Electronic Fund Transfers, 59033-59056 [E9-27474]
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59033
Rules and Regulations
Federal Register
Vol. 74, No. 220
Tuesday, November 17, 2009
This section of the FEDERAL REGISTER
contains regulatory documents having general
applicability and legal effect, most of which
are keyed to and codified in the Code of
Federal Regulations, which is published under
50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by
the Superintendent of Documents. Prices of
new books are listed in the first FEDERAL
REGISTER issue of each week.
FEDERAL RESERVE SYSTEM
12 CFR Part 205
[Regulation E; Docket No. R–1343]
Electronic Fund Transfers
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Final rule; official staff
commentary.
SUMMARY: The Board is amending
Regulation E, which implements the
Electronic Fund Transfer Act, and the
official staff commentary to the
regulation, which interprets the
requirements of Regulation E. The final
rule limits the ability of a financial
institution to assess an overdraft fee for
paying automated teller machine (ATM)
and one-time debit card transactions
that overdraw a consumer’s account,
unless the consumer affirmatively
consents, or opts in, to the institution’s
payment of overdrafts for these
transactions.
DATES: The rule is effective January 19,
2010, with a mandatory compliance
date of July 1, 2010.
FOR FURTHER INFORMATION CONTACT:
Dana Miller, Attorney, Ky Tran-Trong,
Counsel, or Vivian Wong, Senior
Attorney, Division of Consumer and
Community Affairs, Board of Governors
of the Federal Reserve System,
Washington, DC 20551, at (202) 452–
2412 or (202) 452–3667. For users of
Telecommunications Device for the Deaf
(TDD) only, contact (202) 263–4869.
SUPPLEMENTARY INFORMATION:
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I. Statutory Background
The Electronic Fund Transfer Act (15
U.S.C. 1693 et seq.) (EFTA or Act),
enacted in 1978, provides a basic
framework establishing the rights,
liabilities, and responsibilities of
participants in electronic fund transfer
(EFT) systems. The EFTA is
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implemented by the Board’s Regulation
E (12 CFR part 205). Examples of the
types of transactions covered by the Act
and regulation include transfers
initiated through an ATM, point-of-sale
(POS) terminal, automated
clearinghouse (ACH), telephone billpayment plan, or remote banking
service. The Act and regulation provide
for the disclosure of terms and
conditions of an EFT service;
documentation of EFTs by means of
terminal receipts and periodic
statements; limitations on consumer
liability for unauthorized transfers;
procedures for error resolution; certain
rights related to preauthorized EFTs;
and restrictions on the unsolicited
issuance of access devices.
The official staff commentary (12 CFR
part 205 (Supp. I)) interprets the
requirements of Regulation E to
facilitate compliance and provides
protection from liability under Sections
915 and 916 of the EFTA for financial
institutions and other persons subject to
the Act who act in conformity with the
Board’s official interpretations. 15
U.S.C. 1693m(d)(1). The commentary is
updated periodically to address
significant questions that arise.
II. Background on Overdraft Services
Historical Overview of Overdraft
Services
Historically, if a consumer tried to
make a payment using a check that
would overdraw his or her deposit
account, the consumer’s financial
institution used its discretion on an ad
hoc basis to determine whether to pay
the overdraft. If an overdraft was paid,
the institution usually imposed a fee on
the consumer’s account. In recent years,
many institutions have automated the
overdraft payment process, which
reduces costs and ensures consistent
treatment of consumers.1 Automation is
used to apply specific criteria for
determining whether to honor
overdrafts and to set limits on the
amount of coverage provided.
1 According to the FDIC’s Study of Bank
Overdraft Programs, nearly 70 percent of banks
surveyed implemented their automated overdraft
program after 2001. See FDIC Study of Bank
Overdraft Programs at 8 (November 2008) (FDIC
Study) (available at: https://www.fdic.gov/bank/
analytical/overdraft/
FDIC138_Report_FinalTOC.pdf). ATM and POS
overdrafts arose from automated overdraft
programs.
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Overdraft services vary among
institutions but often share certain
common characteristics. In most cases,
consumers that meet a depository
institution’s criteria are automatically
enrolled in overdraft services. While
institutions generally do not underwrite
on an individual account basis when
enrolling the consumer in an overdraft
service, most institutions review
individual accounts periodically to
determine whether the consumer
continues to qualify for the service and
the amount of overdraft coverage
provided. Most institutions disclose that
the payment of overdrafts is
discretionary, and that the institution
has no legal obligation to pay any
overdraft. Many institutions offer their
customers alternative overdraft
protection plans, such as a link to a
savings account or an overdraft line of
credit. These programs, for which the
consumer must qualify and enroll, are
distinguishable from the financial
institution’s overdraft service.
In the past, institutions generally
provided overdraft coverage only for
check transactions. In recent years,
however, the service has been extended
to cover overdrafts resulting from noncheck transactions, including ATM
withdrawals, debit card transactions at
POS, on-line transactions, preauthorized
transfers, and ACH transactions.2
Generally, institutions charge a flat fee
each time an overdraft is paid, although
some larger institutions have a tiered fee
structure and charge higher fees as the
number of overdrafts increases.
Institutions commonly charge the same
amount for paying check and ACH
overdrafts as they would if they
returned the item unpaid. Some
institutions also impose a fee for each
day the account remains overdrawn.
According to a recent report from the
Government Accountability Office
(GAO), the average cost of overdraft and
insufficient funds fees was just over $26
per item in 2007.3 The GAO also
2 Eighty-one percent of banks surveyed that
operate automated overdraft programs now allow
overdrafts to be paid at ATMs and POS debit card
terminals. See FDIC Study at 10.
3 See Bank Fees: Federal Banking Regulators
Could Better Ensure That Consumers Have
Required Disclosure Documents Prior to Opening
Checking or Savings Accounts, GAO Report 08–281,
at 14 (January 2008) (GAO Report). See also
‘‘Consumer Overdraft Fees Increase During
Recession: First-Time Phenomenon,’’ Press release,
Moebs $ervices (July 15, 2009) (Moebs 2009 Pricing
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reported that large institutions on
average charged between $4 and $5
more for overdraft and insufficient fund
fees compared to smaller institutions.4
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Industry and Consumer Advocate
Perspectives
From the industry’s perspective,
automated overdraft services enable
institutions to reduce the cost of
manually reviewing individual items,
and also ensure that all consumers are
treated consistently with respect to
overdraft payment decisions. Industry
representatives observe that overdraft
services provide access to funds in
urgent situations and prevent
embarrassment and inconvenience at
the point-of-sale.5 Some industry
representatives have indicated that a
majority of debit transactions that are
authorized into overdraft later settle into
good funds, without fees being assessed
on the consumer’s account.
In contrast, consumer advocates assert
that overdraft transactions are a highcost form of lending that trap low- and
moderate-income consumers into
paying high fees. Consumer advocates
also state that consumers are often
enrolled in overdraft services
automatically without their consent. In
addition, consumer advocates believe
that by honoring overdrafts, institutions
encourage consumer reliance on the
service and therefore, consumers incur
greater costs in the long run than they
would if the transactions were not
honored. Consumer advocates have
noted, for example, that historically,
institutions declined a consumer’s
request for an ATM withdrawal or debit
card transaction if the consumer did not
have sufficient funds in his or her
account. Today, however, institutions
are more likely to cover those overdrafts
and assess a fee on the consumer’s
account for doing so. According to
consumer advocates, this practice can
be particularly costly in connection
with debit card overdrafts because the
Survey Press Release) (available at: https://
www.moebs.com/AboutUs/Pressreleases/tabid/58/
ctl/Details/mid/380/ItemID/65/Default.aspx)
(reporting an average overdraft fee of $26).
4 See GAO Bank Fees Report at 16. Another recent
survey suggests that the cost difference in overdraft
fees between small and large institutions may be
larger than reported by the GAO, however. See
Moebs 2009 Pricing Survey Press Release (reporting
that banks with more than $50 billion in assets
charged on average $35 per overdrawn check
compared to $26 for all institutions).
5 See ABA Survey: More Consumers Avoid
Overdraft Fees, Press Release, American Bankers
Association (Sept. 9, 2009) (ABA Survey) (available
at: https://www.aba.com/Pressrss/
090909ConsumerSurveyOverdraftFees.htm)
(reporting survey results indicating that of those
consumers who had paid an overdraft fee in the
past 12 months, 96 percent wanted the payment
covered).
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dollar amount of the fee is likely to
considerably exceed the dollar amount
of the overdraft.6 In addition, multiple
fees may be assessed in a single day for
a series of small-dollar transactions.
Because of these costs, consumer
advocates contend that most consumers
would prefer that their bank decline
ATM or debit card transactions if the
transactions would overdraw their
account.7
Previous Agency Actions
In February 2005, the Board, along
with the other federal banking agencies,
issued guidance on overdraft protection
programs in response to the increased
availability and customer use of
overdraft protection services (Joint
Guidance).8 The Joint Guidance
addresses three primary areas—safety
and soundness considerations, legal
risks, and best practices.9 The best
practices described in the Joint
Guidance address the marketing and
communications that accompany the
offering of overdraft services, as well as
the disclosure and operation of program
features, including the provision of
consumer choice to opt out of the
overdraft service.
In May 2005, the Board revised
Regulation DD and the staff commentary
pursuant to its authority under the
Truth in Savings Act (TISA) to provide
uniformity and improve the adequacy of
disclosures provided to consumers
about overdraft and returned-item
fees.10 The 2005 Regulation DD
6 See, e.g., Overdraft Protection: Fair Practices for
Consumers: Hearing before the House Subcomm. on
Financial Institutions and Consumer Credit, House
Comm. on Financial Services, 110th Cong., at 72
(2007) (Overdraft Protection Hearing) (available at:
https://www.house.gov/apps/list/hearing/
financialsvcs_dem/hr0705072.shtml) (testimony
noting that as recently as 2004, 80 percent of banks
still declined ATM and debit card transactions
without charging a fee when account holders did
not have sufficient funds in their account).
7 See Leslie Parrish, Consumers Want Informed
Choice on Overdraft Fees and Banking Options, Ctr.
for Responsible Lending (April 16, 2008) (available
at: https://www.responsiblelending.org/overdraftloans/research-analysis/final-caravan-survey-4-1608.pdf) (reporting the results of a survey indicating
that 80 percent of consumers would prefer that a
debit card transaction be declined if a $5 purchase
would result in an overdraft and an accompanying
$34 fee); Consumers Union, Financial Regulation
Poll (February 13, 2009) (Consumers Union Poll)
(available at: https://www.federalreserve.gov/SECRS/
2009/March/20090317/R-1343/R1343_031209_12532_455058226232_1.pdf) (65% of
consumers would prefer that an ATM or debit card
transaction be denied if it would result in an
overdraft).
8 See Interagency Guidance on Overdraft
Protection Programs, 70 FR 9127, Feb. 24, 2005.
9 The Office of Thrift Supervision (OTS) issued
separate guidance that focuses on safety and
soundness considerations and best practices. OTS
Guidance on Overdraft Protection Programs, 70 FR
8428, Feb. 18, 2005.
10 70 FR 29582, May 24, 2005.
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revisions also addressed concerns about
institutions’ marketing of overdraft
services.
May 2008 FTC Act and Regulation DD
Proposals; January 2009 Regulation DD
Final Rule
In May 2008, the Board, along with
the OTS and the NCUA (collectively,
the Agencies), proposed to exercise their
authority under the Federal Trade
Commission Act (FTC Act) to prohibit
institutions from assessing any fees on
a consumer’s account in connection
with an overdraft service, unless the
consumer was given notice and the right
to opt out of the service, and the
consumer did not opt out.11 The
proposed opt-out right would have
applied to overdrafts resulting from all
methods of payment, including checks,
ACH transactions, ATM withdrawals,
recurring payments, and POS debit card
transactions. The proposed rule was
intended to ensure that consumers
understand overdraft services and have
the choice to avoid the associated costs
where such services do not meet their
needs.
The Board concurrently issued a
proposal under Regulation DD (Truth in
Savings), which set forth requirements
on the delivery of the opt-out notice, as
well as a model opt-out form.12 The
Regulation DD proposal required all
institutions to provide aggregate totals
for overdraft fees and for returned item
fees for the periodic statement period
and the year-to-date. The Regulation DD
proposal also addressed account balance
disclosures provided to consumers
through automated systems, such as
ATMs and on-line banking services. In
January 2009, the Board published the
revisions to Regulation DD in final form
addressing the aggregate fee and balance
disclosures, with an effective date of
January 1, 2010.13
Based on the Board’s review of
comments received with respect to the
2008 FTC Act and Regulation DD
proposals, the results of consumer
testing, and its own analysis, the Board
concluded that concerns about
consumer choice regarding overdraft
services should be addressed under the
EFTA and Regulation E. First,
participants in consumer testing
indicated that they would prefer to have
their checks paid into overdraft, because
those transactions represented
important bills. In contrast, consumer
testing indicated that many participants
would prefer to have ATM withdrawals
and debit card transactions declined if
11 73
FR 28904, May 19, 2008
FR 28730, May 19, 2008.
13 74 FR 5584, January 29, 2009.
12 73
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they had insufficient funds, rather than
incur an overdraft fee, because those
transactions tend to be more
discretionary in nature.
Second, a consumer will generally be
charged the same fee by the financial
institution whether or not a check is
paid; yet, if the institution covers an
overdrawn check, the consumer may
avoid other adverse consequences, such
as the imposition of additional
merchant returned item fees.14 For ATM
and one-time debit card transactions,
however, if the transaction is declined
because the consumer’s account
contains insufficient funds, the
consumer would not incur any
merchant returned item fees and would
avoid any fees assessed by the financial
institution.
Third, consumer testing indicated that
many consumers are unaware that they
can incur overdrafts at the ATM or at
POS, and that they believe instead that
their transactions will be declined.15
Consequently, consumers may overdraw
their accounts based on the erroneous
belief that a transaction would be paid
only if the consumer has sufficient
funds in the account to cover it.
Finally, the Board believed it was
appropriate to focus the proposal on
ATM and one-time debit card
transactions because these transactions
have been a key driver behind the
growth in the volume and cost of
overdraft fees—particularly POS/debit
overdraft transactions, which according
to one study accounted for 41% of
surveyed institutions’ insufficient funds
transactions.16 With respect to debit
card transactions in particular, the
amount of fees assessed may
substantially exceed the amount
overdrawn.17 Given the costs associated
with overdraft services in these
circumstances, consumers may prefer to
have these transactions declined.
Accordingly, the Board published a
revised proposal in January 2009 to
amend Regulation E and the official staff
commentary accompanying the
regulation.18
14 According to one survey, the average merchant
fee for a returned check is $25. See ‘‘National
Survey Reveals Retail Merchants’ Bad-Check Fees
Double Consumer Penalties for Overdrafts,’’ Press
release, Moebs $ervices (July 28, 2009) (available at:
https://www.moebs.com/AboutUs/Pressreleases/
tabid/58/ctl/Details/mid/380/ItemID/66/
Default.aspx). See also FDIC Study at 16 n.18.
15 See also Consumers Union Poll at 9 (48% of
consumers polled incorrectly thought ATM
transaction would be declined if they attempted to
overdraw).
16 FDIC Study at 78–79.
17 See Overdraft Protection Hearing at 72 (stating
that consumers pay $1.94 in fees for every one
dollar borrowed to cover a debit card POS
overdraft).
18 74 FR 5212, January 29, 2009.
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III. The Board’s Proposed Revisions to
Regulation E
Summary of Proposal
The January 2009 Regulation E
proposal was intended to assist
consumers in understanding how
overdraft services provided by their
institutions operate and to ensure that
consumers have the opportunity to limit
the overdraft costs associated with ATM
and one-time debit card transactions
where such services do not meet their
needs.19 The proposal established a
consumer’s right to opt out of, or into,
an institution’s payment of overdrafts
with respect to ATM withdrawals and
one-time debit card transactions. The
proposal also addressed debit holds
placed by an institution on a consumer’s
funds in an amount exceeding the actual
transaction amount.
The Board proposed two alternative
approaches for giving consumers a
choice regarding an institution’s
payment of overdrafts for ATM and onetime debit card transactions. The first
approach would prohibit accountholding financial institutions from
assessing overdraft fees or charges on a
consumer’s account for paying an
overdraft on an ATM withdrawal or
one-time debit card transaction
(whether at POS, on-line or by
telephone), unless the consumer is
given notice and a reasonable
opportunity to opt out of the
institution’s overdraft service in
connection with those transactions, and
the consumer does not opt out. Under
this approach, the opt-out notice would
be provided to the consumer at account
opening (or any time before any
overdraft fees are assessed) and again in
each periodic statement cycle in which
the institution assesses a fee or charge
to the consumer’s account for paying an
overdraft.
The second approach would prohibit
an account-holding financial institution
from assessing any fees on a consumer’s
account for paying an ATM withdrawal
or one-time debit card transaction that
overdraws the account, unless the
consumer is provided notice and a
reasonable opportunity to opt in, or
affirmatively consent, to the service, and
the consumer opts in. Under this
approach, opt-in notices would not have
to be provided again to consumers who
opt in when the financial institution
pays overdrafts on these transactions
and assesses a fee on the consumer’s
account. The proposed opt-in rule
would apply to all consumers, including
accounts existing prior to the mandatory
compliance date. However, the Board
19 Id.
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solicited comment on a hybrid approach
that would apply an opt-out to existing
accounts and an opt-in to accounts
opened on or after the mandatory
compliance date.
The proposal provided two
alternatives for implementing the
consumer’s choice for both the opt-out
and opt-in approaches. Under one
alternative, the proposal would require
an institution to provide consumers
who do not opt in an account that has
the same terms, conditions, or features
that are provided to consumers who
elect to have overdraft coverage for
ATM withdrawals and one-time debit
card transactions, except for features
that limit the institution’s payment of
such overdrafts. Under the second
alternative, institutions could vary the
terms, conditions, or features of the
account that does not permit the
payment of ATM and one-time debit
card overdrafts, provided that the
differences are not so substantial that
they would discourage a reasonable
consumer from exercising his or her
right to opt out of the payment of such
overdrafts (or compel a reasonable
consumer to opt in).
Further, the Board proposed to
permit, or alternatively to prohibit, (1)
conditioning the payment of checks,
ACH transactions, or other types of
transactions that overdraw the
consumer’s account on the consumer
not opting out of (or opting into) the
institution’s overdraft service with
respect to ATM and one-time debit card
transactions, or (2) declining to pay
checks, ACH transactions, or other types
of transactions that overdraw the
consumer’s account because the
consumer has opted out of (or not opted
into) the institution’s overdraft service
for ATM and one-time debit card
transactions. To facilitate compliance,
the proposal provided model forms that
institutions could use to satisfy their
disclosure obligations.
The Board also proposed to prohibit
institutions from assessing an overdraft
fee where the overdraft would not have
occurred but for a debit hold placed on
funds in an amount that exceeds the
actual transaction amount and where
the merchant can determine the actual
transaction amount within a short
period of time after authorization of the
transaction.
Overview of Public Comments
The Board received over 20,700
comment letters on the proposal,
including approximately 16,000 form
letters. The majority of the comment
letters were submitted by individual
consumers. The remaining comment
letters were submitted by banks, savings
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associations, credit unions, industry
trade associations, industry processors
and vendors, consumer advocates,
members of Congress, other federal
banking agencies, state and local
governments and regulators, and others.
Many commenters reiterated comments
made in response to the 2008 FTC Act
proposal.20
Some consumer advocates, federal
and state regulators, and others
generally expressed support for the
more narrowly tailored approach under
Regulation E. However, some other
consumer advocates urged the Board to
reconsider using its authority under the
FTC Act to provide, at a minimum, the
right to opt out of the payment of
overdrafts with respect to checks, ACH,
and recurring debit card transactions.
Industry commenters generally
supported the Board’s decision to issue
a proposal under Regulation E, rather
than pursuant to the FTC Act. Many
industry commenters argued that
consumers derive substantial benefits
from overdraft services, and expressed
concern about the operational feasibility
of limiting the opt-out, or opt-in, right
only to overdrafts paid in connection
with ATM withdrawals and one-time
debit card transactions.
In response to the proposed opt-out
and opt-in alternatives, consumer
advocates, members of Congress, federal
and state regulators, and the
overwhelming majority of individual
consumers who commented urged the
Board to adopt the proposed opt-in
approach. These commenters argued
that the harm to consumers from
overdraft fees outweigh any benefits.
Further, these commenters maintained
that most consumers would prefer to
have an ATM or one-time debit card
transaction declined, rather than trigger
one or more overdraft fees. These
commenters also stated that an opt-in
should apply to all account holders.
In contrast, the majority of industry
commenters favored the proposed optout approach. These commenters
maintained that an opt-out regime
would more effectively provide
consumers the benefits of overdraft
services while causing fewer
disruptions to consumers and other
participants in the banking system.
Further, these commenters argued that
any opt-in requirement should apply
only to new accounts.
Consumer advocates and federal and
state banking regulators supported the
proposed prohibition on conditioning
the payment of overdrafts for checks,
ACH transactions, or other types of
transactions on the consumer also
20 74
FR at 5214.
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affirmatively consenting to the
institution’s payment of overdrafts for
ATM withdrawals and one-time debit
card transactions. These commenters
stated that consumers would otherwise
feel compelled to opt into the
institution’s overdraft service in order to
have check and ACH overdrafts paid.
For similar reasons, these commenters
argued that institutions should be
required to provide consumers who do
not opt into the institution’s overdraft
service for ATM and one-time debit card
transactions an account with identical
terms, conditions and features as an
account provided to consumers who do
opt in. In contrast, industry commenters
supported the alternative permitting
conditioning the opt-in, because it
would be costly to implement a system
that pays overdrafts for certain types of
transactions but not others. These
commenters also urged the Board to
permit institutions to vary the account
terms, conditions, and features for
consumers who do not opt in.
Consumer group commenters stated
that the Board should not provide any
exceptions to the prohibition on fees,
even if overdrafts are inadvertently paid
due to delays in transaction processing
and settlement. Industry commenters,
on the contrary, supported the proposed
exceptions. Many industry commenters
urged the Board to provide for
additional exceptions for transactions
for which authorization is not requested
at the time of the transaction.
Consumer Testing
Following the January 2009 proposal,
the Board engaged a testing consultant,
Macro International, Inc. (Macro), to
revise and test the proposed model optout notice and the newly proposed optin notice. Four additional rounds of
interviews were conducted with a
diverse group of consumers between
May and September 2009. Testing was
conducted at various locations across
the United States. The findings from
each round of interviews were
incorporated in revisions to the model
forms for the following round of testing.
In general, after reviewing the model
disclosures, testing participants
understood the concept of overdraft
coverage, and that they would be
charged fees if their institution paid
their overdrafts. Consistent with
previous testing efforts undertaken in
connection with the 2008 FTC Act
proposal, participants generally
indicated that they would want their
checks paid into overdraft. The majority
of participants also indicated that they
would prefer an opt-in over an opt-out
even if they would choose to have ATM
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and one-time debit card transactions
paid.21
IV. Summary of Final Rule
The Board is adopting a final rule
under Regulation E and the official staff
commentary to assist consumers in
understanding how overdraft services
provided by their institutions operate.
The rule gives consumers the
opportunity to limit the overdraft costs
associated with ATM and one-time
debit card transactions, where such
services do not meet their needs. The
following is a summary of the final rule
and related commentary provisions. The
revisions are discussed in greater detail
in the section-by-section analysis below.
Opt-In Approach
The final rule requires institutions to
provide consumers with the right to opt
in, or affirmatively consent, to the
institution’s overdraft service for ATM
and one-time debit card transactions.
Under the final rule, notice of the optin right must be provided, and the
consumer’s affirmative consent
obtained, before fees or charges may be
assessed on the consumer’s account for
paying such overdrafts. The opt-in
requirement applies to both existing and
new accounts. Based on comments
received and consumer testing efforts,
the final rule adopts a revised model
form that institutions may use to satisfy
the notice requirement.
The final rule also prohibits
institutions from conditioning the
payment of overdrafts for checks, ACH
transactions, or other types of
transactions on the consumer also
affirmatively consenting to the
institution’s payment of overdrafts for
ATM and one-time debit card
transactions. Institutions are also
prohibited from declining to pay check,
ACH transactions, or other types of
transactions that overdraw the
consumer’s account because the
consumer has not opted into the
institution’s overdraft service for ATM
and one-time debit card transactions.
For consumers who do not affirmatively
consent to the institution’s overdraft
service for ATM and one-time debit card
transactions, the final rule requires
institutions to provide those consumers
with the same account terms,
conditions, and features that they
provide to consumers who do
affirmatively consent, except for the
overdraft service for ATM and one-time
debit card transactions.
The final rule does not adopt the
proposed exception to the fee
21 See Design and Testing of Overdraft Notices:
Phase Two, Macro International, October 12, 2009.
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prohibition for transactions authorized
on an institution’s reasonable belief that
the consumer’s account has sufficient
funds to cover the transaction. The final
rule also does not adopt the proposed
exception for transactions where a
merchant or other payee presents a debit
card transaction by paper-based means,
rather than electronically using a card
terminal, and the institution has not
previously authorized the transaction.
Debit Holds
The Board is not adopting the
proposed provisions on debit holds. The
proposal put the obligation on financial
institutions to address concerns about
overdrafts caused by debit holds.
However, upon further consideration,
the Board believes that a more
comprehensive approach that involves
financial institutions, card networks,
and merchants may be required to
effectively address these problems. The
Board will continue to monitor
developments with respect to debit
holds and assess whether to take further
action.
jlentini on DSKJ8SOYB1PROD with RULES
V. Legal Authority
The Board is adopting the final rule
pursuant to its authority under Sections
904(a) and 904(c) of the EFTA (15 U.S.C.
1693b). Section 904(a) of the EFTA
authorizes the Board to prescribe
regulations necessary to carry out the
purposes of the title. The express
purposes of the EFTA are to establish
‘‘the rights, liabilities, and
responsibilities of participants in
electronic fund transfer systems’’ and to
provide ‘‘individual consumer rights.’’
See EFTA Section 902(b); 15 U.S.C.
1693. In addition, Section 904(c) of the
EFTA provides that regulations
prescribed by the Board may contain
any classifications, differentiations, or
other provisions, and may provide for
such adjustments or exceptions for any
class of electronic fund transfers, that
the Board deems necessary or proper to
effectuate the purposes of the title, to
prevent circumvention or evasion, or to
facilitate compliance.
The legislative history of the EFTA
makes clear that the Board has broad
regulatory authority. According to the
Senate Report, regulations are ‘‘essential
to the act’s effectiveness’’ and ‘‘[permit]
the Board to modify the act’s
requirements to suit the characteristics
of individual EFT services. Moreover,
since no one can foresee EFT
developments in the future, regulations
would keep pace with new services and
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assure that the act’s basic protections
continue to apply.’’ 22
The final opt-in rule is intended to
carry out the express purposes of the
EFTA by: (a) Establishing notice
requirements to help consumers better
understand the cost of overdraft services
for certain EFTs; and (b) providing
consumers with a choice as to whether
they want overdraft services for ATM
and one-time debit card transactions in
light of the costs associated with those
services. The final opt-in rule’s
prohibition on conditioning the opt-in
and limitations on how the opt-in may
be implemented have been designed to
prevent circumvention or evasion of the
requirement to provide the consumer
with meaningful choice regarding
overdraft services. The final rule does
not require financial institutions to pay
overdrafts on checks, and does permit
them to offer consumers a choice
regarding overdraft services for checks.
The disclosures implementing the
opt-in requirement are issued pursuant
to the Board’s authority under Sections
904(b) and 905 of the EFTA. 15 U.S.C.
1693b(b) and 1693c.
VI. Section-by-Section Analysis
Section 205.12 Relation to Other Laws
Section 205.12(a) explains the
relationship between Regulation E and
Regulation Z when an access device
permits a consumer to obtain an
extension of credit incident to an EFT.
In general, Regulation E governs the
issuance of access devices and the
addition of an EFT service to an
accepted credit card, and Regulation Z
governs the issuance of a combined
credit card and access device and the
addition of a credit feature to an
accepted credit card. See § 205.12(a).
The final rule is adopted substantially
as proposed to clarify that both the
issuance of an access device with an
overdraft service and the addition of an
overdraft service to an accepted access
device are governed by Regulation E.
Currently, § 205.12(a)(1)(ii) states that
the EFTA and Regulation E govern the
‘‘issuance of an access device that
permits credit extensions (under a
preexisting agreement between a
consumer and a financial institution)
only when the consumer’s account is
overdrawn or to maintain a specified
minimum balance in the consumer’s
account.’’ As the Board stated in the
original March 1979 final rule, this
provision (originally in § 205.4(c)) was
intended to clarify that Regulation E,
rather than Regulation Z, applies to the
issuance of ‘‘access devices that are also
22 S. Rep. No. 95–1273, 95th Cong., 2d Sess., at
26 (Oct. 4, 1978).
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59037
credit cards solely by virtue of their
capacity to access an existing overdraft
credit line attached to the consumer’s
account.’’ 61 FR 18468, 18472, March
28, 1979.
When the rule was originally adopted,
the primary means of covering
overdrafts incurred in connection with
EFTs was through an overdraft line of
credit linked to a debit card or other
access device. Today, however,
consumers are more likely to have these
overdrafts covered by their institution’s
overdraft service, rather than by a
separate overdraft line of credit.
Commenters generally agreed with the
proposed rule and commentary. Some
consumer advocates, however, argued
that overdraft services should be subject
to TILA and Regulation Z.
In the final rule, the Board is
amending § 205.12(a)(1)(ii) substantially
as proposed, with non-substantive edits
for clarity, to provide that Regulation E
governs the issuance of an access device
that permits extensions of funds under
an overdraft service (as defined below
under § 205.17). New § 205.12(a)(1)(iii)
provides that Regulation E also covers
the addition of an overdraft service to a
previously accepted access device. See
also comment 12(a)–2. Comment 12(a)–
3 clarifies that the addition of an
overdraft service to an accepted access
device does not constitute the addition
of a credit feature under Regulation Z.
In addition, the Board is amending
§ 205.12(a)(1)(i) as proposed, to conform
the regulation to reflect the January
2009 redesignation of the definition of
the term ‘‘accepted credit card’’ under
Regulation Z. See 12 CFR 226.12,
comment 226.12–2. Finally, current
§ 205.12(a)(1)(iii), which provides that
Regulation E’s liability limits and error
resolution rules also apply to extensions
of credit under an overdraft line of
credit, is redesignated as
§ 205.12(a)(1)(iv) and revised, as
proposed, to include a reference to
overdraft services.
Section 205.17 Requirements for
Overdraft Services
To ensure consumers are given a
meaningful choice regarding overdraft
services, § 205.17 requires institutions
to provide consumers with the right to
opt in, or affirmatively consent, to the
institution’s overdraft service for ATM
and one-time debit card transactions.
Under the final rule, notice of the optin right must be provided, and the
consumer’s affirmative consent
obtained, before fees or charges may be
assessed on the consumer’s account for
paying such overdrafts. The final rule
also prescribes how the consumer’s optin choice must be implemented. The
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opt-in requirement applies to all
consumers, including account holders
who opened accounts prior to the
mandatory compliance date of July 1,
2010.
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Background
Consumers are often enrolled in
overdraft services automatically without
their consent. Thus, in the February
2005 Joint Guidance on overdraft
protection services, the Board and the
other federal banking agencies
recommended as a best practice that
institutions obtain a consumer’s
affirmative consent to receive overdraft
protection. Alternatively, the Joint
Guidance stated that where overdraft
protection is provided automatically,
institutions should provide consumers
the opportunity to opt out of the
overdraft program and provide
consumers with a clear disclosure of
this option.23
Although many institutions provide
consumers the right to opt out of
overdraft services, this practice is not
uniform across all institutions.24 Even
where an opt-out right is provided,
institutions may not clearly disclose this
right to consumers, or may make it
difficult for consumers to exercise this
right. For example, some institutions
may disclose the opt-out right in a
clause in their deposit agreement, which
many consumers may not notice or may
not consider relevant because they do
not expect to overdraw their accounts.
In other cases, the opt-out provisions
may not be written in clearly
understandable language.
In the January 2009 Regulation E
proposal, the Board proposed to provide
consumers with the right to opt out of,
or in the alternative, opt into the
payment of overdrafts with respect to
their ATM withdrawals and one-time
debit card transactions. The Board
proposed to apply the new rules to both
existing and new accounts, but solicited
comment on a hybrid approach which
would permit institutions to offer an
opt-out to existing accounts.
Consumer advocates, members of
Congress, federal and state regulators,
and the overwhelming majority of
23 70 FR at 9132. The OTS made similar
recommendations in its separate guidance. See 70
FR at 8431.
24 According to the FDIC’s Study of Bank
Overdraft Programs, 75.1% of institutions surveyed
permit consumers to opt out of their automated
overdraft program, while 11.1% of institutions
require consumers to opt in. According to the FDIC,
banks that do not promote automated programs
were less likely to give consumers either the option
to opt in or to opt out of the automated overdraft
program. See FDIC Study at 27. See also Moebs
2009 Pricing Survey Press Release (reporting that
86% of institutions that offer overdraft services
allow the consumer to opt out).
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individual consumers who commented
urged the Board to adopt the proposed
opt-in alternative that would require
institutions to obtain a consumer’s
affirmative consent before fees could be
charged for paying an overdraft. These
commenters argued that any benefit
from permitting ATM and debit card
overdrafts to be paid without prior
consumer consent was far outweighed
by the harm to consumers stemming
from overdraft fees, which may be
significantly higher than the
transactions causing the overdraft.
Further, these commenters maintained
that most consumers would prefer to
have an ATM or one-time debit card
transaction declined rather than pay one
or more overdraft fees.
In contrast, the majority of industry
commenters favored the proposed optout approach. These commenters
contended that an opt-out regime would
provide consumers the benefits of
overdraft services while causing fewer
disruptions to consumers and other
participants in the banking system.
Industry commenters also remained
concerned about the operational
feasibility and costs of an opt-in. For the
following reasons, the Board adopts an
opt-in approach in the final rule.
Discussion
Due to various factors such as
consumer inertia and the difficulty in
anticipating future costs, consumers
may end up with suboptimal outcomes
even when given a choice. As some
studies have suggested, consumers are
likely to adhere to the established
default rule, that is, the outcome that
would apply if the consumer takes no
action.25 Under an opt-out rule,
consumers would default to having their
financial institution’s automatic
overdraft coverage, resulting in some
consumers incurring overdraft fees even
if their preferred course would be for
ATM and debit card transactions to be
declined. The opposite would be true
with an opt-in rule. Specifically,
consumers could avoid fees for a service
they did not request.
The Board believes that, on balance,
an opt-in rule creates the optimal result
for consumers with respect to ATM and
25 See, e.g., Brigette Madrian and Dennis Shea,
‘‘The Power of Suggestion: Inertia in 401(k)
Participation and Savings Behavior,’’ 116 Quarterly
Journal of Economics 1149 (2001); Gabriel D.
Carroll, James J. Choi et al., ‘‘Optimal Defaults and
Active Decisions,’’ Quarterly Journal of Economics
(forthcoming November 2009) (both studies of
automatic enrollment in 401(k) savings plans
indicating a significant increase in employee
participation if the default rule provides that a
consumer is automatically enrolled in the plan
unless they opt out, instead of requiring employees
to affirmatively agree to participate in the plan).
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one-time debit card transactions. First,
the cost to consumers of overdraft fees
assessed in connection with ATM and
debit card overdrafts is significant.26 For
one-time debit card transactions in
particular, the amount of the fee
assessed may substantially exceed the
amount overdrawn.27 If the consumer
incurs multiple debit card overdrafts in
one day, fees may accrue into the
hundreds of dollars. Many consumers
may prefer such transactions not to be
paid.
Second, an opt-in rule that is limited
to ATM and one-time debit card
transactions may result in fewer adverse
consequences for consumers than a rule
applicable to a broader range of
transactions. While a check or ACH
transaction that is returned for
insufficient funds might cause the
consumer to incur a merchant fee for the
returned item, in addition to an
insufficient funds fee assessed by the
consumer’s financial institution, a
declined ATM or debit card transaction
does not result in any fees to the
consumer.
Third, available research indicates
that the large majority of overdraft fees
are paid by a small portion of
consumers who frequently overdraw
their accounts.28 These consumers may
have difficulty both repaying overdraft
fees and bringing their account current,
which may in turn cause them to incur
additional overdraft fees. An opt-in
approach could therefore best prevent
these consumers from entering into a
harmful cycle of repeated overdrafts.
Fourth, many consumers may not be
aware that they are able to overdraft at
an ATM or POS. Debit cards have been
promoted as budgeting tools, and a
means for consumers to pay for goods
and services without incurring
additional debt. Additionally, the ability
26 According to the FDIC Study, the median dollar
amount for debit card transactions resulting in an
overdraft is $20. See FDIC Study at 78–79. This
compares to the average cost of overdraft and
insufficient funds fees of over $26 per item in 2007,
as reported by the GAO Report. GAO Report at 14.
See also FDIC Study at 15, 18 (reporting a median
per item overdraft fee of $27 for banks surveyed).
The FDIC Study also reported that POS/debit
overdraft transactions accounted for the largest
share of all surveyed institutions’ insufficient funds
transactions (41.0%). FDIC Study at 78–79.
27 Eric Halperin, Lisa James and Peter Smith,
Debit Card Danger: Banks Offer Little Warning and
Few Choices as Customers Pay a High Price for
Debit Card Overdrafts, Ctr. for Responsible Lending
at 8 (Jan. 25, 2007) (estimating that the median
amount by which a consumer overdraws his or her
account for a debit card purchase is $17, and that
consumers pay $1.94 in fees for every one dollar
borrowed to cover a debit card POS overdraft).
28 Seventy-five percent of consumers did not
overdraw their accounts at all during the survey
year; consumers who overdrew their accounts five
or more times per year paid 93% of all overdraft
fees. See FDIC Study at iv.
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Federal Register / Vol. 74, No. 220 / Tuesday, November 17, 2009 / Rules and Regulations
to overdraft at an ATM or POS is a
relatively recent development.
Consequently, consumers may
unintentionally overdraw their account
based on the erroneous belief that a
transaction would be paid only if the
consumer has sufficient funds in the
account to cover it. With an opt-in
approach, consumers who do not opt in
will be less likely to incur unanticipated
overdraft fees.
Finally, the opt-in approach is
consistent with consumer preference, as
indicated by the Board’s consumer
testing. Continued consumer testing
after the publication of the January 2009
proposal was consistent with prior
testing efforts, with many participants
stating that they would prefer to have
ATM withdrawals and debit card
transactions declined if they had
insufficient funds, rather than incur an
overdraft fee. Similarly, an
overwhelming majority of consumer
commenters also expressed their
preference for an opt-in approach.
The Board recognizes that, for some
consumers, coverage of occasional
overdrafts and paying occasional
overdraft fees may be preferable to
having transactions declined. Such
consumers could be precluded from
completing important transactions when
there are insufficient funds in the
consumer’s account if the consumer has
not opted in and the consumer does not
have another means of payment.
Some industry representatives
commented that a majority of debit card
transactions authorized into overdraft
later settle into good funds. In
advocating an opt-out approach, these
commenters argued that a consumer’s
failure to opt in would result in
declined transactions even when, a
majority of the time, the consumer
would not have been assessed overdraft
fees on his or her account.
While an opt-in approach may result
in the denial of some transactions which
would otherwise have settled into good
funds, the Board notes that the overall
impact of the final rule on the number
of declined transactions is difficult to
quantify, as it depends on a number of
factors. This includes an institution’s
processing procedures, such as whether
credits are processed before debits, and
funds availability policies. Because
direct deposits pose little risk of failing
to clear, as compared to a deposited
check, institutions may also authorize
transactions based on pending amounts.
As more institutions shift towards realtime clearing, there will be less lag time
between transaction authorization and
clearing. For customer service reasons,
financial institutions also have an
incentive to minimize the circumstances
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under which transactions are declined.
Moreover, the effect may be limited, as
the consumer could choose to opt into
overdraft coverage after the first
declined transaction.
Industry commenters also argued that
overdraft fees—which constitute a
significant percentage of financial
institutions’ deposit service charges—
subsidize other checking account
features consumers enjoy, such as
maintenance fee-free checking accounts,
or free on-line bill payment. Because an
opt-in requirement would likely result
in reduced overdraft fee income, these
commenters argued that an opt-in rule
would result in either higher fees or a
reduction in account features or bank
services for all consumers.
To the extent institutions adjust their
pricing policies to respond to the
potential loss of income from overdraft
fees, some consumers may experience
increases in certain upfront costs as a
result of the final opt-in rule.
Nonetheless, the Board believes that
giving consumers the choice to avoid
the high cost of overdraft fees, and the
increased transparency in overdraft
pricing that would result from an optin rule, outweigh the potential increase
in upfront costs. In addition, some
consumers will continue to be able to
avoid monthly maintenance or other
account fees as a result of meeting
minimum balance requirements or
having other product relationships with
the bank.
The Board also solicited comment on
a hybrid approach consisting of an optout rule for existing accounts and an
opt-in rule for new accounts. Under this
approach, an institution could continue
to pay overdrafts (and assess fees) for
ATM withdrawals and one-time debit
card transactions for existing account
holders who have not opted out, but
would be prohibited from assessing fees
or charges for paying such overdrafts on
new account holders who have not
affirmatively consented to the
institution’s overdraft service. The final
rule applies the opt-in approach to all
consumers.
Industry commenters preferred the
hybrid approach to an opt-in approach
for existing accounts, stating that some
consumers may overlook the opt-in
notice, but nonetheless prefer to have
their overdrafts covered. In such cases,
these consumers may be confused or
angry when a transaction they expect to
go through is denied after the effective
date. In contrast, consumer group
commenters stated that existing account
holders should receive the same opt-in
protections as new customers, because
customer turnover is very low from year
to year.
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59039
The final rule provides an opt-in right
for both new and existing accounts. The
Board believes it is appropriate to apply
the opt-in approach to existing accounts
for several reasons. First, the annual
consumer account attrition rate is low.
One report estimates that only 14% of
financial institution customers leave
their institutions each year.29 Thus,
application of the opt-in rule only to
new customers would mean that a
significant number of consumers would
not receive the protections provided by
an opt-in. In addition, consumers who
have an existing account, and then open
a new account after the rule’s
mandatory compliance date, would
receive inconsistent treatment with
regard to their accounts, which could
lead to consumer confusion. Further, a
hybrid approach would require
institutions to maintain two systems
over time for new and existing accounts,
which could be costly for some
institutions. While some consumers
with existing accounts may be surprised
if, contrary to their expectations, their
ATM and one-time debit card
transactions are not paid into overdraft,
these customers would subsequently be
able to opt in. For those consumers who
are unaware that they can overdraft at
an ATM or at point-of-sale, however, an
opt-in rule would have little impact on
their expectations with respect to the
coverage currently provided to them.
Timing requirements for new and
existing accounts are described in the
discussion of § 205.17(c) below.
A. Definition—§ 205.17(a)
Proposed § 205.17(a) defined
‘‘overdraft service’’ to mean 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 (including a check
or other item) when the consumer has
insufficient or unavailable funds in the
account. The term was intended to
cover circumstances when an institution
assesses a fee for paying an overdraft
pursuant to any automated program or
service, whether promoted or not, or as
a non-automated, ad hoc
accommodation. The proposed
definition excluded an institution’s
payment of overdrafts pursuant to a line
of credit subject to the Board’s
Regulation Z, including transfers from a
credit card account, a home equity line
of credit, or an overdraft line of credit.
The proposed definition also excluded
overdrafts paid pursuant to a service
29 Celent, ‘‘Customer Attrition in Retail Banking:
the US, Canada, the UK, and France,’’ Press Release
(Jan. 2, 2003) (available at: https://
reports.celent.com/PressReleases/20030102/
CustomerAttrition.htm).
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that transfers funds from another
account of the consumer (including any
account that may be jointly held by the
consumer and another person) held at
the institution. These methods of
covering overdrafts were excluded
because they require the express
agreement of the consumer.
Commenters generally supported
proposed § 205.17(a). Accordingly, the
Board is adopting § 205.17(a) with one
modification.
The final rule includes a new
§ 205.17(a)(3) to address a suggestion
that the Board revise the definition of
‘‘overdraft services’’ to also exclude
credit secured by margin securities in
brokerage accounts extended by
Securities and Exchange Commissionregistered broker-dealers. Margin credit
is exempt from the requirements of
TILA and Regulation Z in recognition
that similar substantive consumer
protections already apply to such credit
through federal securities law. See 15
U.S.C. 1603(2); 12 CFR 226.3(d). Also,
margin credit is typically offered
pursuant to a written agreement
between a consumer and a broker.
Accordingly, final § 205.17(a)(3)
clarifies that the term ‘‘overdraft
services’’ does not include a line of
credit or other transaction exempt from
Regulation Z pursuant to 12 CFR
226.3(d).
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B. Opt-In Requirement—§ 205.17(b)
For the reasons discussed above, the
Board is adopting an opt-in rule. The
general rule is implemented in
§ 205.17(b).
17(b)(1) General Rule and Scope of OptIn
Proposed § 205.17(b)(1) set forth the
general rule prohibiting an accountholding institution from assessing a fee
or charge on a consumer’s account held
at the institution for paying an ATM
withdrawal or a one-time debit card
transaction pursuant to the institution’s
overdraft service, unless the consumer
is provided with a notice explaining the
institution’s overdraft service for such
transactions and a reasonable
opportunity to affirmatively consent, or
opt in, to the service, and the consumer
affirmatively consents, or opts in, to the
service. If the consumer opts in, the
institution would be required to provide
written confirmation of the consumer’s
consent.
The proposed opt-in applied to any
ATM withdrawal, including
withdrawals made at proprietary or
foreign ATMs. The proposed opt-in also
applied to any one-time debit card
transaction, regardless of whether the
consumer uses a debit card at a point-
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of-sale (for example, at a merchant or a
store), in an on-line transaction, or in a
telephone transaction.30
In the final rule, the Board adopts the
opt-in approach and scope generally as
proposed, with modifications to
enhance the consumer’s right to revoke
consent, and certain additional
clarifications. The opt-in rule applies to
all accounts covered by Regulation E,
including payroll card accounts, to the
extent overdraft fees may be imposed for
ATM or one-time debit card
transactions.
Several commenters requested that
the Board clarify the kinds of ATM
transactions that are subject to the rule.
The Board understands that consumers
use ATMs not only for withdrawing
cash, but also for inter-account transfers,
bill payments, and even postage stamp
purchases. Therefore, the Board believes
the opt-in rule should apply to all
transactions originating at an ATM, and
not just withdrawals. Accordingly, the
final rule has been revised, as
applicable, to apply to ‘‘ATM
transactions’’ more generally, in
addition to one-time debit card
transactions as proposed.’’ See, e.g.,
§ 205.17(b)(1).
The final rule does not apply to other
types of transactions, including check
transactions and recurring debits. As
discussed above with respect to checks,
the payment of overdrafts for these
transactions may enable consumers to
avoid other adverse consequences that
could result if such items are returned
unpaid, such as returned item fees
charged by the merchant. Consumers
may also be more likely to use checks,
ACH and recurring debit card
transactions to pay for significant
household expenses, such as utilities
and rent. In the Board’s consumer
testing, participants generally indicated
that they were more likely to pay
important bills using checks, ACH, and
recurring debits, and to use debit cards
on a one-time basis for their
discretionary purchases.
The opt-in requirement also does not
apply to ACH transactions. For example,
if the consumer provides his or her
checking account number to authorize
an ACH transfer on-line or by telephone,
the institution would be permitted to
pay the item if it overdraws the
consumer’s account and to assess a fee
for doing so, even if the consumer has
not opted into the payment of overdrafts
for ATM or one-time debit card
transactions. Like checks and recurring
debits, consumers may use ACH
transactions to pay for significant
30 For clarity, this has been added as comment
17(b)–1.iii.
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household expenses. The Board notes
that in many cases, ACH transactions
serve as a replacement for check
transactions, such as where a check is
converted to a one-time ACH debit to
the consumer’s account. In addition,
consumers could avoid merchant
returned item fees if ACH transactions
are paid into overdraft.
Several commenters requested that
the Board explicitly exclude decoupled
debit transactions from the scope of
transactions covered by the final rule.
Decoupled debit cards are debit cards
offered by institutions other than the
account-holding institution that
consumers use as they would any other
debit card. Transactions for these cards
originate as debit card transactions paid
by the card issuer, but are received and
processed by the account-holding
institution as ACH transactions. The
final rule prohibits a financial
institution that holds a consumer’s
account from assessing a fee for paying
an ATM or one-time debit card
transaction. Accordingly, overdraft fees
charged by the account-holding
financial institution for a decoupled
debit transaction processed via ACH are
not generally subject to the opt-in
requirement of the final rule. For clarity,
new comment 17(b)–1.i states that
§ 205.17(b)(1) applies to ATM and onetime debit card transactions made with
a debit card issued by or on behalf of the
account-holding institution.31
Industry commenters generally
objected to the proposed rule’s
differentiation between one-time debit
card transactions and recurring debit
card transactions. These commenters
stated that they currently do not have
technology in place to distinguish
between these types of transactions, and
that such a change would be difficult
and costly to implement. In addition,
they stated that the proposed rule could
lead to consumer confusion as to how
transactions will be treated, because
some consumers may pay their bills on
a transaction-by-transaction basis using
a debit card number each time a bill is
due rather than establishing payment as
a recurring debit.
The Board recognizes that applying
the opt-in rule to one-time debit card
transactions will result in some bill
payments being declined if the
consumer does not opt-in, to the extent
consumers pay bills on a transaction-bytransaction basis using a debit card
number. Nonetheless, the Board
31 The Board understands that currently, issuers
of decoupled debit cards do not assess consumers
overdraft fees because they do not seek
authorization from the account-holding institution
and do not know the consumer’s balance before
paying the transaction.
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believes that the rule as adopted will
address the majority of bill payments
that consumers would prefer to have
paid, because recurring debit card
transactions are established primarily
for bill payments, while one-time debit
card transactions tend to be
discretionary purchases. The Board also
believes that this approach provides a
bright-line approach that will facilitate
compliance.
Industry commenters also argued that,
even if their systems could differentiate
between one-time and recurring
transactions, such differentiation cannot
be done reliably because merchants may
not correctly code transactions as onetime or recurring. The Board recognizes
that institutions cannot fully implement
a consumer’s choice without proper
coding of the transaction by the
merchant. Thus, the Board is adopting
a safe harbor in new comment 17(b)–1.ii
to explain that a financial institution
complies with the rule 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.
Several industry commenters stated
that the rule and model language should
focus on the ‘‘authorization’’ of ATM
and one-time debit card transactions,
rather than ‘‘payment’’ of such
transactions. The final rule generally
retains the language regarding
‘‘payment’’ of ATM and one-time debit
card transactions as proposed. While an
institution decides whether or not to
authorize an overdraft, fees are typically
charged for the institution’s payment of
the transaction. Additionally, in some
instances, transactions are not
submitted for authorization before the
transaction is presented for payment (for
example, where a transaction is below
the floor limits established by card
network rules requiring authorization).
As discussed below, the final rule does
not provide an exception allowing
overdraft fees to be charged for payment
of a transaction that overdraws the
consumer’s account where authorization
was not requested by the merchant or
other party. Moreover, some
transactions that are authorized into
overdraft settle into good funds and do
not result in overdraft fees.
However, the final rule and
commentary include the word
‘‘authorize’’ where necessary for
accuracy. For example, § 205.17(b)(4)
provides an exception to financial
institutions that have a policy and
practice of declining to ‘‘authorize and
pay’’ any ATM or one-time debit card
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transactions under certain conditions. In
addition, as discussed below, the model
form has been revised to include the
term ‘‘authorization’’ in certain places.
Comment 17(b)–2, renumbered from
proposed comment 17(b)–1, is adopted
substantially as proposed to clarify that
a financial institution may pay
overdrafts for ATM and one-time debit
card transactions even if a consumer has
not affirmatively consented or opted in
to the institution’s overdraft service.
However, if the consumer has not opted
into the service, the financial institution
is prohibited from assessing a fee or
charge for paying the overdraft. The
comment also clarifies that the rule does
not limit the institution’s ability to debit
the consumer’s account for the amount
of the overdraft, provided that the
institution is permitted to do so by
applicable law.
Some industry commenters expressed
concern that consumers will believe that
an opt-in creates a contractual right to
payment of overdrafts. The Board
adopts comment 17(b)–3, renumbered
from proposed comment 17(b)–2,
substantially as proposed, to clarify that
§ 205.17 does not require an institution
to authorize or pay any overdrafts on an
ATM or one-time debit card transaction
even if a consumer affirmatively
consents to the institution’s overdraft
service for such transactions.
Additionally, as discussed below, the
model form adopted by the Board
contains language describing the
discretionary nature of an opt-in.
A few commenters recommended that
the Board define ‘‘overdraft fee’’ to
exclude fees assessed on accounts that
maintain a negative balance for an
extended period (often referred to as
‘‘sustained’’ overdraft fees). The Board
believes, however, that any fee charged
on an account for an overdraft should be
subject to the rule, including but not
limited to a per item, per occurrence,
daily, sustained overdraft, or negative
balance fee. A consumer who
inadvertently overdraws his or her
account may not learn about the
overdraft until several days after the
occurrence of the overdraft and so may
unknowingly accrue additional fees.
Therefore, the Board believes all
overdraft fees should be within the
scope of the rule.
A few commenters suggested the
possibility that financial institutions
may create new fees for declining ATM
or one-time debit card transactions.
While the final rule does not address
declined transaction fees, the Board
notes that such fees could raise
significant fairness issues under the FTC
Act, because the institution bears little,
if any, risk or cost to decline
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59041
authorization of an ATM or one-time
debit card transaction.
17(b)(1)(i) Notice Requirements
Proposed § 205.17(b)(1)(i) stated the
institution must provide a consumer a
notice explaining the institution’s
overdraft service for ATM withdrawals
and one-time debit card transactions
that is segregated from all other
information, including other account
disclosures. Proposed § 205.17(b)(1)(i)
also provided that the notice may not
contain any information that is not
specified or otherwise permitted by
§ 205.17(d). For clarity, the final rule
moves this portion of the requirement to
§ 205.17(d).
Some industry commenters argued
that the notice does not need to be
segregated from other account-opening
disclosures, and urged the Board to
provide institutions with flexibility
concerning placement of the notice.
Consumer group commenters supported
the segregation requirement, arguing
that segregation of the notice is essential
to providing consumers a meaningful
way to consent and thus to providing
meaningful choice.
To ensure that the consumer is able to
make an informed choice when opting
into overdraft services for ATM and
one-time debit card transactions, and
that the terms of the overdraft service
are not obscured by other account
information, the final rule retains a
segregation requirement. In addition, as
discussed below, the final rule requires
that the method for providing consent,
such as a signature line or check box,
must be separate from other types of
consents. These requirements are
intended to ensure that opt-in
information is not buried or obscured
within other account documents and
overlooked by the consumer. Otherwise,
institutions could include information
about the overdraft service in preprinted
language in an account-opening
disclosure, and a consumer might
inadvertently consent to the
institution’s overdraft service by signing
a signature card or other accountopening document on the cover page
acknowledging acceptance of the
account terms. The final rule also
requires that notice be provided in
writing, or if the consumer agrees,
electronically.32
32 Because the disclosures are not required to be
in written form, electronic disclosures made under
this section are not subject to compliance with the
consumer consent and other applicable provisions
of the Electronic Signatures in Global and National
Commerce Act (15 U.S.C. 7001 et seq.), which only
applies when information is required to be
provided to a consumer in writing. The notice is,
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Several consumer advocates argued
that, even with an opt-in, the Board
should require subsequent notice of the
right to opt in, and to revoke the opt-in,
on consumers’ periodic statements,
similar to the proposed subsequent
notice requirements with respect to the
opt-out. The final rule does not require
subsequent notices, as the Board
believes such a requirement is
unnecessary when the consumer has
affirmatively elected to enroll in the
overdraft service and, as discussed
below, receives a record of their right to
revoke their opt-in.
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17(b)(1)(ii) Reasonable Opportunity To
Opt In
Proposed § 205.17(b)(1)(ii) stated that
an institution must provide the
consumer a reasonable opportunity to
affirmatively consent to the institution’s
overdraft service for ATM withdrawals
and one-time debit card transactions.
Proposed comment 17(b)–3 contained
three examples illustrating what
constitutes a reasonable opportunity to
affirmatively consent, including
reasonable method(s) to provide
affirmative consent. In addition,
proposed comment 17(b)–4 provided
guidance on obtaining a consumer’s optin at account opening.
Some industry commenters urged the
Board to provide flexibility in how an
opt-in could be provided, while
consumer advocates and an association
of state banking supervisors argued that
consumers should be permitted a
variety of methods to revoke an opt-in.
Several industry commenters suggested
that the methods for making and
revoking a choice should be consistent.
The final rule adopts § 205.17(b)(1)(ii)
substantially as proposed, but revises
the related proposed commentary to
provide further guidance on obtaining a
consumer’s affirmative consent. As
discussed below, final § 205.17(f) has
been revised to address a consumer’s
ability to revoke consent.
Final comment 17(b)–4, renumbered
from 17(b)–3, has been revised to
explain that a financial institution
provides a consumer with a reasonable
opportunity to provide affirmative
consent when, among other things, it
provides reasonable methods by which
the consumer may affirmatively
consent. The comment provides four
examples of such reasonable methods.
First, proposed comment 17(b)–3.i
included providing a written form that
the consumer can complete and mail.
however, subject to Regulation E’s general
requirement that disclosures be clear and readily
understandable and in a form the consumer may
keep. See 12 CFR § 205.4(a)(1).
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The comment, renumbered as comment
17(b)–4.i, is adopted as proposed.
Proposed comment 17(b)–3.ii
provided that an institution could also
provide a toll-free telephone number
that the consumer may call to provide
affirmative consent. On the analogous
proposed opt-out provision, the Board
requested comment on whether the
Board should require institutions to
provide a toll-free telephone number.
For cost and other reasons, industry
commenters generally urged the Board
not to require a toll-free telephone
number in the opt-out context, while
consumer advocates generally argued
that a toll-free telephone number should
be required.
Throughout the Board’s consumer
testing, participants consistently stated
they would prefer to make a telephone
call to obtain information about their
overdraft choices. Under an opt-out
regime, requiring a toll-free number
could help reduce barriers to consumers
exercising their opt-out choice. Under
an opt-in regime, however, institutions
have an incentive to make it easy for
consumers to opt in. Thus, the final
commentary, renumbered as comment
17(b)–4.ii, provides offering a readily
available telephone number as an
example of a reasonable method for
opting in, but does not require a toll-free
telephone number.
The Board’s final rule also revises the
proposed commentary on opting in online. Proposed 17(b)–3.iii illustrated that
an institution may provide an electronic
means for the consumer to affirmatively
consent, such as a form that can be
accessed and processed at an Internet
Web site, provided that the institution
directs the consumer to the specific Web
site address where the form is located,
rather than solely referring to the
institution’s home page. The final
comment, as revised, does not include
a requirement that institutions direct
consumers to a specific Web site
address because institutions have an
incentive to facilitate consumer opt-ins.
Rather, the focus of the comment is on
the appropriate means of obtaining
affirmative consent on-line. Therefore,
the final comment, renumbered as
comment 17(b)–4.iii, provides, by way
of example, that the institution could
provide a form that can be accessed and
processed at its Web site, where the
consumer may click on a check box to
provide consent and confirm that choice
by clicking on a button affirming that
consent.
Because consumers often open
accounts in person, the final rule
includes a new example in comment
17(b)–4.iv, which provides that the
institution could provide a form that the
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consumer can fill out and present in
person at a branch or office to provide
affirmative consent. See also comment
17(b)–5, discussed below.
Proposed comment 17(b)–4 stated that
an institution may provide an opt-in
notice prior to or at account opening
and require the consumer to decide
whether to opt into the payment of ATM
withdrawals or one-time debit card
transactions pursuant to the institution’s
overdraft service as a necessary step to
opening an account. As an example, the
proposed comment stated that
institution could require the consumer
prior to or at account-opening to choose
between an account that does not permit
the payment of ATM withdrawals or
one-time debit card transactions
pursuant to the institution’s overdraft
service and an account that permits the
payment of such overdrafts.
Industry commenters generally
supported this proposed comment.
Some consumer group commenters
supported the proposed comment but
expressed concern that institutions may
attempt to steer consumers into the optin account. For operational reasons, an
institution may not want to set up an
account for the consumer with overdraft
services, only to have to implement the
consumer’s opt-in a short time later (if
the consumer does not opt in concurrent
with account-opening but decides to opt
in shortly thereafter). Therefore, the
Board adopts this comment generally as
proposed, renumbered as comment
17(b)–5, but with an additional example
to clarify that an institution is not
required to implement a consumer’s
opt-in choice by establishing a second
account, but could instead implement
the consent at the account level (for
example, through coding that indicates
whether or not the consumer opts in).
The institution could require the
consumer, at account opening, to sign or
check a box on a form (consistent with
comment 17(b)–6, discussed below)
indicating whether or not the consumer
affirmatively consents at account
opening. To facilitate consumer
understanding, an institution may, but
is not required, to provide a signature
line or check box where the consumer
can indicate that they decline to opt in.
See Model Form A–9. Nonetheless, if
the consumer does not check any box or
provide a signature, the institution must
assume that the consumer does not opt
in. To address potential steering
concerns, the Board has added guidance
in the commentary, as discussed below.
17(b)(1)(iii) and (iv) Affirmative
Consent; Written Confirmation
Proposed § 205.17(b)(1)(iii) stated that
the financial institution must obtain the
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consumer’s affirmative consent to the
institution’s overdraft service, and must
provide the consumer with written
confirmation documenting the
consumer’s choice. For clarity, the final
rule bifurcates these two requirements
and incorporates the disclosure of the
right to revoke consent into the written
confirmation requirement. The final rule
also adds commentary providing further
guidance on obtaining affirmative
consent and providing written
confirmation.
Section § 205.17(b)(1)(iii) of the final
rule requires the institution to obtain
the consumer’s affirmative consent, or
opt-in, to the institution’s payment of
ATM or one-time debit card transactions
pursuant to the institution’s overdraft
service. To address concerns that a
consumer might inadvertently consent
to an institution’s overdraft service, new
comment 17(b)–6 provides examples of
ways in which a consumer’s affirmative
consent is or is not obtained.
Specifically, comment 17(b)–6 clarifies
that a financial institution does not
obtain a consumer’s affirmative consent
by including preprinted language about
the overdraft service in an account
disclosure provided with a signature
card or contract that the consumer must
sign to open the account and that
acknowledges the consumer’s
acceptance of the account terms. Nor
does an institution obtain a consumer’s
affirmative consent by providing a
signature card that contains a preselected check box indicating that the
consumer is requesting the service. The
Board is concerned that these methods
of obtaining an opt-in may not reflect an
informed, affirmative choice by the
consumer. The institution could,
however, provide a blank signature line
or check box that the consumer could
sign or select to indicate affirmative
consent. Comment 17(b)–6 also states
that such consents comply with the rule
when they are obtained separately from
other consents or acknowledgements;
that is, the consent must be used solely
to indicate the consumer’s choice
whether to opt into overdraft services,
and not for other purposes such as to
obtain consents for a financial
institution’s bill payment service.
The final rule also requires that the
institution provide the consumer with
confirmation of the consumer’s consent
in writing, or if the consumer agrees,
electronically. For clarity, the final rule
includes this requirement as a new
§ 205.17(b)(1)(iv). Industry commenters
opposed the requirement that
consumers receive written confirmation
of their opt-in choice, stating that other
protective mechanisms are already in
place in the rule, and questioning the
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benefit of the written confirmation
compared to the cost of providing the
confirmation. Consumer advocates
supported the requirement, stating that
written confirmation is essential to the
rule’s effectiveness.
The Board believes that written
confirmation will help ensure that a
consumer intended to opt into the
overdraft service by providing the
consumer with a written record of his or
her choice. This is particularly
important when a consumer opts in by
telephone. New comment 17(b)(1)–7
permits an institution to comply with
the requirement, for example, by
providing a copy of a consumer’s
completed opt-in form or by sending a
letter or other document to the
consumer acknowledging that the
consumer has elected to opt into the
institution’s service. The final rule
permits the confirmation to be provided
electronically, if the consumer agrees.
Section 205.17(b)(1)(iv) also requires
the written confirmation to include a
statement informing the consumer of the
right to revoke consent. To the extent an
institution complies with
§ 205.17(b)(1)(iv) by providing a copy of
the opt-in notice to the consumer, the
institution may include a statement
about the right to revoke in the opt-in
notice. See also § 205.17(d)(6).
17(b)(2) Conditioning Payment of
Overdrafts on Consumer’s Affirmative
Consent
Proposed § 205.17(b)(2) contained two
approaches to how an institution may
offer the opt-in. Under one approach, an
institution would be prohibited from
conditioning the payment of any
overdrafts for checks, ACH transactions,
or other types of transactions on the
consumer affirmatively consenting to
the institution’s payment of overdrafts
for ATM withdrawals and one-time
debit card transactions. The institution
is also prohibited from declining to pay
checks, ACH transactions, or other types
of transactions because the consumer
has not also affirmatively consented to
the institution’s overdraft service for
ATM and one-time debit card
transactions. Collectively, these
practices are referred to as
‘‘conditioning’’ the consumer’s opt-in.
In light of the operational issues
associated with a bifurcated opt-in, the
alternative proposed approach would
have expressly permitted institutions to
condition the consumer’s opt-in. The
Board also sought comment on other
approaches that might be more effective,
or that would sufficiently balance
concerns about consumers being
effectively compelled to opt in against
the operational difficulties of
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59043
implementing the proposed prohibition.
In the final rule, the Board adopts the
first approach prohibiting conditioning
the opt-in. In light of consumer
preference to have their checks paid, the
prohibition on conditioning is intended
to ensure consumers have a meaningful
opt-in choice regarding overdraft
services for ATM and one-time debit
card transactions.
Consumer advocates and federal and
state banking regulators supported a
prohibition on conditioning the opt-in
right, arguing that any kind of
conditioning would compel consumers
to opt in, because consumers prefer to
have their check and ACH overdrafts
paid.
Industry commenters supported the
approach that permitted conditioning of
the opt-in right, for several reasons.
First, these commenters argued that
permitting conditioning would be easier
for compliance and for consumer
understanding. In addition, many
commenters stated that processors do
not currently have the technology to
distinguish between paying overdrafts
for some, but not all, payment channels,
and that permitting conditioning would
significantly mitigate technology and
implementation costs. Specifically,
industry commenters stated that most
systems today could either pay
overdrafts for all transaction types or
pay overdrafts for none, but were not set
up to pay overdrafts for certain
transaction types (e.g., checks and
ACH), but not others (e.g., ATM and
POS debit card transactions). Some
industry commenters also asserted that
most systems today are unable to readily
differentiate between POS debit card
transactions and other types of debit
card transactions, such as preauthorized
transfers. Some commenters argued that
implementation costs would lead some
institutions, particularly community
banks, to stop offering overdraft services
altogether. However, other industry
commenters stated that they could
develop the technology with sufficient
lead-time for mandatory compliance
with the rule, for example, by providing
an implementation period of 12 to 24
months.
Although the Board acknowledges the
operational concerns raised by industry
commenters, the Board’s consumer
testing shows that many consumers
would prefer that their account-holding
financial institution cover overdrafts by
check, ACH, or automatic bill pay. If
conditioning were permitted, these
consumers may feel compelled to opt
into an institution’s overdraft service for
ATM and one-time debit card
transactions in order to minimize the
risk that checks and other important
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bills would be returned unpaid. This
could deprive consumers of a
meaningful choice with respect to
overdraft coverage for ATM and onetime debit card transactions. Thus, the
final rule prohibits conditioning the optin right.33
Similarly, as discussed in the
proposal, institutions could also use
discretion regarding the payment of
overdrafts in such a manner as to
prevent consumers from exercising a
meaningful choice regarding overdraft
services. Thus, comment 17(b)(2)–1
clarifies that the final rule generally
requires an institution 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 institution’s overdraft
service with respect to ATM and onetime debit card overdrafts. For example,
if an institution’s internal criteria would
lead the institution to pay a check
overdraft if the consumer had
affirmatively consented to the
institution’s overdraft service for ATM
and one-time debit card transactions, it
must also apply the same criteria in a
consistent manner in determining
whether to pay the check overdraft if the
consumer has not opted in.
The Board recognizes that by
prohibiting conditioning, many
institutions will be required to
reprogram systems to differentiate ATM
and one-time debit card transactions
from other transactions. Nonetheless,
the Board believes that the consumer
benefits provided by the prohibition on
conditioning outweigh the associated
costs. As discussed above, from a
consumer’s perspective, any benefits
from overdrawing the consumer’s
account for ATM and one-time debit
card transactions may be substantially
outweighed by the costs associated with
the overdraft.
A few industry commenters suggested
that the Board may not have the
authority under Regulation E to prohibit
institutions from declining checks or
other items not subject the EFTA
because the consumer has not also
affirmatively consented to the
institution’s overdraft service. The
Board disagrees. Comment 17(b)(2)–2
33 Currently, some institutions offer customers an
account feature whereby an institution, for a single
monthly fee, may pay the consumer’s overdrafts (at
its discretion) without imposing an overdraft fee on
a per item or per occurrence basis. An account with
such a feature would be still subject to the
restrictions of § 205.17(b)(2) and thus must provide
consumers the choice to opt into the institution’s
payment of ATM and debit card overdrafts. The
account would also be subject to the restrictions on
variations in terms under § 205.17(b)(3), discussed
below.
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clarifies that the prohibition on
conditioning does not require the
institution to pay overdrafts on checks,
ACH transactions, or other types of
transactions in all circumstances. See
also comment 17(b)–3. Rather, the
provision simply prohibits institutions
from circumventing the opt-in
requirement of the final rule by
prohibiting institutions from
considering the consumer’s decision not
to opt in when deciding whether to pay
overdrafts for checks, ACH, or other
types of transactions. The Board
believes the prohibition adopted under
the final rule is necessary to preserve
consumer choice with respect to ATM
and one-time debit card transactions,
and to prevent circumvention or evasion
of the final rule. Accordingly, the
prohibition on conditioning falls within
the scope of the Board’s authority under
Sections 904(a) and 904(c) of the EFTA,
as discussed in Part V above.
17(b)(3) Same Account Terms,
Conditions and Features
The Board proposed two alternatives
under § 205.17(b)(3) to address how
financial institutions would be
permitted to implement the consumer’s
opt-in. Under the first alternative, an
institution would be required to provide
consumers who do not affirmatively
consent to the institution’s overdraft
service for ATM withdrawals and onetime debit card transactions an account
with the same terms, conditions, and
features that it provides to consumers
who affirmatively consent, except for
the features that limit the institution’s
payment of such overdrafts. Under the
second alternative, an institution would
be permitted to vary the terms,
conditions, or features of the ‘‘no optin’’ account only if the differences in the
terms, conditions, or features are not so
substantial as to effectively compel a
reasonable consumer to affirmatively
consent to the institution’s payment of
overdrafts on ATM withdrawals and
one-time debit card transactions.
Consumer advocates and federal
officials supported the alternative
requiring identical account terms,
conditions, and features regardless of
the consumer’s opt-in choice. In
addition to providing a clear standard
for institutions to follow, these
commenters argued that, if variations
were allowed, it could be difficult to
prohibit institutions from creating terms
and conditions that would effectively
compel consumers to opt in.
Most industry commenters generally,
but not uniformly, urged the Board to
permit institutions to vary the terms,
conditions, or features of the account,
including pricing decisions. These
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commenters stated that institutions
need flexibility in order to manage risk
and to design products meeting the
distinct needs of the customers who do
not opt in. These commenters also
maintained that pricing and features on
an account are inextricably linked. Both
consumer group commenters and
industry commenters alike expressed
concern that the ‘‘reasonable consumer’’
standard in the alternative permitting
variations was too ambiguous.
In the final rule, the Board adopts the
first alternative prohibiting institutions
from varying account terms, conditions,
and features for consumers who do not
opt in, substantially as proposed, and
adds commentary to provide further
guidance. The rule has been revised to
clarify that the account terms,
conditions and features must be the
same, except for the overdraft service for
ATM and one-time debit card
transactions.34 The Board believes some
institutions could otherwise effectively
compel the consumer to provide
affirmative consent to the institution’s
payment of overdrafts for ATM and onetime debit card transactions by
providing consumers who do not opt in
with less favorable terms, conditions, or
features than consumers who do opt in.
For example, an institution could
provide an opt-in account with no
monthly fee to consumers who opt in,
but an account that assesses a monthly
maintenance fee to consumers who do
not opt in. Behavioral research suggests
that consumers may choose the ‘‘free’’
opt-in account, even though the costs
for overdrawing the account could end
up being substantially higher than the
monthly maintenance fee, because they
may optimistically assume they will not
overdraw the account and as a result,
incur overdraft fees.35 In addition,
consumers may prefer the possibility of
paying an overdraft to the certainty of
paying a monthly maintenance fee, even
if the overdraft fee costs are higher than
the monthly fee costs.
The proposed rule included fees and
interest rates as examples of terms that
could not be varied. However, because
the rule is intended to be a broad
prohibition, not limited to price
differences, the Board is adding new
comment 17(b)(3)–1 to provide a nonexclusive list of examples of terms,
conditions, or features that cannot be
34 The heading has been revised to ‘‘Same
Account Terms, Conditions, and Features’’ to more
accurately describe the final rule.
35 This behavior is commonly referred to as
‘‘hyperbolic discounting.’’ See, e.g. Shane
Frederick, et al., Time Discounting and Time
Preference: A Critical Review, 40 J. Econ. Literature
351, 366–67 (2002) (reviewing the literature on
hyperbolic discounting).
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varied. These examples include fees and
interest rates, minimum balance
requirements, account features, such as
on-line bill payment services, and the
type of ATM or debit card provided to
the account holder.
Some industry commenters suggested
that an appropriate variation in features
might be to provide consumers who do
not opt in with a card that has PIN-debit
functionality but not signature-debit
functionality.36 Nonetheless, PIN debit
is available at far fewer merchant
locations than signature debit.37
Consequently, if institutions were
permitted to offer PIN-debit cards to
consumers who do not opt in,
consumers could feel compelled to
choose the opt-in account in order to
obtain a debit card with more
functionality.
Section 205.17(b)(3) is not intended to
interfere with state basic banking laws
or other limited-feature bank accounts
marketed to consumers who have
historically had difficulty entering or
remaining in the banking system. New
comment 17(b)(3)–2 explains that
§ 205.17(b)(3) does not prohibit
institutions from offering deposit
account products with limited features,
provided that the consumer is not
required to open such an account
because the consumer did not opt in.
For example, institutions are not
prohibited from offering a checking
account designed to comply with state
basic banking laws or designed for
consumers who are not eligible for a
full-service or other particular checking
account because of their credit or other
checking account history, which may
include features limiting the payment of
overdrafts. To the extent these more
limited products permit the consumer to
overdraft at ATMs or via a one-time
debit card transaction, the consumer
must be provided an opt-in under the
final rule.38
Nonetheless, institutions may not
steer consumers who do not opt into an
account with fewer features than the
account for which the consumer
initially applied. Comment 17(b)(3)–2
36 With signature debit transactions, the merchant
first obtains authorization, but may not submit the
transaction for payment at a later time; thus,
intervening transactions may cause the consumer to
overdraw his or her account. PIN debit transactions
are a part of a single message system with
authorization and submission of the transaction
occurring on a near-real-time basis, thus reducing
the likelihood of overdrafts caused by intervening
transactions.
37 See, e.g., Fumiko Hayashi, Richard J. Sullivan,
and Stuart E. Weiner, A Guide to the ATM and
Debit Card Industry: 2006 Update, Federal Reserve
Bank of Kansas City (2006) at 11.
38 If these products do not permit overdrafts, the
products are excluded from the requirements of
§ 205.17(b)(1) by § 205.17(b)(4), discussed below.
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explains that a consumer who applies,
and is otherwise eligible, for a particular
deposit account product may not be
provided an account with more limited
features because the consumer has
declined to opt in.
As discussed in the proposal, some
institutions may choose to implement a
consumer’s affirmative consent at the
account level (for example, by setting up
account coding that indicates whether
or not the consumer has opted in). Other
institutions, for operational reasons,
may prefer to implement the consumer’s
choice via a back-room process by
opening a different account for
consumers who have not provided
affirmative consent to the institution’s
overdraft service for ATM and one-time
debit card transactions. The final rule
permits both approaches.
17(b)(4) Exception to the Notice and
Opt-In Requirements
Proposed § 205.17(b)(4) created an
exception to the notice and opt-in
requirement for institutions that have a
policy and practice of declining to pay
any ATM withdrawals or one-time debit
card transactions for which
authorization is requested, when the
institution has a reasonable belief that
the consumer’s account does not have
sufficient funds available to cover the
transaction at the time of the
authorization request. Both consumer
group and industry commenters
generally supported this proposed
exception.
Section 205.17(b)(4) is modified from
the proposal for clarity. The final rule
provides that the requirements of
§ 205.17(b)(1) do not apply to
institutions that have a policy and
practice of declining to authorize and
pay any ATM or one-time debit card
transactions when the institution has a
reasonable belief at the time of the
authorization request that the consumer
does not have sufficient funds available
to cover the transaction.
A few industry commenters suggested
that the Board clarify that the exception
should be applied at the account level,
rather than at the institution level, in
the event that only some of the
institution’s products or business lines
qualify for the exception. Section
205.17(b)(4) of the final rule provides
that financial institutions may apply the
exception on an account-by-account
basis. New comment 17(b)(4)–1 explains
that if a financial institution has a
policy and practice of declining to
authorize and pay any ATM or one-time
debit card transactions with respect to
one type of deposit account offered by
the institution, when the institution has
a reasonable belief at the time of the
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authorization request that the consumer
does not have sufficient funds available
to cover the transaction, that account is
not subject to § 205.17(b)(1), even if
other accounts that the institution offers
are subject to the rule. For example, if
the institution offers three types of
checking accounts, and the institution
has such a policy and practice with
respect to only one of the three types of
accounts, that one type of account is not
subject to the notice requirement.
However, the other two types of
accounts offered by the institution
remain subject to the notice
requirement.
17(b)(5) Exceptions to the Fee
Prohibition
In some circumstances, an institution
may be unable to avoid paying a
transaction that overdraws a consumer’s
account. This can occur, for example,
when a debit card transaction is
authorized, but intervening transactions
reduce the funds in the checking
account before the debit card
transaction clears. Under network rules,
the institution is required to pay the
transaction.
The Board proposed two limited
exceptions to the fee prohibition under
§ 205.17(b)(5) to allow institutions to
assess a fee or charge for paying an ATM
or debit card overdraft even if the
consumer has not affirmatively
consented to the overdraft service.
Under the first exception, an institution
would be permitted to assess an
overdraft fee or charge, notwithstanding
the absence of the consumer’s
affirmative consent, if the institution
has a reasonable belief that there are
sufficient funds available in the
consumer’s account at the time it
authorizes an ATM or one-time debit
card transaction. Under the second
exception, an institution would be
permitted to assess an overdraft fee or
charge, notwithstanding the absence of
the consumer’s affirmative consent,
where a merchant or payee presents a
debit card transaction for payment by
paper-based means, rather than
electronically using a card terminal, and
the institution has not previously
authorized the transaction. Proposed
comments 17(b)(5)–1 through –3
contained examples illustrating the
proposed exceptions for the opt-in
approach.
Consumer group commenters stated
that the Board should not provide any
exceptions to the prohibition on fees,
even if overdrafts are inadvertently paid
due to delays in transaction processing
and settlement, notwithstanding the
consumer’s declining to opt in. They
argued that consumers who do not opt
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in expect that they will not be charged
overdraft fees for ATM or one-time debit
card transactions. Instead, these
commenters contended that institutions,
card processors, and merchants should
resolve operational issues among
themselves. Industry commenters, on
the contrary, supported the proposed
exceptions. Many industry commenters
urged the Board to provide additional
exceptions for transactions not
submitted for authorization at the time
of the transaction, such as for
transactions that are not submitted
because they are below the floor limits
established by card network rules
requiring authorization. These
commenters argued that systems
currently do not identify whether
authorization was previously sought for
a particular transaction. Some of these
commenters suggested that consumers
could be adequately protected through
disclosures at the merchant stating that
transactions are not submitted for
authorization below a particular dollar
amount. Many industry commenters
also urged the Board to broaden the rule
to permit fees to be assessed if an
overdraft was paid when the institution
used a stand-in processor to authorize
the transaction, because the card
network was temporarily off-line.
The final rule does not adopt the
proposed exceptions to the prohibition
on fees. The Board believes that
consumers who make the choice not to
opt in may reasonably expect an ATM
or one-time debit card transaction to be
declined if there are insufficient funds
in their account, and that they will not
be charged overdraft fees. Adopting
exceptions to the prohibition on fees
would undermine the consumer’s
ability to understand the institution’s
overdraft practices and make an
informed choice.
The Board recognizes that financial
institutions and consumers have
imperfect information as to the balance
in the account at the time of the
transaction. Financial institutions face
operational limitations in processing
transactions, and in tracking the
consumer’s actual balance, because
transactions may not be processed in
real-time. Similarly, even if a consumer
checked his or her balance prior to a
transaction, the balance may not be
updated, so the consumer may
inadvertently overdraw his or her
account on the belief funds are
available. On balance, the Board
believes financial institutions are in a
better position to mitigate the
information gap by developing
improved processing and updating
systems, as they have in recent years,
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and as the Board expects they will
continue to do over time.
The rule does not, however, prohibit
financial institutions from paying
overdrafts for ATM and one-time debit
card transactions even if a consumer has
not affirmatively consented or opted in
to the institution’s overdraft service, so
long as a fee is not imposed. For
example, under network rules, financial
institutions must pay authorized debit
card transactions, even if at settlement
intervening transactions by the
consumer have reduced the consumer’s
available balance below the authorized
amount of the transaction. To address
any safety and soundness concerns, and
as discussed above, institutions may
debit the consumer’s account for the
amount of the overdraft, provided that
the institution is permitted to do so by
applicable law. See comment 17(b)–2.
C. Timing—§ 205.17(c)
Proposed § 205.17(c) would generally
require that a financial institution
provide an opt-in notice to the
consumer about the institution’s
overdraft service before the institution
assessed any fee or charge on the
consumer’s account for paying an ATM
withdrawal or one-time debit card
transaction pursuant to the institution’s
overdraft service. However, once a
consumer has opted in, financial
institutions would not be required to
provide a notice regarding the
institution’s overdraft service following
the assessment of any overdraft fees or
charges to the consumer’s account. The
proposed provision would apply
differently depending on when the
account is opened. For new accounts
opened on or after the effective date of
the final rule, the opt-in notice would
have to be provided (and consent
obtained) prior to the assessment of any
fee or charge on the consumer’s account
for paying an ATM withdrawal or onetime debit card transaction pursuant to
the institution’s overdraft service. For
existing accounts, the proposed rule
would permit institutions to either
provide an opt-in notice to all of its
account holders on or with the first
periodic statement sent after the
effective date of the final rule, or
following the first assessment of an
overdraft fee or charge to the consumer’s
account on or after the effective date of
the final rule. Further, under proposed
§ 205.17(g), if an existing account holder
had not affirmatively consented to the
service within 60 days after the
institution sent the opt-in notice, the
institution would have to cease
assessing any fees or charges on the
consumer’s account for paying such
overdrafts, unless permitted by one of
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the exceptions in proposed
§ 205.17(b)(5).
Most comments focused on whether
existing account holders should be
subject to the opt-in rule, or should be
subject to a separate opt-out rule. These
comments, and the Board’s decision to
provide an opt-in right, are discussed
above.
The final rule provides an opt-in right
for new and existing accounts, but
modified from the proposal. As
discussed below, the final rule sets an
effective date of January 19, 2010, with
a mandatory compliance date of July 1,
2010. The proposed timing provisions of
the rule have been consolidated for
clarity into final § 205.17(c)(1) with
respect to existing account holders, and
final § 205.17(c)(2) with respect to new
account holders.
For accounts opened prior to July 1,
2010, final § 205.17(c)(1) states that the
financial institution must not assess any
fees or charges on a consumer’s account
on or after August 15, 2010 for paying
an ATM or one-time debit card
transaction pursuant to the overdraft
service, unless the institution has
complied with § 205.17(b)(1) and
obtained the consumer’s affirmative
consent. For accounts opened on or after
July 1, 2010, § 205.17(c)(2) states that
the financial institution must comply
with § 205.17(b)(1) and obtain the
consumer’s affirmative consent before
the institution assesses any fee or charge
on the consumer’s account for paying an
ATM or one-time debit card transaction
pursuant to the institution’s overdraft
service.
Consumer group commenters objected
to the proposed rule permitting the optin notice for existing account holders
following the first assessment of an
overdraft fee on or after the effective
date, because it would effectively allow
institutions to collect one overdraft fee
notwithstanding the consumer’s
preference. The final rule addresses this
concern by providing a specific date
after which overdraft fees may no longer
be charged.
As revised, the final rule will result in
consistent treatment of all existing
account holders. Otherwise, some
consumers might not receive an opt-in
notice until a later date, and thus might
not be provided an opportunity to make
a choice regarding the institution’s
overdraft service, until some period of
time after other consumers receive the
notice. Including a specific date after
which fees may no longer be charged
provides a bright-line rule that is
beneficial to consumers and facilitates
ease of compliance by institutions,
rather than requiring institutions to
track when notices have been mailed or
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delivered, and consents received, on a
staggered basis.
The Board believes that establishing
an August 15, 2010 date after which
existing account holders may no longer
be charged overdraft fees without
consent is appropriate, as it provides
those consumers adequate time to
research available options, and, for
example, apply for an overdraft line of
credit or establish a savings account to
which their checking account could be
linked. Of course, if an existing account
holder contacts his or her financial
institution in response to the opt-in
notice before August 15, 2010 to express
a desire not to opt in, the Board expects
that the institution would honor the
consumer’s choice at that time.
Industry commenters suggested that
the proposed timing provisions be
revised to permit financial institutions
to obtain opt-ins prior to the effective
date, and apart from (rather than on or
with) the periodic statement. Comment
17(c)–1 explains that financial
institutions may provide the notice and
obtain the consumer’s affirmative
consent prior to the mandatory
compliance date, provided that the
financial institution complies with all of
the requirements of this section,
including the prohibitions on
conditioning the opt-in and on varying
account terms. However, notice for
existing accounts is not required where,
prior to the effective date, an institution
had offered customers an opt-in, and a
customer had not affirmatively
consented to the service.
For either new or existing account
holders, the final rules do not permit
institutions to retroactively apply
affirmative consents to overdrafts that
are paid before the consent is provided.
For example, if a consumer overdraws
his or her account, the rule does not
permit an institution to obtain the
consumer’s affirmative consent one
week later and apply that consent to the
prior overdraft. To clarify the
application of the timing rules, new
comment 17(c)–2 states that fees or
charges for ATM and one-time debit
card overdrafts may be assessed only for
overdrafts paid by the institution on or
after the date the financial institution
receives the consumer’s affirmative
consent to the institution’s overdraft
service.
D. Content and Format—§ 205.17(d)
Proposed § 205.17(d) set forth content
requirements for the notice that must be
provided to the consumer before the
consumer may affirmatively consent to
the institution’s overdraft service. In
addition, proposed § 205.17(d) would
require that the opt-in notice be in a
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form substantially similar to Model
Form A–9 in Appendix A. The Board
requested comment regarding whether
the rule should permit or require any
other information to be included in the
opt-in notice.
Consumer advocates generally
supported the proposed content and
model opt-in form, but suggested the
Board revise the form to include
additional cost information. Industry
commenters provided a variety of
suggestions that, in their view, would
clarify or improve the model disclosure.
In particular, commenters suggested that
the form be revised to be shorter and
clearer. In other cases, however,
commenters suggested various additions
to the model form to provide more
information regarding an institution’s
overdraft policies and practices, such as
language regarding the exceptions
permitting fees to be charged in some
circumstances without a consumer’s
opt-in.
The Board is adopting § 205.17(d), but
with modified content and format
requirements based on the comments
received, consumer testing, and the
Board’s further consideration. Under the
final rule, the opt-in notice required by
§ 205.17(b)(1)(i) may not contain any
information that is not specified or
otherwise permitted by § 205.17(d) and
must be in a form substantially similar
to Model Form A–9.39 The final rule
also substantially revises Model Form
A–9. Overall, the final model form was
edited to make it shorter and clearer to
consumers, including by emphasizing
certain information critical to
understanding the overdraft service.
Proposed § 205.17(d)(1) stated that the
institution must provide a general
description of the financial institution’s
overdraft services and the types of EFTs
for which an overdraft fee may be
imposed, including ATM withdrawals
and one-time debit card transactions.
Consumer testing participants generally
were not aware that financial
institutions provide overdraft services,
and many did not understand that
overdraft services could be provided
automatically with an account. Others
confused overdraft services with other
overdraft alternatives provided by their
institution, such as a link to a savings
account or an overdraft line of credit.
The Board tested a number of ways to
address this misconception in the model
form, and found that consumers best
understood the concept of overdraft
services as distinct from other forms of
overdraft coverage when it was framed
39 Institutions may provide other information
about their overdraft services and other overdraft
protection plans in a separate document.
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as an institution’s ‘‘standard overdraft
practices.’’ Testing also indicated that
placing the discussion of applicable
alternatives in the introductory
paragraph helped improve participants’
comprehension.
Proposed comment 17(d)–2 permitted
a financial institution to include
language describing other types of
transactions not subject to the opt-in
right, or subject to a separate opt-out
right. In the final rule, the Board is
revising § 205.17(d)(1) to require a brief
description of the institution’s overdraft
service and the types of transactions for
which a fee or charge for paying an
overdraft may be imposed. The language
in proposed comment 17(d)–2 has been
revised and adopted in comment 17(d)–
1 as an illustration of the application of
§ 205.17(d)(1).
Because the final rule prohibits
conditioning pursuant to § 205.17(b)(2),
the Board believes that consumers
should be informed that different
transaction types will be treated
differently so they can make an
informed choice about whether or not to
opt into an institution’s overdraft
service for ATM and one-time debit card
transactions. Consumer testing showed
consumers need to understand how
checks and other transactions will be
treated to make such a choice.
Proposed comment 17(d)–2 also
permitted an institution to indicate that
it pays overdrafts at its discretion, and
to briefly describe the benefits of the
institution’s payment of overdrafts on
ATM or one-time debit card
transactions. Some commenters
suggested that the Board provide model
language to describe the consequences
of declining to opt in. Similarly, some
commenters expressed concern that the
form as proposed implied that by
consenting to the institution’s overdraft
service, the consumer’s overdrafts
would be covered in all cases. Upon
further consideration, the Board
believes that these elements of an
institution’s policy are already
encompassed by the requirement in
§ 205.17(d)(1) to disclose a general
description of the institution’s overdraft
services. Thus, as described above, final
comment 17(d)–1 illustrates the
application of § 205.17(d)(1). Additional
optional language that may be included
in the model form has been adopted in
new § 205.17(d)(6).
Industry commenters also contended
that the form should contain language
stating that overdrafts may be paid
regardless of the consumer’s opt-in
decision, due to technical requirements
and under the exceptions proposed
under § 205.17(b)(5). Commenters
provided various suggestions for how to
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convey information about the
exceptions to consumers. Because the
final rule does not adopt the proposed
exceptions, adding this language is not
necessary.
Proposed § 205.17(d)(2) stated that the
initial notice must include information
about the dollar amount of any fees or
charges assessed on the consumer’s
account for paying an ATM withdrawal
or a one-time debit card transaction
pursuant to the institution’s overdraft
service. Some institutions may vary the
fee amount that may be imposed based
upon the number of times the consumer
has overdrawn his or her account, the
amount of the overdraft, or other factors.
Under these circumstances, the
proposed rule would have required the
institution to disclose the maximum fee
that may be imposed or a range of fees.
The Board is adopting § 205.17(d)(2)
generally as proposed, but is removing
the reference to the range of fees.
Institutions that waive the first fee could
include a range from $0 to their
maximum fee, which could lead
consumers to believe that they may
overdraw their account free of charge
more than once. To address tiered
overdraft fees, comment 17(d)–2, as
adopted, provides that the institution
may indicate that the consumer may be
assessed a fee ‘‘up to’’ the maximum fee.
In addition, to ensure that consumers
understand the full array of fees that
may be charged, the comment explains
that the financial institution must also
disclose all applicable overdraft fees,
including but not limited to per item or
per transaction fees, daily fees,
sustained overdraft, and negative
balance fees. Comment 17(d)–2.ii
provides an example illustrating a
sustained overdraft fee. The comment is
intended to illustrate that all types of
fees for paying an overdraft must be
disclosed, regardless of how the fee is
labeled by the institution.
Some consumer group commenters
recommended that the fees section be
moved up on the notice. However,
participants in consumer testing
generally identified the dollar amount of
fees, even when located near the bottom
of the notice. To ensure that consumers
view the fees attributable to use of the
overdraft service, regardless of the
placement of that section in the notice,
final Model Form A–9 displays the
dollar amount of the fees in bold font.
Proposed § 205.17(d)(3) stated that
institutions must disclose any daily
limits on the amount of overdraft fees or
charges that may be assessed. If the
institution does not limit the amount of
fees that can be imposed, it would have
to disclose this fact. The Board adopts
the rule, as modified, to require
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disclosure of any daily limits on the
number of overdraft fees or charges (or,
that there are no limits). Because some
overdraft charges may be assessed as a
percentage, the total dollar limit may be
difficult to calculate with any certainty.
The Board believes the same purpose is
achieved by specifying the number
limits.
Some consumer group commenters
suggested requiring the disclosure of
minimum overdraft amounts that could
trigger fees to alert consumers that they
will be charged overdraft fees even on
small dollar transactions. However,
consumer testing demonstrated that
consumers understood this concept
without a specific statement to this
effect. Therefore, this additional
language is not required or included in
Model Form A–9.
Section 205.17(d)(4), which is
adopted generally as proposed, requires
institutions to inform consumers of the
right to affirmatively consent to the
institution’s payment of overdrafts for
ATM and one-time debit card
transactions, including the method(s)
that the consumer may use to consent to
the service.
Proposed § 205.17(d)(5) provided that
institutions must state whether they
offer any alternatives for the payment of
overdrafts. Specifically, if an institution
offered an overdraft line of credit or a
service that transfers funds from another
account of the consumer held at the
institution to cover the overdraft
(including an account held jointly with
another consumer), the institution
would have to state that fact, and how
to obtain more information. Under the
proposal, institutions were permitted,
but not required, to list any additional
alternatives they may offer to overdraft
services. This provision incorporated a
recommendation from the February
2005 Joint Guidance that institutions
should inform consumers generally of
other overdraft services and credit
products, if any, that are available when
describing their overdraft service.40 The
Board adopts § 205.17(d)(5)
substantially as proposed.
Participants in consumer testing
generally understood that they would
have to qualify for an overdraft line of
credit, without a reference in the notice
to any qualification requirements as
urged by some industry commenters. In
addition, participants generally
understood that they could contact the
bank through the methods listed at the
bottom of the model form without any
reference to how to obtain more
information beyond a statement at the
top of the form that the consumer
40 See
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should ask about the alternatives. Thus,
in an effort to eliminate unnecessary
language in the model form, final
§ 205.17(d)(5) and Model Form A–9
delete the proposed language in the
notice requiring the bank to specify how
consumers can obtain more information
about any alternatives to overdraft
services.
Some consumer group commenters
argued that the Board should revise
Model Form A–9 to state that these
alternatives ‘‘are less costly’’ than an
overdraft service. Depending on the
financial institution’s current and future
practices, the amount of time a
consumer is overdrawn, and other
factors, however, it may not be accurate
to say that these alternatives are less
expensive than overdraft coverage in all
cases. Thus, the final model form
includes a statement that overdraft
alternatives ‘‘may be less expensive’’
than an institution’s standard overdraft
practices.
Consumer group commenters also
suggested amending the model form to
include additional information about
the costs of alternatives to the overdraft
service, including a chart containing
costs and sample effective APRs
associated with charges, based on the
average amount overdrawn and different
payoff times. Including such a chart in
the opt-in form would make the form
lengthy, could confuse consumers, and
could undermine the purpose of the
form, which is to provide consumers
with a choice about opting into the
institution’s overdraft service in a clear
and readily understandable way. While
some participants in consumer testing
stated that having more information in
the form about the alternatives would be
helpful, others stated they would prefer
to call for more information. The Board
also believes that requiring disclosure of
costs expressed in dollars is a more
effective means of alerting consumers to
the costs of the overdraft service.
Consumer testing in the credit card
context demonstrated that costs
expressed in dollars were better
understood and more meaningful than
costs expressed as an effective APR.
New § 205.17(d)(6) provides that a
financial institution may include
language in the notice describing other
types of transactions that are not subject
to the opt-in right, or are subject to a
separate opt-in or opt-out right. For
example, the institution may indicate
that the consumer has the right to opt
out of payment of overdrafts for check
transactions, ACH transactions, or
automatic bill payments, and if so, may
disclose the returned item fee and that
additional merchant fees may apply.
The notice may provide a means for the
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consumer to exercise this choice. An
institution may also disclose the
consumer’s right to revoke consent. The
rule also clarifies that for existing
accounts, the institution may revise the
statement describing the institution’s
overdraft service with respect to ATM
and one-time debit card transactions to
state that ‘‘After August 15, 2010, we
will not authorize and pay overdrafts for
the following types of transactions
unless you ask us to (see below).’’
However, the rule states that the
additional content may not be more
prominent than any required language
under § 205.17(d)(1). Consumer testing
indicated that emphasizing certain
language as shown in Model Form A–
9 substantially enhanced consumer
understanding, and the Board is
concerned that any additional
information provided not diminish that
understanding.
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E. Additional Provisions Addressing
Consumer Opt-In Right—§ 205.17(e)–(g)
Joint accounts. Proposed § 205.17(e)
provided 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. Commenters
generally supported the proposal. The
Board is adopting § 205.17(e)
substantially as proposed, with an
additional clarification that the financial
institution must also treat a revocation
of affirmative consent by any of the joint
consumers as revocation of consent for
that account.
The final rule is adopted in
recognition that it may not be
operationally feasible for an institution
to determine which account holder is
responsible for a particular transaction
and then make an authorization
decision based on whether the
consumer has affirmatively consented to
the institution’s overdraft service. Thus,
for practical reasons, 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.
Likewise, the Board believes the same
principles should apply to revocation of
the consent and revises § 205.17(e)
accordingly.
Continuing right to opt-in or to revoke
the opt-in. Proposed § 205.17(f)
provided that a consumer may
affirmatively consent to a financial
institution’s overdraft service at any
time in the manner described in the optin notice. This provision would allow
consumers to decide later in the account
relationship that they wish to have
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overdrafts paid for ATM withdrawals
and one-time debit card transactions.
Section 205.17(f) is adopted generally
as proposed, but with certain additions
to address the consumer’s right to
revoke his or her consent. Just as a
consumer must be provided a
reasonable opportunity to opt in, the
consumer should be provided the same
reasonable opportunity to revoke the
opt-in. Thus, the final rule requires
financial institutions to permit the
consumer to revoke his or her consent
at any time in the manner made
available to consumers for providing
consent. The final rule also states that
the financial institution must
implement the consumer’s revocation of
consent as soon as reasonably
practicable after receiving the request.
The Board is not prescribing a specific
period of time within which the creditor
must honor the consumer’s revocation
request because the appropriate time
period may depend on a number of
variables, including the method used by
the consumer to communicate the
revocation request (for example, in
writing or orally) and the channel by
which the request is received (for
example, if a consumer sends a written
request to an address specifically
designated to receive consumer opt-in
and revocation requests).
The final rule also adds a new
comment 17(f)–1 to clarify that
revocation 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.
Duration and revocation of opt-in.
Proposed § 205.17(h) provided that a
consumer’s affirmative consent to the
institution’s overdraft service is
generally effective until revoked by the
consumer. The rule also provided that
an institution may also terminate the
consumer’s access to the overdraft
service for any reason, for example, if
the institution determines that there is
excessive usage of the service by the
consumer. Final § 205.17(g),
renumbered from the proposal, is
adopted as proposed.
Real-time opt-in. Although not
addressed in the Board’s proposal, some
industry commenters urged the Board to
allow institutions to offer the consumer
the ability to opt into the institution’s
overdraft service on a transaction-bytransaction basis, if a transaction-level
opt-in becomes technologically feasible
(a ‘‘real-time’’ opt-in). Consumer group
commenters urged the Board to require
institutions to provide real-time
disclosure and opt-in for ATM and debit
card transactions.
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Real-time opt-ins offer potential
benefits and drawbacks to consumers. A
real-time opt-in may provide relief to
consumers who may need access to
funds in an emergency when they have
no alternative forms of payments
available and where technology makes a
real-time opt-in feasible. However,
consumers who make decisions in realtime may not be provided all essential
information necessary to make informed
decisions about whether to incur a fee
by proceeding with a transaction that
overdraws their accounts.
The Board does not believe that it is
technologically feasible to provide realtime opt-ins at many locations at this
time, particularly at non-proprietary
ATMs and merchant POS terminals.
Thus, the Board is not addressing realtime notices in the final rule. The Board
will continue to monitor developments
in real-time notice capability and assess
whether such notice would enhance
consumer protection.
Section 205.19
Debit Holds
Debit Holds
The Board proposed to prohibit
institutions from assessing an overdraft
fee where the overdraft would not have
occurred but for a debit hold placed on
funds in an amount that exceeds the
actual transaction amount and where
the merchant could determine the actual
transaction amount within a short
period of time after authorization of the
transaction (for example, fuel purchases
at a gas station). The prohibition would
not have applied if the institution
adopted procedures designed to release
the hold within a reasonable period of
time.
Consumer group commenters
supported the Board’s proposal to
address debit holds, although some
consumer group commenters objected to
the proposed safe harbor as
inappropriately permitting overdraft
fees to be charged. Industry commenters
raised a number of concerns about the
operational feasibility of implementing
the revised proposal. In addition,
industry commenters stated that the
revised rule would be unworkable
unless the Board addressed how
merchants and payment processors
submit and process payments. While
these commenters supported a safe
harbor, they argued that the proposed
safe harbor was too vague and that
smaller institutions, which are more
likely to batch-process transactions
outside the safe harbor window, would
be disproportionately impacted.
The Board is persuaded that
addressing overdrafts caused by debit
holds raises significant operational
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issues and that a solution may require
the participation of various parties,
including merchants, payment
processors, and card networks, as well
as financial institutions. The final rule
does not include the provision on debit
holds. The Board will continue to
monitor developments with respect to
debit holds and assess whether to take
further action.
jlentini on DSKJ8SOYB1PROD with RULES
Other Consumer Protections for
Overdraft Services
Some consumer advocates raised
additional concerns related to overdrafts
not addressed in the Board’s proposal.
The Board recognizes that additional
consumer protections may be
appropriate with respect to overdraft
services, for example, rules to address
transaction posting order. Therefore, the
Board is continuing to assess whether
additional regulatory action relating to
overdraft services is needed.
Effective Date
The Board solicited comment on an
appropriate implementation period for
the proposed rule. Consumer group
commenters, members of Congress, an
association of state banking regulators
urged the Board to adopt an
implementation period ranging from 60
days to 12 months, in light of the harms
posed to consumers by overdraft fees.
Industry commenters, citing required
technology upgrades and personnel
training, as well as the burdens of
implementing other recent and ongoing
regulatory requirements, urged the
Board to provide an implementation
period of 12 to 24 months.
The final rule sets an effective date of
January 19, 2010, with a mandatory
compliance date of July 1, 2010. As
noted above, for accounts opened prior
to July 1, 2010, the financial institution
may not assess any fees or charges on
a consumer’s account on or after August
15, 2010 for paying an ATM or one-time
debit card transaction pursuant to the
overdraft service, unless the institution
has complied with § 205.17(b)(1) and
obtains the consumer’s affirmative
consent. For accounts opened on or after
July 1, 2010, the financial institution
must comply with § 205.17(b)(1) and
obtain the consumer’s affirmative
consent before the institution assesses
any fee or charge on the consumer’s
account for paying an ATM or one-time
debit card transaction pursuant to the
institution’s overdraft service. The
Board believes that this time frame best
balances the significant consumer
protection interests addressed by this
rule against industry’s need to make
systems changes to comply with the
final rule. Smaller institutions in
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particular need time to come into
compliance because they have fewer
resources to devote to the substantial
systems changes required by the final
rule. Without sufficient time to
implement the substantive requirements
of the final rule, institutions may cease
offering overdraft services for all
transaction types, including the check
transactions that consumers have
indicated they would prefer to be paid.
VII. Final Regulatory Flexibility
Analysis
In accordance with Section 3(a) of the
Regulatory Flexibility Act (5 U.S.C. 601
et seq.) (RFA), the Board is publishing
a final regulatory flexibility analysis for
the final amendments to Regulation E.
The RFA requires an agency either to
provide a final regulatory flexibility
analysis with a final rule or certify that
the final rule will not have a significant
economic impact on a substantial
number of small entities. An entity is
considered ‘‘small’’ if it has $175
million or less in assets for banks and
other depository institutions.41
The Board stated in the January 2009
proposal its belief that the proposal was
likely to have a significant economic
impact on a substantial number of small
entities. Based on comments received,
the Board’s own analysis, and for the
reasons stated below, the Board believes
that the final rule will have a significant
economic impact on a substantial
number of small entities.
1. Statement of the need for, and
objectives of, the proposed rule. The
Board is adopting revisions to
Regulation E to prohibit financial
institutions that hold a consumer’s
account from assessing a fee or charge
for paying ATM and one-time debit card
transactions pursuant to the institution’s
overdraft service, unless the consumer
affirmatively consents to the service for
such transactions. The reasoning for the
rule is set forth in the SUPPLEMENTARY
INFORMATION above.
The EFTA was enacted to provide a
basic framework establishing the rights,
liabilities, and responsibilities of
participants in electronic fund transfer
systems. The primary objective of the
EFTA is the provision of individual
consumer rights. 15 U.S.C. 1693. The
EFTA authorizes the Board to prescribe
regulations to carry out the purpose and
provisions of the statute. 15 U.S.C.
1693b(a). The Act expressly states that
the Board’s regulations may contain
‘‘such classifications, differentiations, or
41 U.S. Small Business Association, Table of
Small Business Size Standards Matched to North
American Industry Classification System Codes,
available at https://www.sba.gov/idc/groups/public/
documents/sba_homepage/serv_sstd_tablepdf.pdf.
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other provisions, * * * as, in the
judgment of the Board, are necessary or
proper to effectuate the purposes of [the
Act], to prevent circumvention or
evasion [of the Act], or to facilitate
compliance [with the Act].’’ 15 U.S.C.
1693b(c).
The Board believes that the revisions
to Regulation E discussed above are
within Congress’s broad grant of
authority to the Board to adopt
provisions that carry out the purposes of
the statute. These revisions facilitate a
consumer’s ability to avoid overdrawing
his or her account in connection with an
electronic fund transfer requested by the
consumer.
2. Summary of issues raised by
comments in response to the initial
regulatory flexibility analysis. The
Board reviewed comments submitted by
various entities in order to ascertain the
economic impact of the proposals on
small entities. Many industry
commenters expressed general concern
about the compliance burden of the
proposed amendments on institutions
offering overdraft services, including
small entities. They expressed concern
that the proposals, if adopted, would be
costly to implement, would not provide
institutions sufficient flexibility, and
could result in higher prices for
consumers. Many of the issues raised by
commenters do not apply uniquely to
small entities and are addressed in Part
VI. Section-by-Section Analysis
regarding specific provisions. One
commenter representing community
banks stated that the rule could be
sufficiently burdensome on small
institutions that they may cease to offer
overdraft services entirely, which could
impact their competitiveness with
respect to larger institutions that may be
able to implement the rule more
quickly.
3. Description of small entities
affected by the final rule. As of June 30,
2009, there were 11,598 depository
institutions with assets of $175 million
or less. The final rule would affect those
institutions that permit overdrafts at an
ATM or via a one-time debit card
transaction. According to the FDIC
Study, approximately 30% of
institutions surveyed with assets of
$250 million or less operate automated
overdraft programs. Using this figure as
a proxy for small institutions,
approximately 3,479 small entities
would be affected by the final rule.
Under the final rule, account-holding
institutions are required to obtain the
consumer’s affirmative consent to the
institution’s overdraft service before
assessing overdraft fees for ATM and
one-time debit card transactions.
According to the FDIC Study, 75.1
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percent of banks with an automated
overdraft program currently provide
some form of an opt-out right to
consumers, and 11.1 percent provide an
opt-in right.42 Nonetheless, even
institutions that already have an opt-out
or an opt-in process in place will have
to reprogram their systems to provide
the notices required by the final rule.
4. Reporting, recordkeeping and
compliance requirements. The
compliance requirements of this final
rule are described above in Part VI.
Section-by-Section Analysis. The
precise effect of the revisions to
Regulation E on small entities is
unknown. The final rule prohibits
institutions from conditioning the
consumer’s affirmative consent to the
payment of checks, ACH and other
transactions on the consumer also
opting into the payment of ATM and
one-time debit card transactions. Thus,
institutions will also have to reprogram
their systems to differentiate between
overdrafts for different transaction
types. As some industry commenters
noted, many systems are not currently
set up to pay overdrafts for certain
transaction types (e.g., checks, ACH and
recurring debit card transactions), but
not others (e.g., ATM and one-time debit
card transactions).
The Board is aware that some small
institutions do not pay overdrafts at
ATMs or for one-time debit card
transactions.43 Some institutions are
already providing customers a method
to opt into their overdraft service. These
institutions will need to conform their
opt-in procedures to the final rule. Also,
those institutions that currently provide
a form of opt-out or opt-in notice will
need to review and revise this
disclosure to conform to the final rule’s
requirements. The Board sought to
reduce the burden on small entities,
where possible, by adopting a model
form that can be used to ease
compliance with the final rule.
5. Steps taken to minimize the
economic impact on small entities. As
previously noted, the final rule
implements the Board’s mandate to
prescribe regulations that carry out the
purposes of the EFTA. The Board seeks
in this final rule to balance the benefits
to consumers of an opt-in approach
against the additional burdens on
account-holding institutions subject to
Regulation E. To that end, and as
discussed above in Part VI. Section-bySection Analysis, consumer testing was
42 See
FDIC Study at 27.
at 10 (reporting that 81 percent of
institutions surveyed that operate automated
programs provide overdraft services for ATM and
POS/debit card transactions).
43 Id.
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conducted in order to assess the
effectiveness of the proposed revisions
to Regulation E. In this manner, the
Board has sought to avoid imposing
additional regulatory requirements
unless these proposed revisions would
be beneficial to consumer
understanding of overdraft services. The
factual, policy, and legal reasons for
selecting the alternatives adopted and
why each one of the other significant
alternatives was not accepted, are
described above in Part VI. Section-bySection Analysis.
The Board has sought to reduce the
burden on small entities, where
possible, by adopting a model form that
can be used to ease compliance with the
final rule, which has been revised and
simplified from the proposed model
form. The Board has also sought to
reduce the burden on small entities,
where possible, by providing a safe
harbor to institutions permitting them to
rely upon a merchant, other institution,
or other third party’s coding of a
transaction as a one-time debit card
transaction or a recurring debit card
transaction, to the extent that the
institution complies with the rule by
maintaining reasonable procedures to
identify transactions as either one-time
or recurring debit card transactions. The
Board believes that these modifications
from the proposal minimize the
significant economic impact on small
entities while still meeting the stated
objectives of Regulation E.
6. Other federal rules. The Board has
not identified any federal rules that
duplicate, overlap, or conflict with the
revisions to Regulation E.
VIII. Paperwork Reduction Act
In accordance with the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C.
3506; 5 CFR 1320 Appendix A.1), the
Board reviewed the final rule under the
authority delegated to the Board by the
Office of Management and Budget
(OMB). The collection of information
that is subject to the PRA by this final
rule is found in 12 CFR part 205. The
Federal Reserve may not conduct or
sponsor, and an organization is not
required to respond to, this information
collection unless the information
collection displays a currently valid
OMB control number. The OMB control
number is 7100–0200.
This information collection is
required to provide benefits for
consumers and is mandatory (15 U.S.C.
1693 et seq.). Since the Board does not
collect any information, no issue of
confidentiality arises. The respondents/
recordkeepers are for-profit financial
institutions, including small businesses.
Institutions are required to retain
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59051
records for 24 months, but this
regulation does not specify types of
records that must be retained.
The EFTA and Regulation E are
designed to ensure adequate disclosure
of basic terms, costs, and rights relating
to electronic fund transfer (EFT)
services debiting or crediting a
consumer’s account. The disclosures
required by the EFTA and Regulation E
are triggered by certain specified events.
The disclosures inform consumers about
the terms of the electronic fund transfer
service, activity on the account,
potential liability for unauthorized
transfers, and the process for resolving
errors. To ease institutions’ burden and
cost of complying with the disclosure
requirements of Regulation E
(particularly for small entities), the
Board publishes model forms and
disclosure clauses.
Regulation E applies to all financial
institutions, not just state member
banks. In addition, certain provisions in
Regulation E apply to entities that are
not financial institutions, including
those that act as service providers or
ATM operators, as well as merchants
and other payees that engage in
electronic check conversion
transactions, the electronic collection of
returned item fees, or preauthorized
transfers. The Federal Reserve accounts
for the paperwork burden associated
with Regulation E only for the financial
institutions it supervises44 and that
meet the criteria set forth in the
regulation. Other federal agencies
account for the paperwork burden
imposed on the entities for which they
have regulatory enforcement authority.
As mentioned in the SUPPLEMENTARY
INFORMATION above, the final rule
(§ 205.17) would prohibit accountholding financial institutions from
assessing a fee or charge for paying
ATM and one-time debit card
transactions pursuant to the institution’s
overdraft service, unless the consumer
is given the right to affirmatively
consent, or opt in to the service, and the
consumer opts in.
The Federal Reserve estimates that, to
comply with the opt-in notice
requirement, 1,205 respondents
regulated by the Federal Reserve would
take, on average, 16 hours (two business
days) to revise and update initial
disclosures (§ 205.7(b)) for new
customers. The Federal Reserve
44 State member banks, branches and agencies of
foreign banks (other than Federal branches, Federal
agencies, and insured state branches of foreign
banks), commercial lending companies owned or
controlled by foreign banks, and Edge and
agreement corporations, organizations operating
under section 25 or 25(a) of the Federal Reserve
Act.
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estimates that 1,205 respondents
regulated by the Federal Reserve would
take, on average, 16 hours (two business
days) to prepare and send new opt-in
notices to existing customers.
The Federal Reserve estimates the
total annual one-time burden for
respondents to be 38,560 hours and
believes that, on a continuing basis,
there would be no additional increase in
burden as the disclosure would be
sufficiently accounted for once
incorporated into the current initial
account disclosure (§ 205.7(b)). This
would increase the total annual burden
to 98,462 hours for Federal Reserveregulated financial institutions that are
required to comply with Regulation E.
To ease the burden of compliance a
model form that institutions may use is
available in Appendix A (See Model
Form A–9).
The Federal Reserve estimates that on
average 5,136,693 consumers would
spend as much as 5 minutes reviewing
and responding to an opt-in notice. This
would increase the total annual burden
for this information collection by
428,058 hours.
Overall, the estimated annual burden
for Regulation E would increase by
466,618 hours, from 59,902 hours to
526,520 hours.
The other federal financial agencies
are responsible for estimating and
reporting to OMB the total paperwork
burden for the institutions for which
they have administrative enforcement
authority. They may, but are not
required to, use the Federal Reserve’s
burden estimation methodology. Using
the Federal Reserve’s method, the total
estimated annual burden for all
financial institutions subject to
Regulation E, including Federal
Reserve-supervised institutions, would
be approximately 853,059 hours.45 The
above estimates represent an average
across all respondents and reflect
variations between institutions based on
their size, complexity, and practices. All
covered institutions, including
depository institutions (of which there
are approximately 17,200), potentially
are affected by this collection of
information, and thus are respondents
for purposes of the PRA. The final rule
will impose a one-time increase in the
estimated annual burden for such
institutions by 550,400 hours to
1,403,459 hours.
The Federal Reserve has a continuing
interest in the public’s opinions of our
collections of information. At any time,
comments regarding the burden
estimate, or any other aspect of this
45 This estimate does not include consumer
burden.
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15:56 Nov 16, 2009
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collection of information, including
suggestions for reducing the burden,
may be sent to: Secretary, Board of
Governors of the Federal Reserve
System, 20th and C Streets, NW.,
Washington, DC 20551; and to the
Office of Management and Budget,
Paperwork Reduction Project (7100–
0200), Washington, DC 20503.
List of Subjects in 12 CFR Part 205
Consumer protection, Electronic fund
transfers, Federal Reserve System,
Reporting and recordkeeping
requirements.
■ For the reasons set forth in the
preamble, the Board amends 12 CFR
part 205 as follows:
PART 205—ELECTRONIC FUND
TRANSFERS (REGULATION E)
The authority citation for part 205
continues to read as follows:
■
Authority: 15 U.S.C. 1693b.
2. Section 205.12 is amended by
revising paragraph (a) to read as follows:
■
§ 205.12
Relation to other laws.
(a) Relation to Truth in Lending. (1)
The Electronic Fund Transfer Act and
this part govern—
(i) The addition to an accepted credit
card as defined in Regulation Z (12 CFR
226.12, comment 12–2), of the
capability to initiate electronic fund
transfers;
(ii) The issuance of an access device
that permits credit extensions (under a
preexisting agreement between a
consumer and a financial institution)
only when the consumer’s account is
overdrawn or to maintain a specified
minimum balance in the consumer’s
account, or under an overdraft service,
as defined in § 205.17(a);
(iii) The addition of an overdraft
service, as defined in § 205.17(a), to an
accepted access device; and
(iv) A consumer’s liability for an
unauthorized electronic fund transfer
and the investigation of errors involving
an extension of credit that occurs under
an agreement between the consumer
and a financial institution to extend
credit when the consumer’s account is
overdrawn or to maintain a specified
minimum balance in the consumer’s
account, or under an overdraft service,
as defined in § 205.17(a).
(2) The Truth in Lending Act and
Regulation Z (12 CFR part 226), which
prohibit the unsolicited issuance of
credit cards, govern—
(i) The addition of a credit feature to
an accepted access device; and
(ii) Except as provided in paragraph
(a)(1)(ii) of this section, the issuance of
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a credit card that is also an access
device.
*
*
*
*
*
■ 3. Section 205.17 is added to read as
follows:
§ 205.17 Requirements for overdraft
services.
(a) Definition. For purposes of this
section, the term ‘‘overdraft service’’
means 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
(including a check or other item) when
the consumer has insufficient or
unavailable funds in the account. The
term ‘‘overdraft service’’ does not
include any payment of overdrafts
pursuant to—
(1) A line of credit subject to the
Federal Reserve Board’s Regulation Z
(12 CFR part 226), including transfers
from a credit card account, home equity
line of credit, or overdraft line of credit;
(2) A service that transfers funds from
another account held individually or
jointly by a consumer, such as a savings
account; or
(3) A line of credit or other
transaction exempt from the Federal
Reserve Board’s Regulation Z (12 CFR
part 226) pursuant to 12 CFR 226.3(d).
(b) Opt-in requirement. (1) General.
Except as provided under paragraphs
(b)(4) and (c) of this section, a financial
institution holding a consumer’s
account shall not assess a fee or charge
on a consumer’s account for paying an
ATM or one-time debit card transaction
pursuant to the institution’s overdraft
service, unless the institution:
(i) Provides the consumer with a
notice in writing, or if the consumer
agrees, electronically, segregated from
all other information, describing the
institution’s overdraft service;
(ii) Provides a reasonable opportunity
for the consumer to affirmatively
consent, or opt in, to the service for
ATM and one-time debit card
transactions;
(iii) Obtains the consumer’s
affirmative consent, or opt-in, to the
institution’s payment of ATM or onetime debit card transactions; and
(iv) Provides the consumer with
confirmation of the consumer’s consent
in writing, or if the consumer agrees,
electronically, which includes a
statement informing the consumer of the
right to revoke such consent.
(2) Conditioning payment of other
overdrafts on consumer’s affirmative
consent. A financial institution shall
not:
(i) Condition the payment of any
overdrafts for checks, ACH transactions,
and other types of transactions on the
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consumer affirmatively consenting to
the institution’s payment of ATM and
one-time debit card transactions
pursuant to the institution’s overdraft
service; or
(ii) Decline to pay checks, ACH
transactions, and other types of
transactions that overdraw the
consumer’s account because the
consumer has not affirmatively
consented to the institution’s overdraft
service for ATM and one-time debit card
transactions.
(3) Same account terms, conditions,
and features. A financial institution
shall provide to consumers who do not
affirmatively consent to the institution’s
overdraft service for ATM and one-time
debit card transactions the same account
terms, conditions, and features that it
provides to consumers who
affirmatively consent, except for the
overdraft service for ATM and one-time
debit card transactions.
(4) Exception to the notice and opt-in
requirements. The requirements of
§ 205.17(b)(1) do not apply to an
institution that has a policy and practice
of declining to authorize and pay any
ATM or one-time debit card transactions
when the institution has a reasonable
belief at the time of the authorization
request that the consumer does not have
sufficient funds available to cover the
transaction. Financial institutions may
apply this exception on an account-byaccount basis.
(c) Timing. (1) Existing account
holders. For accounts opened prior to
July 1, 2010, the financial institution
must not assess any fees or charges on
a consumer’s account on or after August
15, 2010 for paying an ATM or one-time
debit card transaction pursuant to the
overdraft service, unless the institution
has complied with § 205.17(b)(1) and
obtained the consumer’s affirmative
consent.
(2) New account holders. For accounts
opened on or after July 1, 2010, the
financial institution must comply with
§ 205.17(b)(1) and obtain the consumer’s
affirmative consent before the
institution assesses any fee or charge on
the consumer’s account for paying an
ATM or one-time debit card transaction
pursuant to the institution’s overdraft
service.
(d) Content and format. The notice
required by paragraph (b)(1)(i) of this
section shall be substantially similar to
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Model Form A–9 set forth in Appendix
A of this part, include all applicable
items in this paragraph, and may not
contain any information not specified in
or otherwise permitted by this
paragraph.
(1) Overdraft service. A brief
description of the financial institution’s
overdraft service and the types of
transactions for which a fee or charge
for paying an overdraft may be imposed,
including ATM and one-time debit card
transactions.
(2) Fees imposed. The dollar amount
of any fees or charges assessed by the
financial institution for paying an ATM
or one-time debit card transaction
pursuant to the institution’s overdraft
service, including any daily or other
overdraft fees. If the amount of the fee
is determined on the basis of the
number of times the consumer has
overdrawn the account, the amount of
the overdraft, or other factors, the
institution must disclose the maximum
fee that may be imposed.
(3) Limits on fees charged. The
maximum number of overdraft fees or
charges that may be assessed per day,
or, if applicable, that there is no limit.
(4) Disclosure of opt-in right. An
explanation of the consumer’s right to
affirmatively consent to the financial
institution’s payment of overdrafts for
ATM and one-time debit card
transactions pursuant to the institution’s
overdraft service, including the methods
by which the consumer may consent to
the service; and
(5) Alternative plans for covering
overdrafts. If the institution offers a line
of credit subject to the Board’s
Regulation Z (12 CFR part 226) or a
service that transfers funds from another
account of the consumer held at the
institution to cover overdrafts, the
institution must state that fact. An
institution may, but is not required to,
list additional alternatives for the
payment of overdrafts.
(6) Permitted modifications and
additional content. If applicable, the
institution may modify the content
required by § 205.17(d) to indicate that
the consumer has the right to opt into,
or opt out of, the payment of overdrafts
under the institution’s overdraft service
for other types of transactions, such as
checks, ACH transactions, or automatic
bill payments; to provide a means for
the consumer to exercise this choice;
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and to disclose the associated returned
item fee and that additional merchant
fees may apply. The institution may also
disclose the consumer’s right to revoke
consent. For notices provided to
consumers who have opened accounts
prior to July 1, 2010, the financial
institution may describe the
institution’s overdraft service with
respect to ATM and one-time debit card
transactions with a statement such as
‘‘After August 15, 2010, we will not
authorize and pay overdrafts for the
following types of transactions unless
you ask us to (see below).’’
(e) Joint relationships. If two or more
consumers jointly hold an account, the
financial institution shall treat the
affirmative consent of any of the joint
consumers as affirmative consent for
that account. Similarly, the financial
institution shall treat a revocation of
affirmative consent by any of the joint
consumers as revocation of consent for
that account.
(f) Continuing right to opt in or to
revoke the opt-in. A consumer may
affirmatively consent to the financial
institution’s overdraft service at any
time in the manner described in the
notice required by paragraph (b)(1)(i) of
this section. A consumer may also
revoke consent at any time in the
manner made available to the consumer
for providing consent. A financial
institution must implement a
consumer’s revocation of consent as
soon as reasonably practicable.
(g) Duration and revocation of opt-in.
A consumer’s affirmative consent to the
institution’s overdraft service is
effective until revoked by the consumer,
or unless the financial institution
terminates the service.
5. In Appendix A to Part 205, an entry
for A–9 is added to the Table of
Contents, and Appendix A–9 Model
Consent Form for Overdraft Services
(§ 205.17) is added to read as follows:
■
Appendix A to Part 205—Model
Disclosure Clauses and Forms
Table of Contents
*
*
*
*
*
A–9 Model Consent Form for Overdraft
Services (§ 205.17)
*
*
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*
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6. In Supplement I to part 205,
a. Under Section 205.12 Relation to
Other Laws, under 12(a) Relation to
truth in lending, paragraph 2. is revised,
and paragraph 3. is added.
■ b. Section 205.17—Requirements for
Overdraft Services is added.
■
■
Supplement I to Part 205—Official Staff
Interpretations
*
*
*
*
*
Section 205.12—Relation to Other Laws
12(a) Relation to Truth in Lending
*
*
*
*
*
2. Issuance rules. For access devices that
also constitute credit cards, the issuance
rules of Regulation E apply if the only credit
feature is a preexisting credit line attached to
the asset account to cover overdrafts (or to
maintain a specified minimum balance) or an
overdraft service, as defined in § 205.17(a).
Regulation Z (12 CFR part 226) rules apply
if there is another type of credit feature; for
example, one permitting direct extensions of
credit that do not involve the asset account.
3. Overdraft service. The addition of an
overdraft service, as that term is defined in
§ 205.17(a), to an accepted access device does
not constitute the addition of a credit feature
subject to Regulation Z. Instead, the
provisions of Regulation E apply, including
the liability limitations (§ 205.6) and the
requirement to obtain consumer consent to
the service before any fees or charges for
paying an overdraft may be assessed on the
account (§ 205.17).
*
*
*
*
*
Section 205.17—Requirements for Overdraft
Services
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17(a) Definition
1. Exempt securities- and commoditiesrelated lines of credit. Section 205.17(a)(3)
does not apply to transactions in a securities
or commodities account pursuant to which
credit is extended by a broker-dealer
registered with the Securities and Exchange
Commission or the Commodity Futures
Trading Commission.
17(b) Opt-In Requirement
1. Scope.
i. Account-holding institutions. Section
205.17(b) applies to ATM and one-time debit
card transactions made with a debit card
issued by or on behalf of the account-holding
institution. Section 205.17(b) does not apply
to ATM and one-time debit card transactions
made with a debit card issued by or through
a third party unless the debit card is issued
on behalf of the account-holding institution.
ii. Coding of transactions. A financial
institution complies with the rule 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 onetime or a preauthorized or recurring debit
card transaction.
iii. One-time debit card transactions. The
opt-in applies to any one-time debit card
transaction, whether the card is used, for
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example, at a point-of-sale, in an on-line
transaction, or in a telephone transaction.
2. No affirmative consent. A financial
institution may pay overdrafts for ATM and
one-time debit card transactions even if a
consumer has not affirmatively consented or
opted in to the institution’s overdraft service.
If the institution pays such an overdraft
without the consumer’s affirmative consent,
however, it may not impose a fee or charge
for doing so. These provisions do not limit
the institution’s ability to debit the
consumer’s account for the amount
overdrawn if the institution is permitted to
do so under applicable law.
3. Overdraft transactions not required to be
authorized or paid. Section 205.17 does not
require a financial institution to authorize or
pay an overdraft on an ATM or one-time
debit card transaction even if the consumer
has affirmatively consented to an
institution’s overdraft service for such
transactions.
4. Reasonable opportunity to provide
affirmative consent. A financial institution
provides a consumer with a reasonable
opportunity to provide affirmative consent
when, among other things, it provides
reasonable methods by which the consumer
may affirmatively consent. A financial
institution provides such reasonable
methods, if—
i. By mail. The institution provides a form
for the consumer to fill out and mail to
affirmatively consent to the service.
ii. By telephone. The institution provides
a readily-available telephone line that
consumers may call to provide affirmative
consent.
iii. By electronic means. The institution
provides an electronic means for the
consumer to affirmatively consent. For
example, the institution could provide a form
that can be accessed and processed at its Web
site, where the consumer may click on a
check box to provide consent and confirm
that choice by clicking on a button that
affirms the consumer’s consent.
iv. In person. The institution provides a
form for the consumer to complete and
present at a branch or office to affirmatively
consent to the service.
5. Implementing opt-in at account-opening.
A financial institution may provide notice
regarding the institution’s overdraft service
prior to or at account-opening. A financial
institution may require a consumer, as a
necessary step to opening an account, to
choose whether or not to opt into the
payment of ATM or one-time debit card
transactions pursuant to the institution’s
overdraft service. For example, the
institution could require the consumer, at
account opening, to sign a signature line or
check a box on a form (consistent with
comment 17(b)–6) indicating whether or not
the consumer affirmatively consents at
account opening. If the consumer does not
check any box or provide a signature, the
institution must assume that the consumer
does not opt in. Or, the institution could
require the consumer to choose between an
account that does not permit the payment of
ATM or one-time debit card transactions
pursuant to the institution’s overdraft service
and an account that permits the payment of
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59055
such overdrafts, provided that the accounts
comply with § 205.17(b)(2) and
§ 205.17(b)(3).
6. Affirmative consent required. A
consumer’s affirmative consent, or opt-in, to
a financial institution’s overdraft service
must be obtained separately from other
consents or acknowledgements obtained by
the institution, including a consent to receive
disclosures electronically. An institution may
obtain a consumer’s affirmative consent by
providing a blank signature line or check box
that the consumer could sign or select to
affirmatively consent, provided that the
signature line or check box is used solely for
purposes of evidencing the consumer’s
choice whether or not to opt into the
overdraft service and not for other purposes.
An institution does not obtain a consumer’s
affirmative consent by including preprinted
language about the overdraft service in an
account disclosure provided with a signature
card or contract that the consumer must sign
to open the account and that acknowledges
the consumer’s acceptance of the account
terms. Nor does an institution 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 service.
7. Written confirmation. A financial
institution may comply with the requirement
in § 205.17(b)(1)(iv) by providing to the
consumer a copy of the consumer’s
completed opt-in form or by sending a letter
or notice to the consumer acknowledging that
the consumer has elected to opt into the
institution’s service. The written
confirmation notice must include a statement
informing the consumer of his or her right to
revoke the opt-in at any time. To the extent
the institution complies with the written
confirmation requirement by providing a
copy of the completed opt-in form, the
institution may include the statement about
revocation on the initial opt-in notice.
Paragraph 17(b)(2)—Conditioning Payment of
Other Overdrafts on Consumer’s Affirmative
Consent
1. Application of the same criteria. The
prohibitions on conditioning in § 205.17(b)(2)
generally require an institution 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 institution’s overdraft service with
respect to ATM and one-time debit card
overdrafts. For example, if an institution’s
internal criteria would lead the institution to
pay a check overdraft if the consumer had
affirmatively consented to the institution’s
overdraft service for ATM and one-time debit
card transactions, it must also apply the same
criteria in a consistent manner in
determining whether to pay the check
overdraft if the consumer has not opted in.
2. No requirement to pay overdrafts on
checks, ACH transactions, or other types of
transactions. The prohibition on
conditioning in § 205.17(b)(2) does not
require an institution to pay overdrafts on
checks, ACH transactions, or other types of
transactions in all circumstances. Rather, the
rule simply prohibits institutions from
considering the consumer’s decision not to
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opt in when deciding whether to pay
overdrafts for checks, ACH transactions, or
other types of transactions.
Paragraph 17(b)(3)—Same Account Terms,
Conditions, and Features
1. Variations in terms, conditions, or
features. A financial institution may not vary
the terms, conditions, or features of an
account provided to a consumer who does
not affirmatively consent to the payment of
ATM or one-time debit card transactions
pursuant to the institution’s overdraft
service. This includes, but is not limited to:
i. Interest rates paid and fees assessed;
ii. The type of ATM or debit card provided
to the consumer. For instance, an institution
may not provide consumers who do not opt
in a PIN-only card while providing a debit
card with both PIN and signature-debit
functionality to consumers who opt in;
iii. Minimum balance requirements; or
iv. Account features such as on-line bill
payment services.
2. Limited-feature bank accounts. Section
205.17(b)(3) does not prohibit institutions
from offering deposit account products with
limited features, provided that a consumer is
not required to open such an account because
the consumer did not opt in (see comment
17(b)(3)–2). For example, § 205.17(b)(3) does
not prohibit an institution from offering a
checking account designed to comply with
state basic banking laws, or designed for
consumers who are not eligible for a
checking account because of their credit or
checking account history, which may include
features limiting the payment of overdrafts.
However, a consumer who applies, and is
otherwise eligible, for a full-service or other
particular deposit account product may not
be provided instead with the account with
more limited features because the consumer
has declined to opt in.
Paragraph 17(b)(4)—Exception to the Notice
and Opt-In Requirement
1. Account-by-account exception. If a
financial institution has a policy and practice
of declining to authorize and pay any ATM
or one-time debit card transactions with
respect to one 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 available to cover
the transaction, that account is not subject to
§ 205.17(b)(1), even if other accounts that the
institution offers are subject to the rule. For
example, if the institution offers three types
of checking accounts, and the institution has
such a policy and practice with respect to
only one of the three types of accounts, that
one type of account is not subject to the
notice requirement. However, the other two
types of accounts offered by the institution
remain subject to the notice requirement.
17(c) Timing
1. Early compliance. A financial institution
may provide the notice required by
§ 205(b)(1)(i) and obtain the consumer’s
affirmative consent to the financial
institution’s overdraft service for ATM and
one-time debit card transactions prior to July
1, 2010, provided that the financial
institution complies with all of the
requirements of this section.
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2. Permitted fees or charges. Fees or
charges for ATM and one-time debit card
overdrafts may be assessed only for
overdrafts paid by the institution on or after
the date the financial institution receives the
consumer’s affirmative consent to the
institution’s overdraft service.
FEDERAL DEPOSIT INSURANCE
CORPORATION
17(d) Content and Format
AGENCY: Federal Deposit Insurance
Corporation (FDIC).
ACTION: Final rule.
1. Overdraft service. The description of the
institution’s overdraft service should indicate
that the consumer has the right to
affirmatively consent, or opt into payment of
overdrafts for ATM and one-time debit card
transactions. The description should also
disclose the institution’s policies regarding
the payment of overdrafts for other
transactions, including checks, ACH
transactions, and automatic bill payments,
provided that this content is not more
prominent than the description of the
consumer’s right to opt into payment of
overdrafts for ATM and one-time debit card
transactions. As applicable, the institution
also should indicate that it pays overdrafts at
its discretion, and should briefly explain that
if the institution does not authorize and pay
an overdraft, it may decline the transaction.
2. Maximum fee. If the amount of a fee may
vary from transaction to transaction, the
financial institution may indicate that the
consumer may be assessed a fee ‘‘up to’’ the
maximum fee. The financial institution must
disclose all applicable overdraft fees,
including but not limited to:
i. Per item or per transaction fees;
ii. Daily overdraft fees;
iii. Sustained overdraft fees, where fees are
assessed when the consumer has not repaid
the amount of the overdraft after some period
of time (for example, if an account remains
overdrawn for five or more business days); or
iv. Negative balance fees.
17(f) Continuing Right To Opt-In or To
Revoke the Opt-In
1. Fees or charges for overdrafts incurred
prior to revocation. Section 205.17(f)(1)
provides that a consumer may revoke his or
her prior consent at any time. If a consumer
does so, this provision 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.
17(g) Duration of Opt-In.
1. Termination of overdraft service. A
financial institution may, for example,
terminate the overdraft service when the
consumer makes excessive use of the service.
*
*
*
*
*
By order of the Board of Governors of the
Federal Reserve System, November 10, 2009.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E9–27474 Filed 11–16–09; 8:45 am]
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12 CFR Part 327
RIN 3064–AD51
Prepaid Assessments
SUMMARY: The FDIC is amending its
regulations requiring insured
institutions to prepay their estimated
quarterly risk-based assessments for the
fourth quarter of 2009, and for all of
2010, 2011, and 2012. The prepaid
assessment for these periods will be
collected on December 30, 2009, along
with each institution’s regular quarterly
risk-based deposit insurance assessment
for the third quarter of 2009. For
purposes of estimating an institution’s
assessments for the fourth quarter of
2009, and for all of 2010, 2011, and
2012, and calculating the amount that
an institution will prepay on December
30, 2009, the institution’s assessment
rate will be its total base assessment rate
in effect on September 30, 2009.1 On
September 29, 2009, the FDIC increased
annual assessment rates uniformly by 3
basis points beginning in 2011.2 As a
result, an institution’s total base
assessment rate for purposes of
estimating an institution’s assessment
for 2011 and 2012 will be increased by
an annualized 3 basis points beginning
in 2011. Again for purposes of
calculating the amount that an
institution will prepay on December 30,
2009, an institution’s third quarter 2009
assessment base will be increased
quarterly at a 5 percent annual growth
rate through the end of 2012. The FDIC
will begin to draw down an institution’s
prepaid assessments on March 30, 2010,
representing payment for the regular
quarterly risk-based assessment for the
fourth quarter of 2009.
DATES: Effective Date: November 17,
2009.
FOR FURTHER INFORMATION CONTACT:
Robert C. Oshinsky, Senior Financial
Economist, Division of Insurance and
Research, (202) 898–3813; Donna
Saulnier, Manager, Assessment Policy
Section, Division of Finance (703) 562–
1 An institution’s risk-based assessment rate may
change during a quarter when a new CAMELS
rating is transmitted, or a new long-term debt-issuer
rating is assigned. 12 CFR 327.4(f). For purposes of
calculating an institution’s prepaid assessment, the
FDIC will use the institution’s CAMELS ratings and,
where applicable, long-term debt-issuer ratings, and
the resulting assessment rate in effect on September
30, 2009.
2 74 FR 51063 (Oct. 2, 2009).
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Agencies
[Federal Register Volume 74, Number 220 (Tuesday, November 17, 2009)]
[Rules and Regulations]
[Pages 59033-59056]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-27474]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
week.
========================================================================
Federal Register / Vol. 74, No. 220 / Tuesday, November 17, 2009 /
Rules and Regulations
[[Page 59033]]
FEDERAL RESERVE SYSTEM
12 CFR Part 205
[Regulation E; Docket No. R-1343]
Electronic Fund Transfers
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule; official staff commentary.
-----------------------------------------------------------------------
SUMMARY: The Board is amending Regulation E, which implements the
Electronic Fund Transfer Act, and the official staff commentary to the
regulation, which interprets the requirements of Regulation E. The
final rule limits the ability of a financial institution to assess an
overdraft fee for paying automated teller machine (ATM) and one-time
debit card transactions that overdraw a consumer's account, unless the
consumer affirmatively consents, or opts in, to the institution's
payment of overdrafts for these transactions.
DATES: The rule is effective January 19, 2010, with a mandatory
compliance date of July 1, 2010.
FOR FURTHER INFORMATION CONTACT: Dana Miller, Attorney, Ky Tran-Trong,
Counsel, or Vivian Wong, Senior Attorney, Division of Consumer and
Community Affairs, Board of Governors of the Federal Reserve System,
Washington, DC 20551, at (202) 452-2412 or (202) 452-3667. For users of
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.
SUPPLEMENTARY INFORMATION:
I. Statutory Background
The Electronic Fund Transfer Act (15 U.S.C. 1693 et seq.) (EFTA or
Act), enacted in 1978, provides a basic framework establishing the
rights, liabilities, and responsibilities of participants in electronic
fund transfer (EFT) systems. The EFTA is implemented by the Board's
Regulation E (12 CFR part 205). Examples of the types of transactions
covered by the Act and regulation include transfers initiated through
an ATM, point-of-sale (POS) terminal, automated clearinghouse (ACH),
telephone bill-payment plan, or remote banking service. The Act and
regulation provide for the disclosure of terms and conditions of an EFT
service; documentation of EFTs by means of terminal receipts and
periodic statements; limitations on consumer liability for unauthorized
transfers; procedures for error resolution; certain rights related to
preauthorized EFTs; and restrictions on the unsolicited issuance of
access devices.
The official staff commentary (12 CFR part 205 (Supp. I))
interprets the requirements of Regulation E to facilitate compliance
and provides protection from liability under Sections 915 and 916 of
the EFTA for financial institutions and other persons subject to the
Act who act in conformity with the Board's official interpretations. 15
U.S.C. 1693m(d)(1). The commentary is updated periodically to address
significant questions that arise.
II. Background on Overdraft Services
Historical Overview of Overdraft Services
Historically, if a consumer tried to make a payment using a check
that would overdraw his or her deposit account, the consumer's
financial institution used its discretion on an ad hoc basis to
determine whether to pay the overdraft. If an overdraft was paid, the
institution usually imposed a fee on the consumer's account. In recent
years, many institutions have automated the overdraft payment process,
which reduces costs and ensures consistent treatment of consumers.\1\
Automation is used to apply specific criteria for determining whether
to honor overdrafts and to set limits on the amount of coverage
provided.
---------------------------------------------------------------------------
\1\ According to the FDIC's Study of Bank Overdraft Programs,
nearly 70 percent of banks surveyed implemented their automated
overdraft program after 2001. See FDIC Study of Bank Overdraft
Programs at 8 (November 2008) (FDIC Study) (available at: https://www.fdic.gov/bank/analytical/overdraft/FDIC138_Report_FinalTOC.pdf). ATM and POS overdrafts arose from automated overdraft
programs.
---------------------------------------------------------------------------
Overdraft services vary among institutions but often share certain
common characteristics. In most cases, consumers that meet a depository
institution's criteria are automatically enrolled in overdraft
services. While institutions generally do not underwrite on an
individual account basis when enrolling the consumer in an overdraft
service, most institutions review individual accounts periodically to
determine whether the consumer continues to qualify for the service and
the amount of overdraft coverage provided. Most institutions disclose
that the payment of overdrafts is discretionary, and that the
institution has no legal obligation to pay any overdraft. Many
institutions offer their customers alternative overdraft protection
plans, such as a link to a savings account or an overdraft line of
credit. These programs, for which the consumer must qualify and enroll,
are distinguishable from the financial institution's overdraft service.
In the past, institutions generally provided overdraft coverage
only for check transactions. In recent years, however, the service has
been extended to cover overdrafts resulting from non-check
transactions, including ATM withdrawals, debit card transactions at
POS, on-line transactions, preauthorized transfers, and ACH
transactions.\2\ Generally, institutions charge a flat fee each time an
overdraft is paid, although some larger institutions have a tiered fee
structure and charge higher fees as the number of overdrafts increases.
Institutions commonly charge the same amount for paying check and ACH
overdrafts as they would if they returned the item unpaid. Some
institutions also impose a fee for each day the account remains
overdrawn.
---------------------------------------------------------------------------
\2\ Eighty-one percent of banks surveyed that operate automated
overdraft programs now allow overdrafts to be paid at ATMs and POS
debit card terminals. See FDIC Study at 10.
---------------------------------------------------------------------------
According to a recent report from the Government Accountability
Office (GAO), the average cost of overdraft and insufficient funds fees
was just over $26 per item in 2007.\3\ The GAO also
[[Page 59034]]
reported that large institutions on average charged between $4 and $5
more for overdraft and insufficient fund fees compared to smaller
institutions.\4\
---------------------------------------------------------------------------
\3\ See Bank Fees: Federal Banking Regulators Could Better
Ensure That Consumers Have Required Disclosure Documents Prior to
Opening Checking or Savings Accounts, GAO Report 08-281, at 14
(January 2008) (GAO Report). See also ``Consumer Overdraft Fees
Increase During Recession: First-Time Phenomenon,'' Press release,
Moebs $ervices (July 15, 2009) (Moebs 2009 Pricing Survey Press
Release) (available at: https://www.moebs.com/AboutUs/Pressreleases/tabid/58/ctl/Details/mid/380/ItemID/65/Default.aspx) (reporting an
average overdraft fee of $26).
\4\ See GAO Bank Fees Report at 16. Another recent survey
suggests that the cost difference in overdraft fees between small
and large institutions may be larger than reported by the GAO,
however. See Moebs 2009 Pricing Survey Press Release (reporting that
banks with more than $50 billion in assets charged on average $35
per overdrawn check compared to $26 for all institutions).
---------------------------------------------------------------------------
Industry and Consumer Advocate Perspectives
From the industry's perspective, automated overdraft services
enable institutions to reduce the cost of manually reviewing individual
items, and also ensure that all consumers are treated consistently with
respect to overdraft payment decisions. Industry representatives
observe that overdraft services provide access to funds in urgent
situations and prevent embarrassment and inconvenience at the point-of-
sale.\5\ Some industry representatives have indicated that a majority
of debit transactions that are authorized into overdraft later settle
into good funds, without fees being assessed on the consumer's account.
---------------------------------------------------------------------------
\5\ See ABA Survey: More Consumers Avoid Overdraft Fees, Press
Release, American Bankers Association (Sept. 9, 2009) (ABA Survey)
(available at: https://www.aba.com/Pressrss/090909ConsumerSurveyOverdraftFees.htm) (reporting survey results
indicating that of those consumers who had paid an overdraft fee in
the past 12 months, 96 percent wanted the payment covered).
---------------------------------------------------------------------------
In contrast, consumer advocates assert that overdraft transactions
are a high-cost form of lending that trap low- and moderate-income
consumers into paying high fees. Consumer advocates also state that
consumers are often enrolled in overdraft services automatically
without their consent. In addition, consumer advocates believe that by
honoring overdrafts, institutions encourage consumer reliance on the
service and therefore, consumers incur greater costs in the long run
than they would if the transactions were not honored. Consumer
advocates have noted, for example, that historically, institutions
declined a consumer's request for an ATM withdrawal or debit card
transaction if the consumer did not have sufficient funds in his or her
account. Today, however, institutions are more likely to cover those
overdrafts and assess a fee on the consumer's account for doing so.
According to consumer advocates, this practice can be particularly
costly in connection with debit card overdrafts because the dollar
amount of the fee is likely to considerably exceed the dollar amount of
the overdraft.\6\ In addition, multiple fees may be assessed in a
single day for a series of small-dollar transactions. Because of these
costs, consumer advocates contend that most consumers would prefer that
their bank decline ATM or debit card transactions if the transactions
would overdraw their account.\7\
---------------------------------------------------------------------------
\6\ See, e.g., Overdraft Protection: Fair Practices for
Consumers: Hearing before the House Subcomm. on Financial
Institutions and Consumer Credit, House Comm. on Financial Services,
110th Cong., at 72 (2007) (Overdraft Protection Hearing) (available
at: https://www.house.gov/apps/list/hearing/financialsvcs_dem/hr0705072.shtml) (testimony noting that as recently as 2004, 80
percent of banks still declined ATM and debit card transactions
without charging a fee when account holders did not have sufficient
funds in their account).
\7\ See Leslie Parrish, Consumers Want Informed Choice on
Overdraft Fees and Banking Options, Ctr. for Responsible Lending
(April 16, 2008) (available at: https://www.responsiblelending.org/overdraft-loans/research-analysis/final-caravan-survey-4-16-08.pdf)
(reporting the results of a survey indicating that 80 percent of
consumers would prefer that a debit card transaction be declined if
a $5 purchase would result in an overdraft and an accompanying $34
fee); Consumers Union, Financial Regulation Poll (February 13, 2009)
(Consumers Union Poll) (available at: https://www.federalreserve.gov/SECRS/2009/March/20090317/R-1343/R-1343_031209_12532_455058226232_1.pdf) (65% of consumers would prefer that an ATM or
debit card transaction be denied if it would result in an
overdraft).
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Previous Agency Actions
In February 2005, the Board, along with the other federal banking
agencies, issued guidance on overdraft protection programs in response
to the increased availability and customer use of overdraft protection
services (Joint Guidance).\8\ The Joint Guidance addresses three
primary areas--safety and soundness considerations, legal risks, and
best practices.\9\ The best practices described in the Joint Guidance
address the marketing and communications that accompany the offering of
overdraft services, as well as the disclosure and operation of program
features, including the provision of consumer choice to opt out of the
overdraft service.
---------------------------------------------------------------------------
\8\ See Interagency Guidance on Overdraft Protection Programs,
70 FR 9127, Feb. 24, 2005.
\9\ The Office of Thrift Supervision (OTS) issued separate
guidance that focuses on safety and soundness considerations and
best practices. OTS Guidance on Overdraft Protection Programs, 70 FR
8428, Feb. 18, 2005.
---------------------------------------------------------------------------
In May 2005, the Board revised Regulation DD and the staff
commentary pursuant to its authority under the Truth in Savings Act
(TISA) to provide uniformity and improve the adequacy of disclosures
provided to consumers about overdraft and returned-item fees.\10\ The
2005 Regulation DD revisions also addressed concerns about
institutions' marketing of overdraft services.
---------------------------------------------------------------------------
\10\ 70 FR 29582, May 24, 2005.
---------------------------------------------------------------------------
May 2008 FTC Act and Regulation DD Proposals; January 2009 Regulation
DD Final Rule
In May 2008, the Board, along with the OTS and the NCUA
(collectively, the Agencies), proposed to exercise their authority
under the Federal Trade Commission Act (FTC Act) to prohibit
institutions from assessing any fees on a consumer's account in
connection with an overdraft service, unless the consumer was given
notice and the right to opt out of the service, and the consumer did
not opt out.\11\ The proposed opt-out right would have applied to
overdrafts resulting from all methods of payment, including checks, ACH
transactions, ATM withdrawals, recurring payments, and POS debit card
transactions. The proposed rule was intended to ensure that consumers
understand overdraft services and have the choice to avoid the
associated costs where such services do not meet their needs.
---------------------------------------------------------------------------
\11\ 73 FR 28904, May 19, 2008
---------------------------------------------------------------------------
The Board concurrently issued a proposal under Regulation DD (Truth
in Savings), which set forth requirements on the delivery of the opt-
out notice, as well as a model opt-out form.\12\ The Regulation DD
proposal required all institutions to provide aggregate totals for
overdraft fees and for returned item fees for the periodic statement
period and the year-to-date. The Regulation DD proposal also addressed
account balance disclosures provided to consumers through automated
systems, such as ATMs and on-line banking services. In January 2009,
the Board published the revisions to Regulation DD in final form
addressing the aggregate fee and balance disclosures, with an effective
date of January 1, 2010.\13\
---------------------------------------------------------------------------
\12\ 73 FR 28730, May 19, 2008.
\13\ 74 FR 5584, January 29, 2009.
---------------------------------------------------------------------------
Based on the Board's review of comments received with respect to
the 2008 FTC Act and Regulation DD proposals, the results of consumer
testing, and its own analysis, the Board concluded that concerns about
consumer choice regarding overdraft services should be addressed under
the EFTA and Regulation E. First, participants in consumer testing
indicated that they would prefer to have their checks paid into
overdraft, because those transactions represented important bills. In
contrast, consumer testing indicated that many participants would
prefer to have ATM withdrawals and debit card transactions declined if
[[Page 59035]]
they had insufficient funds, rather than incur an overdraft fee,
because those transactions tend to be more discretionary in nature.
Second, a consumer will generally be charged the same fee by the
financial institution whether or not a check is paid; yet, if the
institution covers an overdrawn check, the consumer may avoid other
adverse consequences, such as the imposition of additional merchant
returned item fees.\14\ For ATM and one-time debit card transactions,
however, if the transaction is declined because the consumer's account
contains insufficient funds, the consumer would not incur any merchant
returned item fees and would avoid any fees assessed by the financial
institution.
---------------------------------------------------------------------------
\14\ According to one survey, the average merchant fee for a
returned check is $25. See ``National Survey Reveals Retail
Merchants' Bad-Check Fees Double Consumer Penalties for
Overdrafts,'' Press release, Moebs $ervices (July 28, 2009)
(available at: https://www.moebs.com/AboutUs/Pressreleases/tabid/58/ctl/Details/mid/380/ItemID/66/Default.aspx). See also FDIC Study at
16 n.18.
---------------------------------------------------------------------------
Third, consumer testing indicated that many consumers are unaware
that they can incur overdrafts at the ATM or at POS, and that they
believe instead that their transactions will be declined.\15\
Consequently, consumers may overdraw their accounts based on the
erroneous belief that a transaction would be paid only if the consumer
has sufficient funds in the account to cover it.
---------------------------------------------------------------------------
\15\ See also Consumers Union Poll at 9 (48% of consumers polled
incorrectly thought ATM transaction would be declined if they
attempted to overdraw).
---------------------------------------------------------------------------
Finally, the Board believed it was appropriate to focus the
proposal on ATM and one-time debit card transactions because these
transactions have been a key driver behind the growth in the volume and
cost of overdraft fees--particularly POS/debit overdraft transactions,
which according to one study accounted for 41% of surveyed
institutions' insufficient funds transactions.\16\ With respect to
debit card transactions in particular, the amount of fees assessed may
substantially exceed the amount overdrawn.\17\ Given the costs
associated with overdraft services in these circumstances, consumers
may prefer to have these transactions declined.
---------------------------------------------------------------------------
\16\ FDIC Study at 78-79.
\17\ See Overdraft Protection Hearing at 72 (stating that
consumers pay $1.94 in fees for every one dollar borrowed to cover a
debit card POS overdraft).
---------------------------------------------------------------------------
Accordingly, the Board published a revised proposal in January 2009
to amend Regulation E and the official staff commentary accompanying
the regulation.\18\
---------------------------------------------------------------------------
\18\ 74 FR 5212, January 29, 2009.
---------------------------------------------------------------------------
III. The Board's Proposed Revisions to Regulation E
Summary of Proposal
The January 2009 Regulation E proposal was intended to assist
consumers in understanding how overdraft services provided by their
institutions operate and to ensure that consumers have the opportunity
to limit the overdraft costs associated with ATM and one-time debit
card transactions where such services do not meet their needs.\19\ The
proposal established a consumer's right to opt out of, or into, an
institution's payment of overdrafts with respect to ATM withdrawals and
one-time debit card transactions. The proposal also addressed debit
holds placed by an institution on a consumer's funds in an amount
exceeding the actual transaction amount.
---------------------------------------------------------------------------
\19\ Id.
---------------------------------------------------------------------------
The Board proposed two alternative approaches for giving consumers
a choice regarding an institution's payment of overdrafts for ATM and
one-time debit card transactions. The first approach would prohibit
account-holding financial institutions from assessing overdraft fees or
charges on a consumer's account for paying an overdraft on an ATM
withdrawal or one-time debit card transaction (whether at POS, on-line
or by telephone), unless the consumer is given notice and a reasonable
opportunity to opt out of the institution's overdraft service in
connection with those transactions, and the consumer does not opt out.
Under this approach, the opt-out notice would be provided to the
consumer at account opening (or any time before any overdraft fees are
assessed) and again in each periodic statement cycle in which the
institution assesses a fee or charge to the consumer's account for
paying an overdraft.
The second approach would prohibit an account-holding financial
institution from assessing any fees on a consumer's account for paying
an ATM withdrawal or one-time debit card transaction that overdraws the
account, unless the consumer is provided notice and a reasonable
opportunity to opt in, or affirmatively consent, to the service, and
the consumer opts in. Under this approach, opt-in notices would not
have to be provided again to consumers who opt in when the financial
institution pays overdrafts on these transactions and assesses a fee on
the consumer's account. The proposed opt-in rule would apply to all
consumers, including accounts existing prior to the mandatory
compliance date. However, the Board solicited comment on a hybrid
approach that would apply an opt-out to existing accounts and an opt-in
to accounts opened on or after the mandatory compliance date.
The proposal provided two alternatives for implementing the
consumer's choice for both the opt-out and opt-in approaches. Under one
alternative, the proposal would require an institution to provide
consumers who do not opt in an account that has the same terms,
conditions, or features that are provided to consumers who elect to
have overdraft coverage for ATM withdrawals and one-time debit card
transactions, except for features that limit the institution's payment
of such overdrafts. Under the second alternative, institutions could
vary the terms, conditions, or features of the account that does not
permit the payment of ATM and one-time debit card overdrafts, provided
that the differences are not so substantial that they would discourage
a reasonable consumer from exercising his or her right to opt out of
the payment of such overdrafts (or compel a reasonable consumer to opt
in).
Further, the Board proposed to permit, or alternatively to
prohibit, (1) conditioning the payment of checks, ACH transactions, or
other types of transactions that overdraw the consumer's account on the
consumer not opting out of (or opting into) the institution's overdraft
service with respect to ATM and one-time debit card transactions, or
(2) declining to pay checks, ACH transactions, or other types of
transactions that overdraw the consumer's account because the consumer
has opted out of (or not opted into) the institution's overdraft
service for ATM and one-time debit card transactions. To facilitate
compliance, the proposal provided model forms that institutions could
use to satisfy their disclosure obligations.
The Board also proposed to prohibit institutions from assessing an
overdraft fee where the overdraft would not have occurred but for a
debit hold placed on funds in an amount that exceeds the actual
transaction amount and where the merchant can determine the actual
transaction amount within a short period of time after authorization of
the transaction.
Overview of Public Comments
The Board received over 20,700 comment letters on the proposal,
including approximately 16,000 form letters. The majority of the
comment letters were submitted by individual consumers. The remaining
comment letters were submitted by banks, savings
[[Page 59036]]
associations, credit unions, industry trade associations, industry
processors and vendors, consumer advocates, members of Congress, other
federal banking agencies, state and local governments and regulators,
and others. Many commenters reiterated comments made in response to the
2008 FTC Act proposal.\20\
---------------------------------------------------------------------------
\20\ 74 FR at 5214.
---------------------------------------------------------------------------
Some consumer advocates, federal and state regulators, and others
generally expressed support for the more narrowly tailored approach
under Regulation E. However, some other consumer advocates urged the
Board to reconsider using its authority under the FTC Act to provide,
at a minimum, the right to opt out of the payment of overdrafts with
respect to checks, ACH, and recurring debit card transactions.
Industry commenters generally supported the Board's decision to
issue a proposal under Regulation E, rather than pursuant to the FTC
Act. Many industry commenters argued that consumers derive substantial
benefits from overdraft services, and expressed concern about the
operational feasibility of limiting the opt-out, or opt-in, right only
to overdrafts paid in connection with ATM withdrawals and one-time
debit card transactions.
In response to the proposed opt-out and opt-in alternatives,
consumer advocates, members of Congress, federal and state regulators,
and the overwhelming majority of individual consumers who commented
urged the Board to adopt the proposed opt-in approach. These commenters
argued that the harm to consumers from overdraft fees outweigh any
benefits. Further, these commenters maintained that most consumers
would prefer to have an ATM or one-time debit card transaction
declined, rather than trigger one or more overdraft fees. These
commenters also stated that an opt-in should apply to all account
holders.
In contrast, the majority of industry commenters favored the
proposed opt-out approach. These commenters maintained that an opt-out
regime would more effectively provide consumers the benefits of
overdraft services while causing fewer disruptions to consumers and
other participants in the banking system. Further, these commenters
argued that any opt-in requirement should apply only to new accounts.
Consumer advocates and federal and state banking regulators
supported the proposed prohibition on conditioning the payment of
overdrafts for checks, ACH transactions, or other types of transactions
on the consumer also affirmatively consenting to the institution's
payment of overdrafts for ATM withdrawals and one-time debit card
transactions. These commenters stated that consumers would otherwise
feel compelled to opt into the institution's overdraft service in order
to have check and ACH overdrafts paid. For similar reasons, these
commenters argued that institutions should be required to provide
consumers who do not opt into the institution's overdraft service for
ATM and one-time debit card transactions an account with identical
terms, conditions and features as an account provided to consumers who
do opt in. In contrast, industry commenters supported the alternative
permitting conditioning the opt-in, because it would be costly to
implement a system that pays overdrafts for certain types of
transactions but not others. These commenters also urged the Board to
permit institutions to vary the account terms, conditions, and features
for consumers who do not opt in.
Consumer group commenters stated that the Board should not provide
any exceptions to the prohibition on fees, even if overdrafts are
inadvertently paid due to delays in transaction processing and
settlement. Industry commenters, on the contrary, supported the
proposed exceptions. Many industry commenters urged the Board to
provide for additional exceptions for transactions for which
authorization is not requested at the time of the transaction.
Consumer Testing
Following the January 2009 proposal, the Board engaged a testing
consultant, Macro International, Inc. (Macro), to revise and test the
proposed model opt-out notice and the newly proposed opt-in notice.
Four additional rounds of interviews were conducted with a diverse
group of consumers between May and September 2009. Testing was
conducted at various locations across the United States. The findings
from each round of interviews were incorporated in revisions to the
model forms for the following round of testing.
In general, after reviewing the model disclosures, testing
participants understood the concept of overdraft coverage, and that
they would be charged fees if their institution paid their overdrafts.
Consistent with previous testing efforts undertaken in connection with
the 2008 FTC Act proposal, participants generally indicated that they
would want their checks paid into overdraft. The majority of
participants also indicated that they would prefer an opt-in over an
opt-out even if they would choose to have ATM and one-time debit card
transactions paid.\21\
---------------------------------------------------------------------------
\21\ See Design and Testing of Overdraft Notices: Phase Two,
Macro International, October 12, 2009.
---------------------------------------------------------------------------
IV. Summary of Final Rule
The Board is adopting a final rule under Regulation E and the
official staff commentary to assist consumers in understanding how
overdraft services provided by their institutions operate. The rule
gives consumers the opportunity to limit the overdraft costs associated
with ATM and one-time debit card transactions, where such services do
not meet their needs. The following is a summary of the final rule and
related commentary provisions. The revisions are discussed in greater
detail in the section-by-section analysis below.
Opt-In Approach
The final rule requires institutions to provide consumers with the
right to opt in, or affirmatively consent, to the institution's
overdraft service for ATM and one-time debit card transactions. Under
the final rule, notice of the opt-in right must be provided, and the
consumer's affirmative consent obtained, before fees or charges may be
assessed on the consumer's account for paying such overdrafts. The opt-
in requirement applies to both existing and new accounts. Based on
comments received and consumer testing efforts, the final rule adopts a
revised model form that institutions may use to satisfy the notice
requirement.
The final rule also prohibits institutions from conditioning the
payment of overdrafts for checks, ACH transactions, or other types of
transactions on the consumer also affirmatively consenting to the
institution's payment of overdrafts for ATM and one-time debit card
transactions. Institutions are also prohibited from declining to pay
check, ACH transactions, or other types of transactions that overdraw
the consumer's account because the consumer has not opted into the
institution's overdraft service for ATM and one-time debit card
transactions. For consumers who do not affirmatively consent to the
institution's overdraft service for ATM and one-time debit card
transactions, the final rule requires institutions to provide those
consumers with the same account terms, conditions, and features that
they provide to consumers who do affirmatively consent, except for the
overdraft service for ATM and one-time debit card transactions.
The final rule does not adopt the proposed exception to the fee
[[Page 59037]]
prohibition for transactions authorized on an institution's reasonable
belief that the consumer's account has sufficient funds to cover the
transaction. The final rule also does not adopt the proposed exception
for transactions where a merchant or other payee presents a debit card
transaction by paper-based means, rather than electronically using a
card terminal, and the institution has not previously authorized the
transaction.
Debit Holds
The Board is not adopting the proposed provisions on debit holds.
The proposal put the obligation on financial institutions to address
concerns about overdrafts caused by debit holds. However, upon further
consideration, the Board believes that a more comprehensive approach
that involves financial institutions, card networks, and merchants may
be required to effectively address these problems. The Board will
continue to monitor developments with respect to debit holds and assess
whether to take further action.
V. Legal Authority
The Board is adopting the final rule pursuant to its authority
under Sections 904(a) and 904(c) of the EFTA (15 U.S.C. 1693b). Section
904(a) of the EFTA authorizes the Board to prescribe regulations
necessary to carry out the purposes of the title. The express purposes
of the EFTA are to establish ``the rights, liabilities, and
responsibilities of participants in electronic fund transfer systems''
and to provide ``individual consumer rights.'' See EFTA Section 902(b);
15 U.S.C. 1693. In addition, Section 904(c) of the EFTA provides that
regulations prescribed by the Board may contain any classifications,
differentiations, or other provisions, and may provide for such
adjustments or exceptions for any class of electronic fund transfers,
that the Board deems necessary or proper to effectuate the purposes of
the title, to prevent circumvention or evasion, or to facilitate
compliance.
The legislative history of the EFTA makes clear that the Board has
broad regulatory authority. According to the Senate Report, regulations
are ``essential to the act's effectiveness'' and ``[permit] the Board
to modify the act's requirements to suit the characteristics of
individual EFT services. Moreover, since no one can foresee EFT
developments in the future, regulations would keep pace with new
services and assure that the act's basic protections continue to
apply.'' \22\
---------------------------------------------------------------------------
\22\ S. Rep. No. 95-1273, 95th Cong., 2d Sess., at 26 (Oct. 4,
1978).
---------------------------------------------------------------------------
The final opt-in rule is intended to carry out the express purposes
of the EFTA by: (a) Establishing notice requirements to help consumers
better understand the cost of overdraft services for certain EFTs; and
(b) providing consumers with a choice as to whether they want overdraft
services for ATM and one-time debit card transactions in light of the
costs associated with those services. The final opt-in rule's
prohibition on conditioning the opt-in and limitations on how the opt-
in may be implemented have been designed to prevent circumvention or
evasion of the requirement to provide the consumer with meaningful
choice regarding overdraft services. The final rule does not require
financial institutions to pay overdrafts on checks, and does permit
them to offer consumers a choice regarding overdraft services for
checks.
The disclosures implementing the opt-in requirement are issued
pursuant to the Board's authority under Sections 904(b) and 905 of the
EFTA. 15 U.S.C. 1693b(b) and 1693c.
VI. Section-by-Section Analysis
Section 205.12 Relation to Other Laws
Section 205.12(a) explains the relationship between Regulation E
and Regulation Z when an access device permits a consumer to obtain an
extension of credit incident to an EFT. In general, Regulation E
governs the issuance of access devices and the addition of an EFT
service to an accepted credit card, and Regulation Z governs the
issuance of a combined credit card and access device and the addition
of a credit feature to an accepted credit card. See Sec. 205.12(a).
The final rule is adopted substantially as proposed to clarify that
both the issuance of an access device with an overdraft service and the
addition of an overdraft service to an accepted access device are
governed by Regulation E.
Currently, Sec. 205.12(a)(1)(ii) states that the EFTA and
Regulation E govern the ``issuance of an access device that permits
credit extensions (under a preexisting agreement between a consumer and
a financial institution) only when the consumer's account is overdrawn
or to maintain a specified minimum balance in the consumer's account.''
As the Board stated in the original March 1979 final rule, this
provision (originally in Sec. 205.4(c)) was intended to clarify that
Regulation E, rather than Regulation Z, applies to the issuance of
``access devices that are also credit cards solely by virtue of their
capacity to access an existing overdraft credit line attached to the
consumer's account.'' 61 FR 18468, 18472, March 28, 1979.
When the rule was originally adopted, the primary means of covering
overdrafts incurred in connection with EFTs was through an overdraft
line of credit linked to a debit card or other access device. Today,
however, consumers are more likely to have these overdrafts covered by
their institution's overdraft service, rather than by a separate
overdraft line of credit. Commenters generally agreed with the proposed
rule and commentary. Some consumer advocates, however, argued that
overdraft services should be subject to TILA and Regulation Z.
In the final rule, the Board is amending Sec. 205.12(a)(1)(ii)
substantially as proposed, with non-substantive edits for clarity, to
provide that Regulation E governs the issuance of an access device that
permits extensions of funds under an overdraft service (as defined
below under Sec. 205.17). New Sec. 205.12(a)(1)(iii) provides that
Regulation E also covers the addition of an overdraft service to a
previously accepted access device. See also comment 12(a)-2. Comment
12(a)-3 clarifies that the addition of an overdraft service to an
accepted access device does not constitute the addition of a credit
feature under Regulation Z.
In addition, the Board is amending Sec. 205.12(a)(1)(i) as
proposed, to conform the regulation to reflect the January 2009
redesignation of the definition of the term ``accepted credit card''
under Regulation Z. See 12 CFR 226.12, comment 226.12-2. Finally,
current Sec. 205.12(a)(1)(iii), which provides that Regulation E's
liability limits and error resolution rules also apply to extensions of
credit under an overdraft line of credit, is redesignated as Sec.
205.12(a)(1)(iv) and revised, as proposed, to include a reference to
overdraft services.
Section 205.17 Requirements for Overdraft Services
To ensure consumers are given a meaningful choice regarding
overdraft services, Sec. 205.17 requires institutions to provide
consumers with the right to opt in, or affirmatively consent, to the
institution's overdraft service for ATM and one-time debit card
transactions. Under the final rule, notice of the opt-in right must be
provided, and the consumer's affirmative consent obtained, before fees
or charges may be assessed on the consumer's account for paying such
overdrafts. The final rule also prescribes how the consumer's opt-in
choice must be implemented. The
[[Page 59038]]
opt-in requirement applies to all consumers, including account holders
who opened accounts prior to the mandatory compliance date of July 1,
2010.
Background
Consumers are often enrolled in overdraft services automatically
without their consent. Thus, in the February 2005 Joint Guidance on
overdraft protection services, the Board and the other federal banking
agencies recommended as a best practice that institutions obtain a
consumer's affirmative consent to receive overdraft protection.
Alternatively, the Joint Guidance stated that where overdraft
protection is provided automatically, institutions should provide
consumers the opportunity to opt out of the overdraft program and
provide consumers with a clear disclosure of this option.\23\
---------------------------------------------------------------------------
\23\ 70 FR at 9132. The OTS made similar recommendations in its
separate guidance. See 70 FR at 8431.
---------------------------------------------------------------------------
Although many institutions provide consumers the right to opt out
of overdraft services, this practice is not uniform across all
institutions.\24\ Even where an opt-out right is provided, institutions
may not clearly disclose this right to consumers, or may make it
difficult for consumers to exercise this right. For example, some
institutions may disclose the opt-out right in a clause in their
deposit agreement, which many consumers may not notice or may not
consider relevant because they do not expect to overdraw their
accounts. In other cases, the opt-out provisions may not be written in
clearly understandable language.
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\24\ According to the FDIC's Study of Bank Overdraft Programs,
75.1% of institutions surveyed permit consumers to opt out of their
automated overdraft program, while 11.1% of institutions require
consumers to opt in. According to the FDIC, banks that do not
promote automated programs were less likely to give consumers either
the option to opt in or to opt out of the automated overdraft
program. See FDIC Study at 27. See also Moebs 2009 Pricing Survey
Press Release (reporting that 86% of institutions that offer
overdraft services allow the consumer to opt out).
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In the January 2009 Regulation E proposal, the Board proposed to
provide consumers with the right to opt out of, or in the alternative,
opt into the payment of overdrafts with respect to their ATM
withdrawals and one-time debit card transactions. The Board proposed to
apply the new rules to both existing and new accounts, but solicited
comment on a hybrid approach which would permit institutions to offer
an opt-out to existing accounts.
Consumer advocates, members of Congress, federal and state
regulators, and the overwhelming majority of individual consumers who
commented urged the Board to adopt the proposed opt-in alternative that
would require institutions to obtain a consumer's affirmative consent
before fees could be charged for paying an overdraft. These commenters
argued that any benefit from permitting ATM and debit card overdrafts
to be paid without prior consumer consent was far outweighed by the
harm to consumers stemming from overdraft fees, which may be
significantly higher than the transactions causing the overdraft.
Further, these commenters maintained that most consumers would prefer
to have an ATM or one-time debit card transaction declined rather than
pay one or more overdraft fees.
In contrast, the majority of industry commenters favored the
proposed opt-out approach. These commenters contended that an opt-out
regime would provide consumers the benefits of overdraft services while
causing fewer disruptions to consumers and other participants in the
banking system. Industry commenters also remained concerned about the
operational feasibility and costs of an opt-in. For the following
reasons, the Board adopts an opt-in approach in the final rule.
Discussion
Due to various factors such as consumer inertia and the difficulty
in anticipating future costs, consumers may end up with suboptimal
outcomes even when given a choice. As some studies have suggested,
consumers are likely to adhere to the established default rule, that
is, the outcome that would apply if the consumer takes no action.\25\
Under an opt-out rule, consumers would default to having their
financial institution's automatic overdraft coverage, resulting in some
consumers incurring overdraft fees even if their preferred course would
be for ATM and debit card transactions to be declined. The opposite
would be true with an opt-in rule. Specifically, consumers could avoid
fees for a service they did not request.
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\25\ See, e.g., Brigette Madrian and Dennis Shea, ``The Power of
Suggestion: Inertia in 401(k) Participation and Savings Behavior,''
116 Quarterly Journal of Economics 1149 (2001); Gabriel D. Carroll,
James J. Choi et al., ``Optimal Defaults and Active Decisions,''
Quarterly Journal of Economics (forthcoming November 2009) (both
studies of automatic enrollment in 401(k) savings plans indicating a
significant increase in employee participation if the default rule
provides that a consumer is automatically enrolled in the plan
unless they opt out, instead of requiring employees to affirmatively
agree to participate in the plan).
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The Board believes that, on balance, an opt-in rule creates the
optimal result for consumers with respect to ATM and one-time debit
card transactions. First, the cost to consumers of overdraft fees
assessed in connection with ATM and debit card overdrafts is
significant.\26\ For one-time debit card transactions in particular,
the amount of the fee assessed may substantially exceed the amount
overdrawn.\27\ If the consumer incurs multiple debit card overdrafts in
one day, fees may accrue into the hundreds of dollars. Many consumers
may prefer such transactions not to be paid.
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\26\ According to the FDIC Study, the median dollar amount for
debit card transactions resulting in an overdraft is $20. See FDIC
Study at 78-79. This compares to the average cost of overdraft and
insufficient funds fees of over $26 per item in 2007, as reported by
the GAO Report. GAO Report at 14. See also FDIC Study at 15, 18
(reporting a median per item overdraft fee of $27 for banks
surveyed). The FDIC Study also reported that POS/debit overdraft
transactions accounted for the largest share of all surveyed
institutions' insufficient funds transactions (41.0%). FDIC Study at
78-79.
\27\ Eric Halperin, Lisa James and Peter Smith, Debit Card
Danger: Banks Offer Little Warning and Few Choices as Customers Pay
a High Price for Debit Card Overdrafts, Ctr. for Responsible Lending
at 8 (Jan. 25, 2007) (estimating that the median amount by which a
consumer overdraws his or her account for a debit card purchase is
$17, and that consumers pay $1.94 in fees for every one dollar
borrowed to cover a debit card POS overdraft).
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Second, an opt-in rule that is limited to ATM and one-time debit
card transactions may result in fewer adverse consequences for
consumers than a rule applicable to a broader range of transactions.
While a check or ACH transaction that is returned for insufficient
funds might cause the consumer to incur a merchant fee for the returned
item, in addition to an insufficient funds fee assessed by the
consumer's financial institution, a declined ATM or debit card
transaction does not result in any fees to the consumer.
Third, available research indicates that the large majority of
overdraft fees are paid by a small portion of consumers who frequently
overdraw their accounts.\28\ These consumers may have difficulty both
repaying overdraft fees and bringing their account current, which may
in turn cause them to incur additional overdraft fees. An opt-in
approach could therefore best prevent these consumers from entering
into a harmful cycle of repeated overdrafts.
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\28\ Seventy-five percent of consumers did not overdraw their
accounts at all during the survey year; consumers who overdrew their
accounts five or more times per year paid 93% of all overdraft fees.
See FDIC Study at iv.
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Fourth, many consumers may not be aware that they are able to
overdraft at an ATM or POS. Debit cards have been promoted as budgeting
tools, and a means for consumers to pay for goods and services without
incurring additional debt. Additionally, the ability
[[Page 59039]]
to overdraft at an ATM or POS is a relatively recent development.
Consequently, consumers may unintentionally overdraw their account
based on the erroneous belief that a transaction would be paid only if
the consumer has sufficient funds in the account to cover it. With an
opt-in approach, consumers who do not opt in will be less likely to
incur unanticipated overdraft fees.
Finally, the opt-in approach is consistent with consumer
preference, as indicated by the Board's consumer testing. Continued
consumer testing after the publication of the January 2009 proposal was
consistent with prior testing efforts, with many participants stating
that they would prefer to have ATM withdrawals and debit card
transactions declined if they had insufficient funds, rather than incur
an overdraft fee. Similarly, an overwhelming majority of consumer
commenters also expressed their preference for an opt-in approach.
The Board recognizes that, for some consumers, coverage of
occasional overdrafts and paying occasional overdraft fees may be
preferable to having transactions declined. Such consumers could be
precluded from completing important transactions when there are
insufficient funds in the consumer's account if the consumer has not
opted in and the consumer does not have another means of payment.
Some industry representatives commented that a majority of debit
card transactions authorized into overdraft later settle into good
funds. In advocating an opt-out approach, these commenters argued that
a consumer's failure to opt in would result in declined transactions
even when, a majority of the time, the consumer would not have been
assessed overdraft fees on his or her account.
While an opt-in approach may result in the denial of some
transactions which would otherwise have settled into good funds, the
Board notes that the overall impact of the final rule on the number of
declined transactions is difficult to quantify, as it depends on a
number of factors. This includes an institution's processing
procedures, such as whether credits are processed before debits, and
funds availability policies. Because direct deposits pose little risk
of failing to clear, as compared to a deposited check, institutions may
also authorize transactions based on pending amounts. As more
institutions shift towards real-time clearing, there will be less lag
time between transaction authorization and clearing. For customer
service reasons, financial institutions also have an incentive to
minimize the circumstances under which transactions are declined.
Moreover, the effect may be limited, as the consumer could choose to
opt into overdraft coverage after the first declined transaction.
Industry commenters also argued that overdraft fees--which
constitute a significant percentage of financial institutions' deposit
service charges--subsidize other checking account features consumers
enjoy, such as maintenance fee-free checking accounts, or free on-line
bill payment. Because an opt-in requirement would likely result in
reduced overdraft fee income, these commenters argued that an opt-in
rule would result in either higher fees or a reduction in account
features or bank services for all consumers.
To the extent institutions adjust their pricing policies to respond
to the potential loss of income from overdraft fees, some consumers may
experience increases in certain upfront costs as a result of the final
opt-in rule. Nonetheless, the Board believes that giving consumers the
choice to avoid the high cost of overdraft fees, and the increased
transparency in overdraft pricing that would result from an opt-in
rule, outweigh the potential increase in upfront costs. In addition,
some consumers will continue to be able to avoid monthly maintenance or
other account fees as a result of meeting minimum balance requirements
or having other product relationships with the bank.
The Board also solicited comment on a hybrid approach consisting of
an opt-out rule for existing accounts and an opt-in rule for new
accounts. Under this approach, an institution could continue to pay
overdrafts (and assess fees) for ATM withdrawals and one-time debit
card transactions for existing account holders who have not opted out,
but would be prohibited from assessing fees or charges for paying such
overdrafts on new account holders who have not affirmatively consented
to the institution's overdraft service. The final rule applies the opt-
in approach to all consumers.
Industry commenters preferred the hybrid approach to an opt-in
approach for existing accounts, stating that some consumers may
overlook the opt-in notice, but nonetheless prefer to have their
overdrafts covered. In such cases, these consumers may be confused or
angry when a transaction they expect to go through is denied after the
effective date. In contrast, consumer group commenters stated that
existing account holders should receive the same opt-in protections as
new customers, because customer turnover is very low from year to year.
The final rule provides an opt-in right for both new and existing
accounts. The Board believes it is appropriate to apply the opt-in
approach to existing accounts for several reasons. First, the annual
consumer account attrition rate is low. One report estimates that only
14% of financial institution customers leave their institutions each
year.\29\ Thus, application of the opt-in rule only to new customers
would mean that a significant number of consumers would not receive the
protections provided by an opt-in. In addition, consumers who have an
existing account, and then open a new account after the rule's
mandatory compliance date, would receive inconsistent treatment with
regard to their accounts, which could lead to consumer confusion.
Further, a hybrid approach would require institutions to maintain two
systems over time for new and existing accounts, which could be costly
for some institutions. While some consumers with existing accounts may
be surprised if, contrary to their expectations, their ATM and one-time
debit card transactions are not paid into overdraft, these customers
would subsequently be able to opt in. For those consumers who are
unaware that they can overdraft at an ATM or at point-of-sale, however,
an opt-in rule would have little impact on their expectations with
respect to the coverage currently provided to them. Timing requirements
for new and existing accounts are described in the discussion of Sec.
205.17(c) below.
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\29\ Celent, ``Customer Attrition in Retail Banking: the US,
Canada, the UK, and France,'' Press Release (Jan. 2, 2003)
(available at: https://reports.celent.com/PressReleases/20030102/CustomerAttrition.htm).
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A. Definition--Sec. 205.17(a)
Proposed Sec. 205.17(a) defined ``overdraft service'' to mean 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
(including a check or other item) when the consumer has insufficient or
unavailable funds in the account. The term was intended to cover
circumstances when an institution assesses a fee for paying an
overdraft pursuant to any automated program or service, whether
promoted or not, or as a non-automated, ad hoc accommodation. The
proposed definition excluded an institution's payment of overdrafts
pursuant to a line of credit subject to the Board's Regulation Z,
including transfers from a credit card account, a home equity line of
credit, or an overdraft line of credit. The proposed definition also
excluded overdrafts paid pursuant to a service
[[Page 59040]]
that transfers funds from another account of the consumer (including
any account that may be jointly held by the consumer and another
person) held at the institution. These methods of covering overdrafts
were excluded because they require the express agreement of the
consumer. Commenters generally supported proposed Sec. 205.17(a).
Accordingly, the Board is adopting Sec. 205.17(a) with one
modification.
The final rule includes a new Sec. 205.17(a)(3) to address a
suggestion that the Board revise the definition of ``overdraft
services'' to also exclude credit secured by margin securities in
brokerage accounts extended by Securities and Exchange Commission-
registered broker-dealers. Margin credit is exempt from the
requirements of TILA and Regulation Z in recognition that similar
substantive consumer protections already apply to such credit through
federal securities law. See 15 U.S.C. 1603(2); 12 CFR 226.3(d). Also,
margin credit is typically offered pursuant to a written agreement
between a consumer and a broker. Accordingly, final Sec. 205.17(a)(3)
clarifies that the term ``overdraft services'' does not include a line
of credit or other transaction exempt from Regulation Z pursuant to 12
CFR 226.3(d).
B. Opt-In Requirement--Sec. 205.17(b)
For the reasons discussed above, the Board is adopting an opt-in
rule. The general rule is implemented in Sec. 205.17(b).
17(b)(1) General Rule and Scope of Opt-In
Proposed Sec. 205.17(b)(1) set forth the general rule prohibiting
an account-holding institution from assessing a fee or charge on a
consumer's account held at the institution for paying an ATM withdrawal
or a one-time debit card transaction pursuant to the institution's
overdraft service, unless the consumer is provided with a notice
explaining the institution's overdraft service for such transactions
and a reasonable opportunity to affirmatively consent, or opt in, to
the service, and the consumer affirmatively consents, or opts in, to
the service. If the consumer opts in, the institution would be required
to provide written confirmation of the consumer's consent.
The proposed opt-in applied to any ATM withdrawal, including
withdrawals made at proprietary or foreign ATMs. The proposed opt-in
also applied to any one-time debit card transaction, regardless of
whether the consumer uses a debit card at a point-of-sale (for example,
at a merchant or a store), in an on-line transaction, or in a telephone
transaction.\30\
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\30\ For clarity, this has been added as comment 17(b)-1.iii.
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In the final rule, the Board adopts the opt-in approach and scope
generally as proposed, with modifications to enhance the consumer's
right to revoke consent, and certain additional clarifications. The
opt-in rule applies to all accounts covered by Regulation E, including
payroll card accounts, to the extent overdraft fees may be imposed for
ATM or one-time debit card transactions.
Several commenters requested that the Board clarify the kinds of
ATM transactions that are subject to the rule. The Board understands
that consumers use ATMs not only for withdrawing cash, but also for
inter-account transfers, bill payments, and even postage stamp
purchases. Therefore, the Board believes the opt-in rule should apply
to all transactions originating at an ATM, and not just withdrawals.
Accordingly, the final rule has been revised, as applicable, to apply
to ``ATM transactions'' more generally, in addition to one-time debit
card transactions as proposed.'' See, e.g., Sec. 205.17(b)(1).
The final rule does not apply to other types of transactions,
including check transactions and recurring debits. As discussed above
with respect to checks, the payment of overdrafts for these
transactions may enable consumers to avoid other adverse consequences
that could result if such items are returned unpaid, such as returned
item fees charged by the merchant. Consumers may also be more likely to
use checks, ACH and recurring debit card transactions to pay for
significant household expenses, such as utilities and rent. In the
Board's consumer testing, participants generally indicated that they
were more likely to pay important bills using checks, ACH, and
recurring debits, and to use debit cards on a one-time basis for their
discretionary purchases.
The opt-in requirement also does not apply to ACH transactions. For
example, if the consumer provides his or her checking account number to
authorize an ACH transfer on-line or by telephone, the institution
would be permitted to pay the item if it overdraws the consumer's
account and to assess a fee for doing so, even if the consumer has not
opted into the payment of overdrafts for ATM or one-time debit card
transactions. Like checks and recurring debits, consumers may use ACH
transactions to pay for significant household expenses. The Board notes
that in many cases, ACH transactions serve as a replacement for check
transactions, such as where a check is converted to a one-time ACH
debit to the consumer's account. In addition, consumers could avoid
merchant returned item fees if ACH transactions are paid into
overdraft.
Several commenters requested that the Board explicitly exclude
decoupled debit transactions from the scope of transactions covered by
the final rule. Decoupled debit cards are debit cards offered by
institutions other than the account-holding institution that consumers
use as they would any other debit card. Transactions for these cards
originate as debit card transactions paid by the card issuer, but are
received and processed by the account-holding institution as ACH
transactions. The final rule prohibits a financial institution that
holds a consumer's account from assessing a fee for paying an ATM or
one-time debit card transaction. Accordingly, overdraft fees charged by
the account-holding financial institution for a decoupled debit
transaction processed via ACH are not generally subject to the opt-in
requirement of the final rule. For clarity, new comment 17(b)-1.i
states that Sec. 205.17(b)(1) applies to ATM and one-time debit card
transactions made with a debit card issued by or on behalf of the
account-holding institution.\31\
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\31\ The Board understands that currently, issuers of decoupled
debit cards do not assess consumers overdraft fees because they do
not seek authorization from the account-holding institution and do
not know the consumer's balance