Supplemental Guidance on Overdraft Protection Programs, 22681-22688 [2010-10006]

Agencies

• DEPARTMENT OF THE TREASURY
• Office of Thrift Supervision
• Thrift Supervision Office

[Federal Register Volume 75, Number 82 (Thursday, April 29, 2010)]
[Notices]
[Pages 22681-22688]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-10006]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[Docket ID OTS-2010-0008]


Supplemental Guidance on Overdraft Protection Programs

AGENCY: Office of Thrift Supervision, Treasury (OTS).

ACTION: Proposed Guidance with request for comment.

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SUMMARY: OTS is proposing to issue this Supplemental Guidance on 
Overdraft Protection Programs (Supplemental Guidance) to update the 
Guidance on Overdraft Protection Programs OTS previously issued on 
February 18, 2005.

DATES: Comments must be submitted on or before June 28, 2010.

ADDRESSES: You may submit comments, identified by OTS-2010-0008, by any 
of the following methods:
     E-mail: regs.comments@ots.treas.gov. Please include ID 
OTS-2010-0008 in the subject line of the message and include your name 
and telephone number in the message.
     Fax: (202) 906-6518.
     Mail: Regulation Comments, Chief Counsel's Office, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention: OTS-2010-0008.
     Hand Delivery/Courier: Guard's Desk, East Lobby Entrance, 
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: 
Regulation Comments, Chief Counsel's Office, Attention: OTS-2010-0008.
    Instructions: All submissions received must include the agency name 
and docket number for this rulemaking. All comments received will be 
entered into the docket and posted on Regulations.gov without change, 
including any personal information provided. Comments, including 
attachments and other supporting materials received are part of the 
public record and subject to public disclosure. Do not enclose any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    Viewing Comments Electronically: OTS will post comments on the OTS 
Internet Site at https://www.ots.treas.gov/?p=LawsRegulations.

[[Page 22682]]

    Viewing Comments Onsite: You may inspect comments at the Public 
Reading Room, 1700 G Street, NW., by appointment. To make an 
appointment for access, call (202) 906-5922, send an e-mail to 
public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile transmission to (202) 
906-6518. (Prior notice identifying the materials you will be 
requesting will assist us in serving you.) We schedule appointments on 
business days between 10 a.m. and 4 p.m. In most cases, appointments 
will be available the next business day following the date we receive a 
request.

FOR FURTHER INFORMATION CONTACT: April Breslaw, Director, Consumer 
Regulations, Compliance and Consumer Protection, (202) 906-6989; or 
Richard Bennett, Senior Compliance Counsel, Regulations and Legislation 
Division, (202) 906-7409, Office of Thrift Supervision, 1700 G Street, 
NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

Background

    OTS is proposing to issue this Supplemental Guidance on Overdraft 
Protection Programs (Supplemental Guidance) to update the Guidance on 
Overdraft Protection Programs (Overdraft Guidance) OTS issued February 
18, 2005 (70 FR 8428). OTS issued the Overdraft Guidance after notice 
and comment. See 69 FR 31858 (June 7, 2004).
    Through its Overdraft Guidance, OTS explained concerns about how 
overdraft protection programs had been implemented and suggested Best 
Practices intended to improve these programs. The Office of the 
Comptroller of the Currency (OCC), the Board of Governors of the 
Federal Reserve (Board), the Federal Deposit Insurance Corporation 
(FDIC), and the National Credit Union Administration (NCUA) issued 
guidance shortly thereafter containing many of the same Best Practices. 
See Joint Guidance on Overdraft Protection Programs, 70 FR 9127 (Feb. 
24, 2005). Although OTS believes many institutions provide overdraft 
protection in a responsible manner, those that do not may be violating 
Federal law.
    As stated in the preamble to the Overdraft Guidance (74 FR at 
8429):

    OTS reminds savings associations * * * that overdraft protection 
programs must comply with all applicable Federal laws and 
regulations. It is important that savings associations have their 
overdraft protection programs reviewed by counsel for compliance 
with all applicable laws prior to implementation. As these laws and 
regulations are subject to amendment, savings associations are 
reminded to monitor applicable laws and regulations for revisions 
and to ensure that their overdraft protection programs are fully 
compliant with them.

    Since 2005, the legal landscape has changed considerably. As 
discussed in detail in the proposed Supplemental Guidance, these 
changes are particularly evident with respect to Regulation DD (12 CFR 
part 230), which implements the Truth in Savings Act (12 U.S.C. 4301 et 
seq.), and Regulation E (12 CFR part 205), which implements the 
Electronic Fund Transfer Act (15 U.S.C. 1693 et seq.). The Board has 
significantly amended Regulation DD twice since 2005 and Regulation E 
once since 2005 to address overdraft services. See Truth in Savings; 
Final rule, 70 FR 29582 (May 24, 2005); Truth in Savings; Final rule, 
official staff commentary, 74 FR 5584 (Jan. 29, 2009); and Electronic 
Fund Transfers; Final rule, official staff commentary, 74 FR 59033 
(Nov. 17, 2009). Most recently, the Board proposed further amendments 
to Regulations E and DD to clarify certain overdraft issues. See 
Electronic Fund Transfers; Proposed rule, 75 FR 9120 (March 1, 2010) 
and Truth in Savings; Proposed rule, 75 FR 9126 (March 1, 2010). As a 
result, many of the Best Practices addressed in the Overdraft Guidance 
are now required by law.
    Further, since 2005 OTS has articulated the standards that it 
applies to determine whether an act or practice is unfair or deceptive 
under section 5 of the Federal Trade Commission Act (FTC Act) (15 
U.S.C. 45). See Unfair or Deceptive Acts or Practices; Final rule, 74 
FR 5498, 5502-5504 (Jan. 29, 2009) (UDAP final rule). OTS's proposed 
guidance, if adopted, would conclude that certain overdraft practices 
violate the FTC Act prohibition against unfair or deceptive acts or 
practices. The proposed Supplemental Guidance explains these situations 
in more detail.

Discussion of the Supplemental Guidance

    This proposed Supplemental Guidance is designed to complement, 
rather than replace, the Overdraft Guidance. Accordingly, it does not 
revisit the safety and soundness concerns addressed in the Overdraft 
Guidance. Savings associations should continue to provide overdraft 
protection in conformity with the risk management advice contained in 
the Overdraft Guidance. In addition, OTS continues to encourage 
institutions to adhere to the following Best Practices, although the 
proposed Supplemental Guidance does not restate them:
     Avoid promoting poor account management. The Overdraft 
Guidance recommended as a Best Practice that a savings association 
should not market an overdraft program in a manner that encourages 
routine or intentional overdrafts. Rather, it indicated that a savings 
association should present the program as a customer service that may 
cover inadvertent consumer overdrafts. 70 FR at 8430.
     Train staff to explain program features and other choices. 
The Overdraft Guidance recommended as a Best Practice that a savings 
association train customer service or consumer complaint processing 
staff to explain their overdraft protection program's features, costs, 
and terms including how to opt out of the service. 70 FR at 8431. It 
also recommended that staff be able to explain other available 
overdraft products offered by the savings association and how consumers 
may qualify for them. Id.
     Alert consumers before a transaction triggers any fees. 
The Overdraft Guidance recommended as a Best Practice that when 
consumers attempt to withdraw, transfer, or otherwise access funds made 
available through an overdraft protection program (other than by 
check), a savings association should alert consumers that completing 
the transaction will trigger an overdraft protection fee. Id. It also 
indicated that a savings association should give consumers an 
opportunity to cancel the attempted transaction. Id.
    The remainder of the Best Practices contained in the Overdraft 
Guidance would be updated by the proposed Supplemental Guidance. Aside 
from minor changes in the order in which they have been presented, the 
proposed Supplemental Guidance is organized into the same broad 
categories as the Overdraft Guidance: ``Marketing and Consumer 
Communications'' and ``Program Features and Operation.'' However, for 
ease of reference, the following table shows where the Overdraft 
Guidance Best Practices are addressed in the proposed Supplemental 
Guidance.

[[Page 22683]]



      Organization of Overdraft Guidance vs. Supplemental Guidance
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                                       Supplemental Guidance title and
      Overdraft Guidance title                     location
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       Marketing and Consumer
           Communications
 
Avoid promoting poor account         No change--Best Practice remains in
 management.                          effect.
Fairly represent overdraft           Fairly represent overdraft
 protection programs and              protection programs--Part III.A.1.
 alternatives.
                                     Provide information about
                                      alternatives when they are
                                      offered--Part III.A.2.
Train staff to explain program       No change--Best Practice remains in
 features and other choices.          effect.
Clearly explain the discretionary    Same title, updated discussion--
 nature of the program.               Part III.A.3.
Distinguish overdraft protection     Same title, updated discussion--
 services from ``free'' account       Part III.A.4.
 features.
Clearly disclose program fees.       Same title, updated discussion--
                                      Part III.A.5.
Clarify that fees count against the  Clarify that fees will reduce the
 disclosed overdraft protection       amount of overdraft protection
 dollar limit.                        provided--Part III.A.6.
Demonstrate when multiple fees will  Same title, updated discussion--
 be charged.                          Part III.A.7.
Do not manipulate transaction-       Same title, updated discussion--
 clearing rules.                      Part III.B.3.
Explain the impact of transaction-   Same title, updated discussion--
 clearing policies.                   Part III.A.8.
Illustrate the type of transactions  Same title, updated discussion--
 covered.                             Part III.A.9.
   Program Features and Operation
 
Provide election or opt-out of       Provide consumer choice--Part
 service.                             III.B.1.
Alert consumers before a             No change--Best Practice remains in
 transaction triggers any fees.       effect.
Prominently distinguish balances     Disclose account balances in a
 from overdraft protection funds      manner that distinguishes consumer
 availability.                        funds from funds made available
                                      through overdraft protection--Part
                                      III.A.10.
Promptly notify consumers of         Same title, updated discussion--
 overdraft protection program usage   Part II.A.11.
 each time used.
Consider daily limits on fees        Reasonably limit aggregate
 imposed.                             overdraft fees--Part III.B.2.
Monitor overdraft protection         Same title, updated discussion--
 program usage.                       Part III.B.4.
Fairly report program usage.         Same title, updated discussion--
                                      Part III.B.5.
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    In addition, the Supplemental Guidance addresses one practice that 
was not addressed in the Overdraft Guidance. The practice concerns 
informing consumers when access to overdraft services will be or has 
been reinstated after suspension. See Part III.A.12 of the proposed 
Supplemental Guidance.

Request for Comment

    OTS requests comment on all aspects of the proposed Supplemental 
Guidance. OTS specifically requests comment on the following issues:
     Part III.B.2 of the proposed Supplemental Guidance 
discusses reasonably limiting aggregate overdraft fees but does not 
provide guidance on reasonable per transaction overdraft fees. We note 
that section 102 of the Credit Card Accountability Responsibility and 
Disclosure Act of 2009 (Credit CARD Act), Public Law 111-24, 123 Stat. 
1734 (2009), provides in the context of credit cards, ``The amount of 
any penalty fee or charge that a card issuer may impose with respect to 
a credit card account under an open end consumer credit plan in 
connection with any omission with respect to, or violation of, the 
cardholder agreement, including any late payment fee, over-the-limit 
fee, or any other penalty fee or charge, shall be reasonable and 
proportional to such omission or violation.'' Section 102 of Public Law 
111-24, 123 Stat. 1734 (2009). The Board has issued a proposal to 
implement that requirement. See Truth in Lending; Proposed rule, 75 FR 
12334 (March 15, 2010). Although section 102 and the Board's proposed 
rule apply only to penalty fees or charges on certain credit card 
accounts under open-end consumer credit plans, should OTS's final 
guidance include similar standards for overdraft fees on overdraft 
protection plans?
     Is the relationship between the Overdraft Guidance and the 
proposed Supplemental Guidance clear?

Paperwork Reduction Act

    In accordance with section 3512 of the Paperwork Reduction Act of 
1995, 44 U.S.C. 3501-3521 (PRA), OTS may not conduct or sponsor an 
information collection, and respondents are not required to respond to 
an information collection, unless it displays a currently valid Office 
of Management and Budget (OMB) control number.
    Comments are invited on:
    (a) Whether the collection of information is necessary for the 
proper performance of OTS's, including whether the information has 
practical utility;
    (b) The accuracy of the estimates of the burden of the information 
collection, including the validity of the methodology and assumptions 
used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collection on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or start up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Please follow 
the instructions found in the ADDRESSES caption above for submitting 
comments.
    A copy of the comments may also be submitted to the OMB desk 
officer for the Agencies: Office of Information and Regulatory Affairs, 
Office of Management and Budget, New Executive Office Building, 
Washington, DC 20503.
    Title of Information Collection: Supplemental Guidance on Overdraft 
Protection Programs.
    OMB Control Numbers: 1550-0NEW.
    Regulation Requirement: 12 CFR 563.27.
    Description: Through previous Overdraft Guidance, OTS explained 
concerns about how overdraft protection programs had been implemented 
and suggested ``Best Practices'' intended to improve these programs. 
Both failure to adhere to certain Best Practices and the emergence of 
controversial implementation strategies raise the risk that overdraft 
protection programs have been operated in an unfair or deceptive manner 
that violates section 5 of the

[[Page 22684]]

FTC Act and the OTS Advertising Rule. Consequently, OTS is providing 
this Supplemental Guidance to clarify its supervisory expectations and 
the application of relevant laws and regulations. The burden associated 
with this collection of information may be summarized as follows:
    Type of Review: New collection.
    Affected Public: Savings associations.
    Estimated Number of Respondents: 759.
    Estimated Time for Developing Disclaimers: 4 hours.
    Estimated Time for Training: 4 hours.
    Total Estimated Time Per Respondent: 8 hours.
    Total Estimated Annual Burden: 6,072 hours.
    The text of the proposed OTS Supplemental Guidance on Overdraft 
Protection Programs follows:

OTS Supplemental Guidance on Overdraft Protection Programs

I. Background

    Most institutions offer consumers a variety of options to avoid 
overdrawing their deposit accounts. These include providing consumers 
with lines of credit and permitting consumers to link one account to 
another. Fee based overdraft programs, in which a flat fee is charged 
each time that an overdraft is paid, have become common. Overdraft 
protection has typically been extended for checking, debit card, 
automated teller machine (ATM), and other deposit account transactions.
    Through previous Guidance on Overdraft Protection Programs \1\ 
(Overdraft Guidance), the Office of Thrift Supervision (OTS) explained 
concerns about how overdraft protection programs had been implemented 
and suggested ``Best Practices'' intended to improve these programs. 
While overdraft protection programs continue to be widely used,\2\ new 
concerns about their implementation have emerged. In addition, both new 
rules and well-established laws have been applied to these programs. 
OTS is, therefore, providing this Supplemental Guidance to clarify its 
supervisory expectations and the application of relevant laws and 
regulations, although the Overdraft Guidance remains in effect with 
respect to matters not addressed here.
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    \1\ Guidance on Overdraft Protection Programs, 70 FR 8428 (Feb. 
18, 2005), issued as CEO Memorandum 211, available at 
https://files.ots.treas.gov/25211.pdf. The other Federal banking 
agencies and the National Credit Union Administration (NCUA) issued 
guidance shortly thereafter containing many of the same Best 
Practices. See Joint Guidance on Overdraft Protection Programs, 70 
FR 9127 (Feb. 24, 2005).
    \2\ For example, close to 90% of the institutions recently 
studied by the Federal Deposit Insurance Corporation (FDIC) had some 
form of overdraft protection program. See FDIC Study of Bank 
Overdraft Programs at page 5 (Nov. 2008) (FDIC Overdraft Study), 
available at https://www.fdic.gov/bank/analytical/overdraft/FDIC138_Report_FinalTOC.pdf.
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    As discussed in Part III, many of the ``Best Practices'' covered in 
the Overdraft Guidance are now mandated. However, even where these 
practices are not legally required, OTS strongly encourages 
institutions to implement them as a means of addressing reputation 
risk.\3\ Such risk has intensified due to public concern about the lack 
of choice, cost, and ways in which some overdraft protection programs 
have been provided.
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    \3\ Consistent with the ``Best Practices'' recommended in the 
Overdraft Guidance, OTS continues to encourage institutions to avoid 
promoting poor account management, train staff to explain program 
features and other choices, and alert consumers before a transaction 
triggers any fees. See 70 FR at 8430-31.
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    Savings associations should review their overdraft programs to 
confirm that they are being operated in a manner that is effective, 
compliant with the law, and fair to consumers. To inform the 
examination process, OTS has added several questions to the Preliminary 
Examination Response Kit (PERK) that gather information about the way 
associations manage their overdraft programs. OTS will use this 
information to determine whether such programs warrant heightened 
review.

II. Legal Developments

    Changes in the legal landscape mean that many of the Best Practices 
covered in the Overdraft Guidance are now required by law. These 
changes are particularly evident with respect to Regulation DD,\4\ 
which implements the Truth in Savings Act,\5\ and Regulation E,\6\ 
which implements the Electronic Fund Transfer Act.\7\
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    \4\ 12 CFR part 230.
    \5\ 12 U.S.C. 4301 et seq.
    \6\ 12 CFR part 205.
    \7\ 15 U.S.C. 1693 et seq.
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    Although OTS believes that many institutions provide overdraft 
protection in a responsible manner, the proposed guidance, if adopted, 
would conclude that institutions that engage in certain overdraft 
practices violate the prohibition on unfair or deceptive acts or 
practices in section 5 of the Federal Trade Commission Act (FTC 
Act).\8\ OTS has recently articulated the standards that it applies to 
determine whether an act or practice is unfair or deceptive under the 
FTC Act.\9\
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    \8\ 15 U.S.C. 45.
    \9\ See Unfair or Deceptive Acts or Practices; Final rule, 74 FR 
5498, 5502-5504 (Jan. 29, 2009) (UDAP final rule).
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    Essentially, an act or practice is unfair if: (1) It causes or is 
likely to cause substantial injury to consumers; (2) the injury is not 
reasonably avoidable by consumers themselves; and (3) the injury is not 
outweighed by countervailing benefits to consumers or to competition. 
While established public policy may be considered, public policy may 
not serve as the primary basis for a determination that an act or 
practice is unfair. An act or practice is deceptive if: (1) there is a 
representation or omission of information that is likely to mislead 
consumers acting reasonably under the circumstances; and (2) that 
information is material to consumers. The adoption of these standards 
provides OTS with a useful method of analyzing whether practices are 
unfair or deceptive. The other federal financial institution regulatory 
agencies and FTC take the same approach.\10\
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    \10\ Id. (Board of Governors of the Federal Reserve (Board) and 
NCUA); Board and FDIC, Unfair or Deceptive Acts or Practices by 
State-Chartered Banks (Mar. 11, 2004), available at https://www.federalreserve.gov/boarddocs/press/bcreg/2004/20040311/attachment.pdf; Office of the Comptroller of the Currency (OCC) 
Advisory Letter 2002-3, Guidance on Unfair or Deceptive Acts or 
Practices (Mar. 22, 2002), available at https://www.occ.treas.gov/ftp/advisory/2002-3.doc; FTC Policy Statement on Unfairness, Letter 
from the FTC to the Hon. Wendell H. Ford and the Hon. John C. 
Danforth, S. Comm. on Commerce, Science & Transp. (Dec. 17, 1980), 
available at https://www.ftc.gov/bcp/policystmt/ad-unfair.htm; and 
FTC Policy Statement on Deception, Letter from the FTC to the Hon. 
John H. Dingell, H. Comm. on Energy & Commerce (Oct. 14, 1983), 
available at https://www.ftc.gov/bcp/policystmt/ad-decept.htm.
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III. Specific Overdraft Practices

A. Marketing and Consumer Communications
    The Overdraft Guidance recommended a number of Best Practices for 
communicating with consumers. It explained that following such 
practices can minimize consumer confusion and complaints, foster good 
customer relations, and reduce legal and compliance risks to the 
savings association. The following updates that discussion.
    1. Fairly represent overdraft protection programs.
    The Overdraft Guidance encouraged savings associations to identify 
the consequences of extensively using overdraft protection for 
consumers.\11\ The need to do so is heightened where associations 
target consumers who have experienced financial difficulties. For these 
consumers, associations should avoid marketing accounts covered by 
overdraft protection in a manner that leaves the impression that the 
accounts are designed to help avoid future

[[Page 22685]]

financial challenges, especially when contrary information is omitted. 
For example, it would be a material misrepresentation to market an 
account as particularly suitable for those with prior credit or bank 
account problems without informing consumers of significant overdraft 
fees associated with an account. As consumers who have had problems 
with their bank account in the past may be particularly likely to 
overdraw their accounts in the future, such fees may be likely to lead 
to significant expenses for them. Failing to provide such consumers 
with fee information appears to significantly impair their ability to 
determine whether an account meets their needs. Consequently, these 
circumstances violate the FTC Act prohibition against deceptive 
practices. For similar reasons, they also violate OTS's Advertising 
Rule.
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    \11\ 70 FR at 8431.
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    2. Provide information about alternatives when they are offered.
    The Overdraft Guidance recommended that, when informing consumers 
about an overdraft protection program, associations should also provide 
general information about other overdraft services or credit products, 
if any, that the associations offers.\12\ Such information should 
address how the terms, including fees, for these services or products 
differ. For example, research indicates that most institutions offer 
overdraft protection through linked accounts or lines of credit,\13\ 
and fees for such arrangements are typically lower than for automated 
overdraft programs.\14\ OTS continues to recommend providing 
information about these services as a Best Practice.
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    \12\ 70 FR at 8430-31.
    \13\ See FDIC Overdraft Study at page 5 (finding that 62.1% of 
studied banks offered linked accounts and 50.1% of studied banks 
offer lines of credit).
    \14\ For example, according to the FDIC Overdraft Study, almost 
half of the banks studied with linked-account programs (48.9%) 
reported charging no explicit fees for the service. The most common 
fee associated with linked-account programs was a transfer fee; 
where charged, the median transfer fee was $5. The primary cost 
associated with overdraft line of credit programs was the interest 
charged on funds advanced, usually accruing at an annual percentage 
rate (APR) of around 18 percent. FDIC Overdraft Study at page iii.
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    An affordable small dollar term loan might also serve as an 
alternative to fee based overdraft protection. If an institution 
chooses to provide such credit, it may consider guidelines on 
affordable small dollar loans that the FDIC has developed.\15\ Research 
indicates that institutions that employ these guidelines have been able 
to offer affordable small dollar loans that meet multiple business 
goals, including building long term customer relationships, cross 
selling additional products, and creating goodwill in the 
community.\16\
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    \15\ FDIC Affordable Small-Dollar Loan Guidelines, FIL-50-2007 
(June 19, 2007), available at https://www.fdic.gov/news/news/financial/2007/fil07050.pdf.
    \16\ See ``The FDIC's Small-Dollar Loan Pilot Program: A Case 
Study after One Year,'' FDIC Quarterly 2009, Vol. 3, No. 2, 
available at https://www.fdic.gov/bank/analytical/quarterly/2009_vol3_2/smalldollar.html.
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    3. Clearly explain the discretionary nature of the program.
    The Overdraft Guidance encouraged savings associations to make 
clear, where applicable, that the payment of an overdraft is 
discretionary.\17\ Consistent with this advice, Regulation DD has since 
been interpreted to prohibit a financial institution from representing 
that it will honor all checks or authorize the payment of all 
transactions that overdraw an account, when the institution retains 
discretion at any time not to honor checks or authorize 
transactions.\18\ Pursuant to Regulation DD, any advertisement 
promoting the payment of overdrafts must also now clearly disclose the 
circumstances under which the institution will not pay an 
overdraft.\19\
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    \17\ 70 FR at 8431.
    \18\ 12 CFR pt. 230, Supp. I, Comment 230.8(a) -10(ii) 
(interpreting Sec.  230.8(a)).
    \19\ 12 CFR 230.11(b)(1)(iv).
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    4. Distinguish overdraft protection programs from ``free'' account 
features.
    The Overdraft Guidance discouraged savings associations from 
promoting free accounts and overdraft protection programs in the same 
advertisement in a way that suggests that overdraft protection is 
provided free of cost.\20\ Regulation DD's prohibition against 
misleading or inaccurate advertising has since been interpreted in a 
manner that essentially bans this practice. Specifically, Regulation DD 
has been interpreted to ban marketing an account-related service for 
which the institution charges a fee--such as overdraft protection--in 
an advertisement that also describes the account as ``free'' or ``no 
cost'' (or a similar term), unless the advertisement clearly and 
conspicuously indicates that there is a cost associated with the 
service.\21\ In addition, Regulation DD now prohibits institutions from 
advertising an account as ``free'' where any maintenance or activity 
fee may be imposed on it.\22\
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    \20\ 70 FR at 8431.
    \21\ 12 CFR pt. 230, Supp. I, Comment 230.8(a)-10(v) 
(interpreting Sec.  230.8(a)).
    \22\ 12 CFR 230.8(a)(2) and 12 CFR pt. 230, Supp. I, Comment 
230.8(a)-10(v).
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    Moreover, it would be a material misrepresentation to use marketing 
that focuses on account features that are ``free'' or inexpensive, but 
omits information about the cost of each overdraft transaction. This is 
particularly true when consumers have been automatically enrolled in 
programs that charge a significant fee for each overdrawn transaction. 
The net impression of such marketing may be to mislead consumers acting 
reasonably under the circumstances to believe that the total cost of 
the account (including overdraft protection) is free or inexpensive and 
to be unaware that engaging in overdraft transactions will result in 
the assessment of significant overdraft fees. Consequently, these 
circumstances violate the FTC Act prohibition against deceptive 
practices. For similar reasons, they also violate OTS's Advertising 
Rule.
    Although not discussed in the Overdraft Guidance, associations 
should also be cautious about representing overdraft protection as 
``free'' when it is only provided for accounts with higher costs for 
other services or less favorable terms. Such a situation might occur 
when ``free'' overdraft protection is provided only for accounts with 
increased maintenance fees or for accounts that pay lower deposit 
interest rates. Although a reasonable consumer may be misled into 
believing that the ``free'' overdraft protection was being provided at 
no cost, the consumer would essentially pay for the program through 
increased fees or a lower return, compared to other accounts offered by 
that association.\23\ This kind of misrepresentation is material 
because it may affect the consumer's decision to select the account 
with ``free overdraft protection'' over another type of account. 
Consequently, these circumstances violate the FTC Act prohibition 
against deceptive practices. For similar reasons, they also violate 
OTS's Advertising Rule.
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    \23\ Cf. Federal Trade Commission's Guide Concerning Use of the 
Word ``Free'' and Similar Representations, 16 CFR 251.1 (``[W]hen 
the purchaser is told that an article is `Free' to him if another 
article is purchased, the word `Free' indicates that he is paying 
nothing for that article and no more than the regular price for the 
other. Thus, a purchaser has a right to believe that the merchant 
will not directly and immediately recover, in whole or in part, the 
cost of the free merchandise or service by marking up the price of 
the article which must be purchased, by the substitution of inferior 
merchandise or service, or otherwise.'')
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    5. Clearly disclose program fees.
    The Overdraft Guidance encouraged savings associations to disclose 
the dollar amount of the fee for each overdraft and any interest rate 
or other fee that may apply.\24\ After the Overdraft Guidance was 
issued, Regulation DD

[[Page 22686]]

was amended to require that institutions that promote overdraft 
protection provide periodic deposit account statements that include a 
total dollar amount for all fees or charges imposed on the account for 
paying overdrafts.\25\ These disclosures were required for both the 
statement period and the calendar year-to-date.\26\ Recently, 
Regulation DD was further revised to require these disclosures by all 
institutions, not just those that promote overdraft protection.\27\
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    \24\ 70 FR at 8431.
    \25\ Truth in Savings; Final rule, 70 FR 29582, 29593 (May 24, 
2005) (promulgating Sec.  230.11(a)).
    \26\ Id. Further, as previously discussed in Part III.A.3, after 
the Overdraft Guidance was issued, Regulation DD was revised to 
provide that any advertisement promoting the payment of overdrafts 
must clearly disclose the circumstances under which the institution 
will not pay an overdraft. 12 CFR 230.11(b)(1)(iv).
    \27\ Truth in Savings; Final rule, official staff commentary, 74 
FR 5584, 5593 (Jan. 29, 2009) (amending Sec.  230.11(a)). This 
provision took effect on January 1, 2010.
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    6. Clarify that fees will reduce the amount of overdraft protection 
provided.
    The Overdraft Guidance recommended that savings associations alert 
consumers that the fees charged for covering overdrafts, as well as the 
overdraft items themselves, will be subtracted from the overdraft 
protection limit disclosed.\28\ Failing to explain the treatment of 
such fees is deceptive. Such an omission may mislead a reasonable 
consumer into believing that a more substantial amount of overdraft 
protection is available for use than is actually available. Such an 
omission is material because it may affect the consumer's decision 
about whether to engage in a transaction that would overdraft the 
account. For example, the consumer might believe that a transaction may 
be covered by overdraft protection when it would not because fees had 
eroded the limit available. Consequently, these circumstances violate 
the FTC Act prohibition against deceptive practices. For similar 
reasons, the omission of information on how fees affect overdraft 
limits also violates OTS's Advertising Rule.
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    \28\ 70 FR at 8431.
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    7. Demonstrate when multiple fees will be charged.
    The Overdraft Guidance recommended that savings associations 
promoting overdraft protection programs clearly disclose that more than 
one overdraft fee may be charged against the account each day, 
depending on the number of items presented for withdrawal from the 
consumer's account.\29\ Omitting such information is deceptive, whether 
a savings association promotes overdraft protection, or not. Such an 
omission may mislead a reasonable consumer into believing that only one 
overdraft fee will be charged against an account each day. Such an 
omission is material because it may affect a number of consumer 
decisions, including whether to open an account in the first place, or 
whether to later engage in more than one transaction that overdraws an 
account on a specific day. Consequently, such an omission violates the 
FTC Act prohibition against deceptive practices. For similar reasons, 
such an omission also violates OTS's Advertising Rule.
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    \29\ Id.
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    8. Explain the impact of transaction-clearing policies.
    The Overdraft Guidance encouraged savings associations to clearly 
explain to consumers that transactions may not be processed in the 
order in which they occur and that the order in which transactions are 
processed and cleared can affect the total amount of overdraft fees 
incurred by a consumer.\30\ The Overdraft Guidance also recommended 
that associations clearly disclose their processing and clearing 
policies.\31\
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    \30\ Id.
    \31\ Id.
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    Omitting such information is deceptive. Such an omission may 
mislead reasonable consumers to believe that transactions will be 
processed in the order in which they have occurred. The omission is 
material because it may affect a consumer's decision about when to 
engage in transactions to minimize or avoid overdrafts. Consequently, 
the omission violates the FTC Act prohibition against deceptive 
practices. For similar reasons, such an omission also violates OTS's 
Advertising Rule.
    9. Illustrate the type of transactions covered.
    The Overdraft Guidance recommended that savings associations 
clearly explain to consumers that overdraft protection fees may be 
imposed on transactions such as ATM withdrawals, debit card 
transactions, preauthorized automatic debits, telephone-initiated 
transfers, or other electronic transfers, if applicable, to avoid 
implying that check transactions are the only transactions covered.\32\
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    \32\ Id.
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    Since the Overdraft Guidance was issued, Regulation DD has been 
interpreted to expressly address this practice. This rule is now 
interpreted to prohibit advertisements that describe an institution's 
overdraft service solely as protection for overdrawn checks, when the 
institution also provides overdraft protection when an account is 
overdrawn by other means, such as ATM withdrawals, debit card 
transactions, or other electronic fund transfers.\33\
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    \33\ 12 CFR part 230, Supp. I, Comment 230.8(a)-10(iv) 
(interpreting Sec.  230.8(a)).
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    10. Disclose account balances in a manner that distinguishes 
consumer funds from funds made available through overdraft protection.
    The Overdraft Guidance discouraged savings associations that 
provide consumers with a single deposit account balance from including 
overdraft protection funds in the balance.\34\ Instead, the Overdraft 
Guidance advised associations to disclose only a consumer's own funds 
available for withdrawal. The Overdraft Guidance encouraged 
associations to separately and prominently identify the balance that 
does not include overdraft protection, if more than one balance is 
provided.\35\
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    \34\ 70 FR at 8431.
    \35\ Id.
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    Regulation DD has recently been amended to require that where an 
institution discloses balance information through an automated system, 
it must disclose a balance that excludes funds that the institution 
provides to cover overdrafts through a discretionary overdraft 
protection service, line of credit, or linked account.\36\ Institutions 
are permitted to provide another balance that includes these funds, so 
long as they prominently disclose the types of funds that have been 
included.\37\ Consistent with the Overdraft Guidance, OTS continues to 
encourage associations to make use of this approach whenever account 
balances are disclosed, not just when automated systems are employed.
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    \36\ 74 FR at 5593 (promulgating Sec.  230.11(c)). This 
provision took effect on January 1, 2010.
    \37\ Id.
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    11. Promptly notify consumers of overdraft protection program usage 
each time used.
    The Overdraft Guidance advised savings associations to ``promptly 
notify consumers of overdraft protection program usage each time 
used.'' \38\ Failing to do so--including failing to provide a consumer 
with the information necessary to return the account to a positive 
balance--is deceptive. Such omissions may mislead a reasonable consumer 
into assuming that an account is in balance, when it is not. The 
omissions are material because this type of information would likely 
influence decisions about whether to proceed with additional 
transactions or replenish a deposit account first. Prompt notification 
is important

[[Page 22687]]

because the shorter the time that elapses between the occurrence of an 
overdraft and consumer notification that overdraft protection has been 
accessed, the more benefit a consumer derives from the information. 
This is because the notification may prevent a consumer from incurring 
further overdrafts, as well as alert a consumer of the need to 
replenish funds in the underlying deposit account.\39\ Consequently, 
such omissions violate the FTC Act prohibition against deceptive 
practices. For similar reasons, they also violate OTS's Advertising 
Rule. Where technologically feasible to do so, real time notification 
should be provided.
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    \38\ 70 FR at 8431.
    \39\ According to the FDIC Overdraft Study, about one-fourth of 
the banks it surveyed (24.6%) assessed fees on accounts that 
remained in negative balance status in the form of flat fees or 
interest charged on a percentage basis. FDIC Overdraft Study at page 
iii.
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    12. Inform consumers when access to overdraft services will be or 
has been reinstated after suspension.
    Although not discussed in the Overdraft Guidance, it is deceptive 
to fail to notify consumers about the circumstances in which overdraft 
protection may be reinstated after suspension, e.g., when a deposit 
clears the outstanding overdraft and fee balance. Failure to provide 
this information, particularly when a consumer has been previously 
notified that overdraft protection has been suspended, may lead a 
reasonable consumer to believe that overdraft protection will 
definitely not be available, when in fact, it is or may be available. 
As a result, a consumer may overdraw an account without appreciating 
that significant overdraft fees may result. For example, a consumer may 
attempt a point of sale transaction believing that it will be denied 
without charge if sufficient funds are not available. However, if 
overdraft protection has been reinstated and the transaction is paid 
despite insufficient funds, the consumer would be charged potentially 
significant overdraft fees. Consequently, failure to clearly and 
conspicuously notify a consumer about the circumstances in which 
overdraft protection may be reinstated after suspension violates the 
FTC Act prohibition against deceptive practices. For similar reasons, 
the failure also violates OTS's Advertising Rule.
B. Program Features and Operation
    The Overdraft Guidance also recommended a number of Best Practices 
on the manner of providing overdraft protection. As the Overdraft 
Guidance noted, ``appropriate management oversight of the program [is] 
fundamental to enabling responsible use of overdraft protection.'' \40\ 
The following updates that discussion.
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    \40\ 70 FR at 8430.
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    1. Provide consumer choice.
    A longstanding concern about overdraft protection is the lack of 
consumer choice. In response to this concern, the Overdraft Guidance 
encouraged institutions to ``obtain affirmative consent of consumers to 
receive overdraft protection.'' \41\ Since then, the Board has revised 
Regulation E to partially address this practice.\42\ When compliance is 
required on July 1, 2010, institutions will not be permitted to assess 
an overdraft fee for paying automated teller machine (ATM) withdrawals 
and one-time debit card transactions that overdraw a consumer's 
account, unless the consumer affirmatively ``opts in'' to the 
institution's payment of overdrafts for these transactions.
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    \41\ Id. at 8431.
    \42\ Electronic Fund Transfers; Final rule, official staff 
commentary, 74 FR 59033, 59052 (Nov. 17, 2009) (promulgating Sec.  
205.17).
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    The revision to Regulation E will address opt-in for certain 
electronic transactions, which account for the largest share of 
overdraft transactions.\43\ OTS recommends as a Best Practice, however, 
that associations also provide their customers with the opportunity to 
affirmatively choose or ``opt in'' to overdraft protection for 
transactions outside the scope of Regulation E's opt-in 
requirement.\44\ Checking and ACH transactions fall into this category. 
Using an ``opt in'' approach to such transactions means that consumers 
who decline to consent to the payment of overdraft items will 
occasionally incur both a merchant fee and an insufficient funds fee 
for a returned item. However, as explained in Part III.B.2, research 
indicates that the large majority of overdraft fees are paid by a small 
portion of consumers who frequently overdraw their accounts. These 
consumers may have difficulty both repaying overdraft fees and bringing 
their accounts current, which may in turn cause them to incur 
additional overdraft fees. An opt-in approach could therefore ensure 
that these consumers make an informed, affirmative choice about whether 
to enroll in an overdraft protection program that could result in 
material overdraft fees unless sound account management is exercised.
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    \43\ According to the FDIC Overdraft Study, point of sale and 
debit transactions account for 41% of overdraft transactions at 
banks studied with automated programs. FDIC Overdraft Study at page 
78. Further, debit transactions at banks studied with automated 
programs are generally small--around $20--while the typical $27 
overdraft fee often exceeds the value of the transaction. FDIC 
Overdraft Study at page 79 and n.51. According to a Center for 
Responsible Lending report, debit card transactions (either at the 
point of sale or ATM) cause 46% of total overdrafts, while checks 
trigger just 27%, while the average overdraft fee for a point of 
sale or ATM transaction is $34. See Eric Halperin, Lisa James & 
Peter Smith, Debit Card Danger: Banks offer little warning and few 
choices as customers pay a high price for debit card overdrafts (CRL 
Debit Card Danger Report), Center for Responsible Lending (January 
25, 2007) at 7-8, available at https://www.responsiblelending.org/overdraft-loans/research-analysis/Debit-Card-Danger-report.pdf.
    \44\ In some circumstances, the Overdraft Guidance also endorsed 
a different approach--automatically providing overdraft protection, 
but offering consumers the opportunity to ``opt out'' of it. 
However, such an approach will soon be impermissible for ATM and 
one-time debit card transactions under Regulation E. Further, since 
the Overdraft Guidance was issued, questions have been raised about 
the value of an ``opt out'' strategy for consumers. See, e.g., 74 FR 
at 59038 (``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.''); U.S. Gov't 
Accountability Office, Credit Cards: Increased Complexity in Rates 
and Fees Heightens Need for More Effective Disclosures to Consumers 
(Sept. 2006) at 26-27, available at https://www.gao.gov/new.items/d06929.pdf (indicating that although state laws applying to four of 
the six largest credit card issuers require them to provide 
consumers with the opportunity to ``opt-out'' of retroactive rate 
increases, few consumers exercise that right).
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    2. Reasonably limit aggregate overdraft fees.
    Research suggests that a relatively small number of consumers pay 
most of the overdraft fees incurred. For example, the FDIC Overdraft 
Study found that while 87% of consumers have less than five overdrafts 
per year, consumers that have more than five overdrafts annually pay 
over 90% of the total overdraft fees reported.\45\ The Overdraft 
Guidance helped address this problem by advising institutions to 
consider providing a daily cap on the overdraft fees charged against 
any one account.\46\
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    \45\ FDIC Overdraft Study at page iv.
    \46\ 70 FR at 8431.
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    Historically, OTS and its predecessor agency, the Federal Home Loan 
Bank Board (FHLBB), have indicated in rules \47\ and legal opinions 
\48\ that fees charged by savings associations are to be 
``reasonable.'' Indeed, going back at least 30 years the position of 
the agency has been that ``a practice of charging grossly

[[Page 22688]]

unreasonable fees might be objectionable as unsafe or unsound.'' \49\
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    \47\ See, e.g., 12 CFR 550.380 (``If the amount of your 
compensation for acting in a fiduciary capacity is not set or 
governed by applicable law, you may charge a reasonable fee for your 
services.'') and 12 CFR 533.6, 563e.27, 563e.43 (savings 
associations may charge reasonable copying and mailing fees).
    \48\ See, e.g., FHLBB Op. Deputy Gen. Counsel (Oct. 22, 1986), 
available at 1986 FHLBB LEXIS 98 (``It is also our view that 
acceptance of reasonable fees for permissible activities is 
authorized for Federal associations.'').
    \49\ FHLBB Op. Acting Gen. Counsel (1980), available at 1980 
FHLBB LEXIS 274.
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    In some circumstances, failure to impose a reasonable limit on 
aggregate overdraft fees is an unfair practice under the FTC Act. The 
risk of engaging in an unfair practice is heightened when an 
association fails to limit fees for consumers who frequently overdraw 
their accounts and, as a result, such consumers incur substantial 
injury in the form of unreasonable and excessive overdraft fees. 
Depending on the circumstances, these consumers may not be able to 
avoid the harm caused by high overdraft fees. For example, where 
overdraft protection is marketed deceptively, consumers may lack the 
information needed to make a reasonable choice among programs. 
Regardless of how overdraft protection is promoted, those who 
frequently overdraw accounts may simply not have other options in the 
market, as they may have credit histories and other characteristics 
that prevent them from obtaining less expensive services. Notably, 
younger consumers and those with lower incomes tend to exhibit a 
pattern of recurring overdrafts and a high volume of fees.\50\ While 
some consumers may benefit from the occasional use of overdraft 
protection, the harm caused by high fees outweighs this benefit for 
consumers who frequently overdraw their accounts. Two of the 
circumstances in which the harm may particularly outweigh the benefit 
are where consumers' aggregate overdraft fees exceed the average daily 
balance of their accounts or the overdraft limit on their accounts. 
Based on OTS supervisory experience, most institutions do not provide 
overdraft protection in a manner that permits overdraft fees to reach 
such levels. However, when fees become excessive, consumers may have 
difficulty both repaying overdrafts and bringing accounts current, 
which may cause them to incur additional fees.
---------------------------------------------------------------------------

    \50\ FDIC Overdraft Study at pages 77-79.
---------------------------------------------------------------------------

    Aside from imposing a reasonable limit on overdraft fees, 
associations should also monitor customer usage of overdraft 
protection. This strategy is discussed below. Where use becomes 
excessive, associations should either limit it or offer consumers any 
lower cost services that may be available, as previously discussed in 
Parts III.A.1 and III.A.2.
    3. Do not manipulate transaction-clearing rules.
    The Overdraft Guidance warns savings associations, ``Transaction-
clearing rules (including check-clearing and batch debit processing) 
should not be administered unfairly or manipulated to inflate fees.'' 
\51\ Such a situation would occur if, for example, a savings 
association varied its transaction-clearing rules on a daily, customer-
by-customer basis in order to maximize each customer's fees. Where 
consumer accounts lack a sufficient balance, such a practice could 
cause consumers substantial injury in the form of unnecessary fees. 
Because consumers have no control over the order in which an 
institutions clears transactions and would not know which transaction 
clearing rule would be applied to any given transaction, this is a harm 
that consumers cannot avoid. While manipulating transaction-clearing 
order to inflate fees could increase an institution's fee income, it 
would not benefit consumers. Moreover, such fee generation not only 
fails to benefit the market, it suggests a lack of transparency: 
Economically rational consumers would likely move their accounts to 
other institutions if they understood that their transactions were 
being posted in an unfair manner. Consequently, manipulating 
transaction clearing in this way violates the FTC Act prohibition 
against unfair practices. Instead of operating an overdraft protection 
program in this manner, a savings association should establish 
consistent transaction clearing rules for similar accounts.
---------------------------------------------------------------------------

    \51\ 70 FR at 8431.
---------------------------------------------------------------------------

    4. Monitor overdraft protection program usage.
    The Overdraft Guidance notes the importance of monitoring overdraft 
protection usage as both a safety and soundness consideration and a 
Best Practice.\52\ Where an association informs consumers that their 
usage will be held to specific limits, it is critical that the 
association monitor how the program is implemented as consumers are 
likely to rely on such representations. Such monitoring may identify 
excessive consumer usage of overdraft protection, which may indicate a 
need for alternative arrangements or other services.\53\
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    \52\ 70 FR at 8430-31.
    \53\ See Part III.A.2.
---------------------------------------------------------------------------

    5. Fairly report program usage.
    The Overdraft Guidance advises savings associations against 
furnishing negative information to credit reporting agencies (CRAs) 
when overdrafts have been paid under the terms of an overdraft 
protection program.\54\ This advice was provided pursuant to the Fair 
Credit Reporting Act, which has long prohibited furnishing consumer 
information to a CRA that is known or reasonably believed to be 
inaccurate.\55\ Savings associations should also be cognizant of new 
rules issued by OTS and other agencies effective July 1, 2010. These 
rules will require, among other things, that each furnisher establish 
and implement written policies and procedures regarding the accuracy 
and integrity of the information that it furnishes to a CRA.\56\ Each 
furnisher must consider agency guidelines, which include, as an 
objective, furnishing consumer account information that is 
accurate.\57\ In this context, ``accuracy'' means that the furnished 
information reflects the terms of the account and the consumer's 
performance and other conduct with respect to the account.\58\ 
Furnishing negative information to CRAs when overdrafts are paid under 
the terms of an overdraft protection program may not be accurate 
because such information may not reflect the terms of the account or 
the consumer's performance and other conduct with respect to the 
account.
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    \54\ 70 FR at 8431.
    \55\ See 15 U.S.C. 1681s-2(a)(1)(A).
    \56\ Procedures to Enhance the Accuracy and Integrity of 
Information Furnished to Consumer Reporting Agencies under Section 
312 of the Fair and Accurate Credit Transactions Act, 74 FR 31484, 
31520 (July 1, 2009) (promulgating Sec.  571.42(a)).
    \57\ See 74 FR at 31520 (promulgating Sec.  571.42(b)) and 74 FR 
at 31521 (promulgating paragraph I.(b)(1) of Appendix E to part 
571).
    \58\ See 74 FR at 31520 (promulgating Sec.  571.41(a)) and 74 FR 
at 31521 (promulgating paragraph I.(b)(1) of Appendix E to part 
571).
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IV. Conclusion

    Overdraft protection programs can provide a service that consumers 
value. However, these programs pose a number of operational risks. OTS 
expects institutions under its jurisdiction to manage these risks in a 
responsible manner and comply with applicable laws and regulations.
    This concludes the text of the proposed OTS Supplemental Guidance 
on Overdraft Protection Programs.

    Dated: April 13, 2010.

    By the Office of Thrift Supervision.
John E. Bowman,
Acting Director.
[FR Doc. 2010-10006 Filed 4-28-10; 8:45 am]
BILLING CODE P