requirement, accompanied by the address to which the written confirmation must be sent. If the bank requires written confirmation, an oral stop payment order ceases to be binding after 14 days.
Should the preauthorized EFT vary in amount from the previous transfer under the same authorization or from the preauthorized amount, the bank or the designated payee must send a written notice to the consumer of the amount and date of the transfer at least 10 days in advance of the scheduled date of the transfer (§ 205.10(d)(1)), except that the bank or the designated payee may give the consumer the option to receive notice only when a transfer falls outside a specified range of amounts or when a transfer differs from the most recent transfer by more than an agreed-upon amount (§ 205.10(d)(2)).
Neither the bank or any other person may condition an extension of credit to a consumer on the consumer’s repayment by preauthorized EFTs, unless the credit is extended under an overdraft credit plan or is extended to maintain a specified minimum balance in the consumer’s account.
D. Periodic Disclosures – § 205.9(b)
The bank must send a periodic disclosure statement for an account to or from which EFTs can be made. The statement must be for each monthly cycle in which an EFT has occurred, but may send a quarterly statement if no transfers have occurred. The periodic statement must document the following:
A periodic statement need not be sent when the only transfers were made between accounts held by the same consumer at the same bank.
V. ATM FEE DISCLOSURES
Section 904(d) of the EFTA, as amended by the Gramm-Leach-Bliley Act of 1999, provides that an ATM operator that imposes a fee on any consumer for providing EFT services is required to provide notice of the fee to the consumer in a prominent and conspicuous location on or at the ATM on which the EFT is initiated. Also, the ATM operator must disclose that a fee will be imposed and the amount of the fee, either on the ATM screen or on a paper notice (e.g., an ATM receipt), before the consumer is committed to completing the transaction. Regulation E, § 205.16 implements these requirements. An ATM operator is defined as a person who operates an ATM at which a consumer initiates an EFT or balance inquiry and who does not hold an account to or from which the transfer is made or about which an inquiry is made. When the ATM’s bank and consumer’s bank are not the same institution, and the fee disclosure is properly made, both banks may charge a separate fee. This disclosure does not apply when the fee is charged to the consumer’s account rather than deducted from the EFT transaction. See, “ATM Access Fee Disclosures” article, under Deposit Accounts, NBA Compliance Handbook.
VI. CHANGES IN TERMS OR CONDITIONS – § 205.8(A)
When changes to the terms or conditions of an agreement between the consumer and the bank result in an increase in the consumer’s costs or liability or in a decrease to a consumer’s account accessibility (i.e., fewer types of available EFTs or stricter limitations of the frequency or dollar amount of transfers), such changes must be disclosed in writing to the consumer at least 21 days prior to the effective date of the change, except in the case where changes are necessary to maintain or restore account or EFT system security (in such case, if the change is permanent and disclosure will not jeopardize security, the bank must give the consumer written notification of the change on or with the next regularly scheduled periodic statement or within 30 days of making the change permanent).
VII. ACCESS DEVICES – § 205.5
A bank may not send access devices on an unsolicited basis, but are only issued upon a consumer’s oral or written request or as a renewal or substitution for an accepted access device. An access device may be distributed on an unsolicited basis if it is: (1) not validated (i.e., bank has not enabled consumer to initiate the device); (2) accompanied by a clear explanation that the device is not validated and how it may be disposed of if validation is not desired; (3) accompanied by initial disclosures and of the consumer’s rights and liabilities if the device is validated; and (4) validated only in response to the consumer’s oral or written request for validation, after the bank has verified the consumer’s identity by a reasonable means.
VIII. ERROR RESOLUTION PROCEDURES – § 205.11
An alleged EFT error may be any one of the following items:
When the bank is notified (oral or written) of an EFT transaction error by a consumer, the bank must investigate promptly to determine whether the error occurred within 10 business days of receiving a notice of error, report the results to the consumer within three business days after completing its investigation and correct the error within one business day after determining that an error occurred.
The consumer notification must be received by the bank within 60 days after the bank sent the periodic statement (or provides passbook account documentation) on which the error is shown, identifying the consumer’s name and account number, and indicates why the consumer believes that an error exists and includes, when available, the type, date, and amount of the error (except for a computational or bookkeeping error made by the bank relating to an EFT).
If the bank cannot complete its investigation within 10 business days, it may take up to 45 additional days from receipt of the consumer notice of error to investigate and determine whether an error occurred, subject to the following rule: provisionally credit the consumer’s account in the amount of the alleged error (including applicable interest) within 10 business days of receiving the error notice, in addition to notifying the consumer within two days that the account has been recredited and that the consumer may use the recredited funds during the investigation period. Should the bank find no error, the consumer must be given notice prior to debiting the account for the provisionally recredited funds. The bank must also provide notice to the consumer that all checks or items drawn on the provisionally recredited funds will be honored for five days after sending such notice.
If the notice of error involves an electronic fund transfer that was either a foreign-initiated transaction (not initiated within a state) or a point-of-sale (POS) debit card transaction, the time periods for claims that require a bank to provide provisional credit is also within ten business days, however there is a 90-day (in place of a 45 day) time limit to complete an investigation. A bank may extend the 10 business days to 20 business days when investigating an error before the bank provisionally credits the consumer’s account, and a bank may take up to 90 days to resolve a claim when the notice of error involves an electronic fund transfer to or from a new account (occurred within 30 days after the first deposit to the account was made).
IX. UNAUTHORIZED TRANSFERS OR USE ISSUES – § 205.6
Regulation E, at §205.2(2)(m), defines an unauthorized EFT to mean an EFT from a consumer’s account initiated by a person other than the consumer without actual authority to initiate the transfer and from which the consumer receives no benefit. The regulation goes on to state that the term does not include an EFT initiated: (1) by a person who was furnished the access device to the consumer’s account by the consumer, unless the consumer has notified the bank that transfers by that person are no longer authorized; (2) with fraudulent intent by the consumer or any person acting in concert with the consumer; or (3) by the bank or its employee.
The consumer may be subject to liability for unauthorized EFTs if: (1) the access device is accepted; and (2) the bank provided a means to identify the consumer to whom the access device was issued; and (3) the bank provided written disclosures to the consumer containing a summary of the consumer’s liability for unauthorized EFTs, the telephone number and address for reporting an unauthorized EFT made or may be made, and the bank’s business days.
When all these above-recited conditions are met, the regulation limits consumer liability at two levels: first, when the consumer’s access device is lost or stolen, and second, when the consumer fails to report unauthorized transactions which appear on a periodic statement.
When the consumer notifies the bank within two business days after learning that an access device has been lost or stolen, the consumer may be held liable for an unauthorized EFT or series of related EFTs not to exceed the lesser of $50 or the amount of money or value of property or services obtained from the unauthorized EFT(s) before the bank is notified or before it otherwise has reason to suspect that an unauthorized EFT involving the consumer’s account has been or may be made. If the consumer should fail to notify the bank within two business days after learning of the loss or theft of the access device, the consumer’s liability will be limited to the lesser of $500 or the sum of (1) $50 or the amount of unauthorized EFTs occurring within the two business days, whichever is less; and (2) the amount of unauthorized EFTs occurring after the close of two business days and before notice to the bank (and the bank must establish that such transfers would not have occurred had the consumer notified the bank within that two day period). Liability is calculated up to the time the bank is notified of the missing or stolen access device.
When an unauthorized EFT appears on a periodic statement, the consumer may be liable for: (1) the lesser of $50 or the amount of money or value of property or services obtained from the unauthorized EFT that is shown on the periodic statement or that occurs during the 60 days after the bank’s transmittal of the statement; or (2) an unlimited amount as to unauthorized transfers after 60 days (until the bank is notified) if the notice of the unauthorized EFT as shown on the periodic statement is not given within 60 days of the statement’s transmittal by the bank (and the bank must establish that such transfers would not have occurred had the consumer notified the bank within that 60 day period).
Therefore, it is possible for a consumer to be subject to unlimited liability for EFTs occurring after the 60 day period, plus up to $500 for unauthorized EFTs occurring before that date. For example, the loss or theft of a card may not be reported by the consumer for more than two business days after discovering that it is missing or stolen, the unauthorized EFTs may appear on a periodic statement and not be reported for more than 60 days, and more unauthorized EFTs take place after the 60 day period.
NOTE: Section 205.6(b)(4) provides that if a consumer’s delay in notifying the bank was due to “extenuating circumstances,” the bank must extend the times that are outlined above to a “reasonable period” and § 205.6(b)(6) permits lesser liability limits pursuant to either state law or an agreement between the consumer and the bank. There are no Nebraska laws which address consumer EFT liability limitations.
Notice of unauthorized use to a bank is considered given, according to § 205.6(b)(5) when the consumer takes the steps reasonably necessary to provide the bank with the pertinent information, whether or not any particular employee or agent of the bank actually receives the information. The consumer may notify the bank either in person, by telephone, or in writing. Written notice is considered given at the time the consumer deposits the notice in the mail or delivers it to the bank by any other usual means. Constructive notice is presumed given when the bank becomes aware of circumstances leading to the reasonable belief that an unauthorized EFT to or from the consumer’s account has been or may be made.
X. REQUIREMENTS FOR OVERDRAFT SERVICES – § 205.17
A. Introduction
The Federal Reserve Board issued a final rule containing revisions to Regulation E that requires many banks to revise their existing procedures for paying and disclosing consumer overdrafts that result from automated teller machine (ATM) and one-time debit card transactions made with a debit card issued by or on behalf of the account-holding institution. Banks were required to achieve full compliance with the final rule by July 1, 2010.
The final rule limits a bank’s ability to assess an overdraft fee for paying ATM and one-time debit card transactions that overdraw a consumer’s account, unless the consumer affirmatively consents (“opts in”) to such payment.
B. Transactions Subject to the Final Rule
The opt-in requirement is applicable to a bank’s “overdraft services” provided in connection with all ATM transactions and all one-time debit card transactions. The final rule does not reach all debit card transactions, as the “one-time” qualifier for debit card transactions is intended to clarify that providing overdraft services for recurring debit transactions will not trigger the final rule’s opt-in right.
The Board has adopted a safe harbor in the comments to the final rule to explain that a financial institution complies with the rules if it adapts its systems to identify debit card transactions as either one-time or recurring. If it does so, the financial institution may rely on the transaction’s coding by merchants, other institutions, and other third parties as a one-time or recurring debit card transaction.
For purposes of the final rule, an “overdraft service” is defined as a service under which a financial institution assesses a fee or charge on a consumer’s account held by the institution for paying a transaction when the consumer has insufficient or unavailable funds in the account. The term does not include payment of overdrafts pursuant to transfers from a credit card account, a home equity line of credit or an overdraft line of credit. The definition also excludes overdrafts covered from another account of the consumer that is held at the bank. As such, payment of overdrafts pursuant to these excluded types of services fall beyond the scope of the final rule and do not require the consumer’s affirmative consent.
C. Opt-In Requirement
The final rule requires banks to affirmatively obtain the consent of consumers before charging overdraft fees in connection with ATM or one-time debit card transactions. No such consent will be required for the payment of overdrafts resulting from a transaction involving a check. Under the final rule, a bank may not assess any fee or charge on a consumer’s account for paying an ATM or one-time debit card transaction pursuant to the bank’s overdraft service, unless the consumer is provided with a notice explaining the service and a reasonable opportunity to affirmatively consent, and the consumer does affirmatively consent. If the consumer opts in, then the bank will be required to provide the consumer with a confirmation of the consent. The opt-in right applies only to the assessment of fees and not to the payment of the overdraft itself. As a result, a bank could still decide to pay and collect the amount of any consumer overdraft without previously obtaining the consumer’s affirmative consent; however, it would not be able to charge a fee for this service.
The Federal Reserve Board has clarified that an institution cannot assess a fee for the payment of ATM and one-time debit card overdrafts if the consumer does not opt-in, even if the institution has a policy and practice of declining ATM and one-time debit card transactions upon a reasonable belief that an account has insufficient funds at the time of the authorization request.
D. Notice of Requirements
The final rule requires banks to provide consumers with a notice explaining its overdraft service for ATM and one-time debit card transactions. This notice must be provided in writing (or if the customer agrees, electronically), and it must be segregated from all other account information, including other account disclosures. In addition, the method for providing consent, such as a signature line or check box, must be separate from other types of consents.
The final rule provides specific instructions regarding how notice and consent are to be provided to, and obtained from, consumers. The final rule’s notice requirement is relatively inflexible, in that it states that the required consumer opt-in notice may not contain any information that is not specified or otherwise permitted by the final rule.
The final rule also provides specific guidance on what will, and what will not, be considered appropriate methods for obtaining consumer consent to cover overdraft services. The following are four ways that banks can provide consumers a “reasonable opportunity” to opt in:
The final rule emphasizes that a bank will not be considered to have appropriately obtained a consumer’s consent to overdraft services when the bank has included preprinted language about such services in an account disclosure provided with a signature card or contract that the consumer must sign to open the account. Nor does the bank obtain a consumer’s affirmative consent by providing a signature card that contains a pre-selected check box indicating that the consumer is requesting the services. Significantly, this does not mean that a consumer’s consent may not be obtained at the time of account opening. It simply means that the notice and consent may not be included with other disclosures and that the consent form used must solely indicate the consumer’s choice whether to opt in to overdraft services.
E. Confirmation of Opt-In
After the bank has obtained a consumer’s consent, using one of the appropriate methods described above, the final rule then requires the bank to provide the consumer with a written, or if the customer agrees, electronic confirmation documenting the consumer’s choice. The confirmation requirement may be satisfied by providing the consumer with a copy of its completed opt-in form, or by sending a letter or other document to the consumer acknowledging that the consumer has elected to opt in to the overdraft services. The written confirmation must include a statement informing the consumer of the right to revoke consent. Therefore, if a bank complies with this requirement by providing the customer with a copy of its opt-in notice, that notice should include a statement about the customer’s right to revoke consent. The Final Rule’s confirmation requirement may also be satisfied electronically, if the customer agrees.
The final rule clarifies that an institution may not assess any overdraft fees or charges on the consumer’s account until the institution has sent the written confirmation. An institution complies with this requirement if it has adopted reasonable procedures designed to ensure that the written confirmation is sent before fees are assessed.
The rule does not require receipt of the confirmation by the consumer before an institution may impose a fee because a consumer may not opt into an institution’s overdraft service until the time the service is needed. Requiring receipt of the confirmation would delay the consumer’s access to overdraft funds. By contrast, permitting fees to be charged once the confirmation is provided allows institutions to pay the transaction with minimal delay to the consumer, in accordance with the consumer’s direction. At the same time, if fees cannot be charged until the confirmation has been provided, institutions would be incented to mail or deliver the written confirmation promptly. This would alert consumers to their choice quickly and enable them to revoke their choice if they did not intend to opt in. The requirement to provide the confirmation before charging overdraft fees thus balances the objective of ensuring that consumers understand their choice with the objective of providing consumers access to overdraft services expeditiously when requested.
For purposes of determining when a confirmation notice is “sent” when the notice is provided in person (for instance, at a branch), the commentary to the final rule indicates that the confirmation notice must be “mailed or delivered” (for example, by handing the consumer the confirmation in a branch) and may also be provided electronically if the consumer agrees.
Since Regulation E generally requires disclosures to be clear and readily understandable, and in a form the consumer may keep, oral disclosures would not comply with the requirements of the final rule.
The final comment has been revised to clarify that fees or charges may generally be assessed only on transactions paid after the confirmation has been mailed or delivered. Final comment 17(b) – 7 therefore provides that an institution complies with the confirmation requirement if it has adopted reasonable procedures designed to ensure that overdraft fees are assessed only in connection with transactions paid after the confirmation has been mailed or delivered to the consumer. Thus, an institution that adopts and follows such procedures complies with the rule even if on rare occasion, notwithstanding such procedures, it assesses a fee before the confirmation is mailed or delivered. For example, an institution complies with the rule if a computer error results in the confirmation being mailed after an overdraft fee is assessed.
F. Outstanding Negative Balance
While many institutions charge the same per-item overdraft fee regardless of the amount of the consumer’s negative balance, some institutions impose tiered fees based on the amount of the consumer’s outstanding negative balance at the end of the day. For example, an institution may impose a $10 per-item overdraft fee if the consumer’s account is overdrawn by less than $20, and a $25 per-item overdraft fee if the account is overdrawn by $20 or more. Questions have been raised as to how overdraft fees may be assessed in these circumstances if a consumer has not opted into the payment of ATM and one-time debit card transactions, but if overdrafts may be paid and fees assessed for other types of transactions, such as checks and ACH.
Final comment 17(b) – 8 has been revised for consistency with the treatment of flat per-item fees under the rule. The comment states that if a fee or charge is based on the amount of the outstanding negative balance, the rule prohibits the assessment of any such fee if the negative balance is solely attributable to an ATM or one-time debit card transaction, unless the consumer has opted into the institution’s overdraft service for ATM or one-time debit card transactions. However, the comment explains that the rule does not prohibit an institution from assessing such a fee if the negative balance is attributable in whole or in part to a check, ACH, or other type of transaction not subject to the fee prohibition in § 205.17(b)(1).
G. Daily or Sustained Overdraft, Negative Balance, or Similar Fees or Charges
Some institutions assess daily or sustained overdraft, negative balance, or similar fees or charges when a consumer has overdrawn an account and has not repaid the amount overdrawn within a specified period of time. For example, if a consumer overdraws his or her account by $30, the institution may assess an overdraft fee of $20. If the consumer does not repay the resulting negative $50 balance by the fifth day, the institution may assess an additional $20 sustained overdraft fee.
Under the final rule, consumers who do not opt in may not be assessed overdraft fees for paying ATM or one-time debit card transactions, including daily or sustained overdraft, negative balance, or similar fees or charges. Consumers who do not opt in may reasonably expect not to incur per-item overdraft fees for ATM and one-time debit card transactions, even if such transactions overdraw their accounts. Similarly, such consumers would reasonably expect not to incur daily or sustained overdraft, negative balance, or similar fees or charges due to these transactions. Comment 17(b)-9.i explains that if a consumer has not opted into the institution’s overdraft service for ATM and one-time debit card transactions, the fee prohibition in § 205.17(b)(1) applies to all overdraft fees or charges for paying those transactions, including but not limited to daily or sustained overdraft, negative balance, or similar fees or charges. Thus, where a consumer’s negative balance is attributable solely to an ATM or one-time debit card transaction, the rule prohibits the assessment of such sustained overdraft fees if the consumer has not opted in. For example, if a consumer who has not opted in has a $50 account balance, and the institution nonetheless pays a $60 debit card transaction (and no other transactions occur), the institution may not charge any overdraft fees, including a daily or sustained overdraft, negative balance, or similar fee or charge, for paying that debit card transaction.
The final rule applies solely to overdraft fees imposed in connection with ATM and one-time debit card transactions. It does not apply to overdraft fees imposed in connection with other types of transactions, including checks, ACH, and recurring debit card transactions. As a result, the rule does not prohibit institutions from imposing daily or sustained overdraft, negative balance, or similar fees or charges associated with paying overdrafts for transactions not covered by the final rule. For example, where a consumer has a $50 account balance, and the institution pays a $60 check, the rule does not prohibit the institution from charging a per-item overdraft fee, as well as a daily or sustained, negative balance, or similar fee or charge if a negative balance remains outstanding.
Comment 17(b)-9.i clarifies that where the consumer’s negative balance is attributable in part to a check, ACH, or other type of transaction not subject to the fee prohibition in § 205.17(b)(1), and in part to an ATM or one-time debit card transaction, an institution is not prohibited from assessing a daily or sustained overdraft, negative balance, or similar fee or charge, even if a consumer has not opted in.
The comment also provides guidance on the date on which such a fee may be assessed. Specifically, comment 17(b)-9.i states that the date is based on the date on which the check, ACH, or other type of transaction not subject to the fee prohibition is paid into overdraft. Because the rule does not cover checks, ACH, or recurring debit card transactions, the Board believes institutions may charge per-item overdraft fees, or sustained or other similar fees. Nonetheless, the Board believes it is appropriate to base the date on which fees may be charged on the date that the transaction not subject to the rule is paid.
The final rule prohibits overdraft fees with respect to ATM and one-time debit card transactions if the consumer has not opted in. Therefore, institutions must be able to determine whether a negative balance is attributable solely to these types of transactions, or to transactions on which overdraft fees are permitted. This inquiry is not a static one; however, when the amount of the negative balance is reduced by a deposit but not eliminated, institutions must be able to determine whether they can continue charging fees and still comply with the fee prohibition. Otherwise, if a small-dollar check overdraft occurs at the same time as a larger ATM or one-time debit card overdraft, a consumer would potentially be subject to sustained overdraft fees on the small-dollar check for an extended period of time, even where a deposit would have been sufficient to pay off the amount of the check. The following examples demonstrate how an institution can make a determination about the permissibility of charging overdraft fees on an ongoing basis:
1. Examples
For each example, assume the following: (a) The consumer has not opted into the payment of ATM or one-time debit card overdrafts; (b) these transactions are paid into overdraft because the amount of the transaction at settlement exceeded the amount authorized or the amount was not submitted for authorization; (c) under the account agreement, the institution may charge a per-item fee of $20 for each overdraft, and a one-time sustained overdraft fee of $20 on the fifth consecutive day the consumer’s account remains overdrawn; (d) the institution posts ATM and debit card transactions before other transactions; and (e) the institution allocates deposits to account debits in the same order in which it posts debits.
a. Assume that a consumer has a $50 account balance on March 1. That day, the institution posts a one-time debit card transaction of $60 and a check transaction of $40. The institution charges an overdraft fee of $20 for the check overdraft but cannot assess an overdraft fee for the debit card transaction. At the end of the day, the consumer has an account balance of negative $70. The consumer does not make any deposits to the account, and no other transactions occur between March 2 and March 6. Because the consumer’s negative balance is attributable in part to the $40 check (and associated overdraft fee), the institution may charge a sustained overdraft fee on March 6 in connection with the check.
b. Same facts as in a., except that on March 3, the consumer deposits $40 in the account. The institution allocates the $40 to the debit card transaction first, consistent with its posting order policy. At the end of the day on March 3, the consumer has an account balance of negative $30, which is attributable to the check transaction (and associated overdraft fee). The consumer does not make any further deposits to the account, and no other transactions occur between March 4 and March 6. Because the remaining negative balance is attributable to the March 1 check transaction, the institution may charge a sustained overdraft fee on March 6 in connection with the check.
c. Assume that a consumer has a $50 account balance on March 1. That day, the institution posts a one-time debit card transaction of $60. At the end of that day, the consumer has an account balance of negative $10. The institution may not assess an overdraft fee for the debit card transaction. On March 3, the institution pays a check transaction of $100 and charges an overdraft fee of $20. At the end of that day, the consumer has an account balance of negative $130. The consumer does not make any deposits to the account, and no other transactions occur between March 4 and March 8. Because the consumer’s negative balance is attributable in part to the check, the institution may assess a $20 sustained overdraft fee. However, because the check was paid on March 3, the institution must use March 3 as the start date for determining the date on which the sustained overdraft fee may be assessed. Thus, the institution may charge a $20 sustained overdraft fee on March 8.
The commentary to the final rule includes an alternative approach that institutions may use to comply with the fee prohibition in § 205.17(b)(1) that does not require an institution to consider the allocation of deposits. Specifically, comment 17(b)-9.iii provides that, where a consumer has not opted into the payment of ATM or one-time debit card transaction overdrafts, an institution may comply with § 205.17(b)(1) by not assessing daily or sustained overdraft, negative balance, or similar fees or charges unless a consumer’s negative balance is attributable solely to checks, ACH or other types of transactions not subject to the fee prohibition, while that negative balance remains outstanding. Under this approach, the institution would not have to consider how to allocate subsequent deposits that reduce but do not eliminate the negative balance. For example, if a consumer has a negative balance of $30, of which $10 is attributable to a one-time debit card transaction, an institution complies with § 205.17(b)(1) if it does not assess a sustained overdraft fee while that negative balance remains outstanding.
H. Model Consent Form
The final rule includes a Model Consent Form, and requires that all opt-in notices under the final rule be in a form substantially similar to Form A-9. A copy of Form A-9 may be obtained from the Federal Reserve’s Web site at http://www.federalreserve.gov/. Other types of information that the final rule permits to be included with the overdraft notice include language describing transactions that are not subject to the opt-in right or that are subject to a separate opt-out right. For example, a bank may modify Form A-9 to clarify that the consumer has the right to opt out of payment of overdraft services for check transactions, ACH transactions or automatic bill payments, and, if so, may disclose the amount of a returned item fee and that additional merchant fees may apply.
The Model Consent Form can be used as a “safe harbor” to comply with the notice requirements of the final rule. The Model Consent Form describes one hypothetical institution’s overdraft service. The Model Consent Form satisfies the requirement in the final rule that the institution provide: (1) a brief description of its “standard overdraft service” and the types of transactions for which an overdraft fee may be imposed; (2) a clear statement of the right to opt in; and (3) a description of all applicable overdraft fees.
The final rule requires the opt-in notice to include the methods by which the consumer may consent to the overdraft service for ATM and one-time debit card transactions. The final comments authorizes institutions to tailor Model Form A-9 to the methods offered by the institution. The comment explains that an institution need not provide the tear-off portion of Model Form A-9, for example, if it is only permitting consumers to opt-in telephonically or electronically.
The comment states that an institution may use any reasonable method to identify the account for which the consumer submits the opt-in notice. For example, the institution may include a line for a printed name and an account number, as shown in Model Form A-9. Or, the institution may print a bar code or use other tracking information.
The final rule requires institutions that offer a line of credit subject to the Board’s Regulation Z or a service that transfers funds from another account of the consumer held at the institution to cover overdrafts to state that fact in the opt-in notice. Thus, if an institution offers both a line of credit subject to the Board’s Regulation Z and a service that transfers funds from another account of the consumer held at the institution to cover overdrafts, the institution must state in its opt-in notice that both alternative plans are offered. If the institution offers one, but not the other, it must state in its opt-in notice the alternative plan that it offers. If the institution does not offer either plan, it should omit the reference to the alternative plans.
I. Prohibition on Conditioning Payment of Other Types of Overdrafts on Opting In
The final rule contains an express prohibition on “conditioning” the payment of any overdrafts for checks, ACH transactions or other types of transactions on the consumer’s affirmatively consenting to the bank’s payment of overdrafts for ATM withdrawals and one-time debit transactions. The final rule also prohibits banks from declining to pay checks, ACH transactions or other types of transactions because the consumer has not also affirmatively consented to the bank’s overdraft service for ATM and one-time debit card transactions.
The final rule’s prohibition on “conditioning” does not mean that banks are required to pay all consumer overdrafts, even if those consumers have not opted in to overdraft services for ATM and one-time debit card transactions. The final rule clarifies that a bank is simply required to apply the same criteria for deciding when to pay overdrafts for checks, ACH transactions and other types of transactions, whether or not the consumer has affirmatively consented to the bank’s overdraft service with respect to ATM and one-time debit card overdrafts. The final rule provides, as an example, that if a bank’s internal criteria would lead it to pay a check overdraft of a consumer that has affirmatively consented to its ATM and one-time debit card overdraft services, it must also apply that same criteria in a consistent manner when determining whether to pay a check overdraft if the consumer has not opted in.
J. Same Account Terms Requirement
The final rule requires banks to provide consumers who do not opt in to its overdraft services for ATM and one-time debit card transactions an account with the same terms, conditions and features that it provides to consumers who affirmatively consent, except for features that limit the bank’s payment of such overdrafts. The final rule includes a “nonexclusive” list of example terms, conditions and features that cannot be varied. Those examples include fees and 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.
The final rule explains that it does not prohibit banks from offering deposit accounts with limited features, so long as the consumer is not required to open such an account because the consumer did not opt in. As a specific example, the final rule states that banks are not prohibited from offering a checking account designed for consumers who are not eligible to receive a full-service account based on their credit or other checking account history, which may include features limiting the payment of overdrafts. Nonetheless, banks may not steer consumers who do not opt in to an account with fewer features than the account for which the customer initially applies and is otherwise eligible.
K. Limited Exception to the Final Rule’s Notice and Opt-In Requirements
There is an exception to the final rule’s general notice and opt-in requirements. The exception applies if the bank has a policy and practice of declining to authorize and pay any ATM or one-time debit card transactions, with respect to a specific type of deposit account offered by the institution, when the institution has a reasonable belief at the time of the authorization request that the consumer does not have sufficient funds to cover the transaction. This exception is available even if the bank’s other accounts are subject to the final rule’s notice and opt-in requirements. For example, if a bank offered three types of checking accounts and the bank has a policy of not paying ATM or one-time debit card overdrafts for one of those types of accounts, that one type of account would not be subject to the final rule’s notice and opt-in requirements. The other two types of accounts would remain subject to the final rule.
L. Disclosure of Fees
The final rule requires disclosure of any daily limits on the number of overdraft fees or charges (or, that there are no limits).
M. Joint Accounts – Opt-In and Revocation
The final rule provides that a financial institution must treat affirmative consent provided by any joint consumer of an account as affirmative consent for the account from all of the joint consumers. Similarly, the financial institution must also treat a revocation of affirmative consent by any of the joint consumers as revocation of consent for that account. Thus, if one joint consumer opts in to the institution’s overdraft service, the institution must treat the consent as applying to all overdrafts involving an ATM or debit card transaction for that account and the same principals apply to revocation of the consent. In addition, revocation of the consent does not require the financial institution to waive or reverse any overdraft fees assessed on the consumer’s account prior to the institution’s implementation of the consumer’s revocation request.
N. Marketing of Opt-Ins
The Board has clarified that institutions may provide consumers other information about their overdraft services and other overdraft protection plans in a separate document outside of the opt-in notice. However, to the extent such additional materials promote the payment of overdrafts under Regulation DD, they may be subject to additional disclosure requirements. The Board also notes that the opt-in notice may be combined with other materials (e.g., in the same mailing), but that the rule requires the notice to be segregated from all other information.
A separate opt-in decision must be made by a consumer for each account, and the choices must be presented in a clear and readily understandable. Thus, a statement on the form that the consumer’s signature acts as an opt-in for all of the consumer’s accounts is not permissible under the final rule.
Under the final rule, the opt-in notice must be in a form substantially similar to the model form A-9 and include all of the information specified in the rule. The notice must also be clear and readily understandable, and in a form the consumer may keep. As a result, the font size, screen size and character limitations inherent in short message service (“SMS”) raise significant doubts about the ability of SMS text messages to satisfy the Regulation E disclosure requirements.
O. Effective Date
The final rule became effective on January 19, 2010, but compliance with the final rule was required by July 1, 2010. For accounts opened prior to this date, banks may not assess any fees or charges on a consumer’s account after August 15, 2010, for paying an ATM or one-time debit card transaction pursuant to an overdraft service, unless an affirmative consent has been obtained. For accounts opened after July 1, 2010, the bank must comply with the final rule immediately upon account opening and obtain the consumer’s affirmative consent prior to assessing any overdraft fee or charge in connection with an ATM or one-time debit card transaction. For both new and existing account holders, a bank may not retroactively apply affirmative consents to overdrafts that are paid before the consent is obtained.