ABA Banking Journal - February 2009 - (Page 40)
Compliance Clinic Fed proposes targeted approach to overdrafts ederal regulation of popular automated overdraft checking service continues to evolve. On January 29, the Federal Reserve Board published the latest iterations in the Federal Register. The Fed’s announcement referenced research that FDIC unveiled late in the fourth quarter. Highlights are covered in the box to the right. The Fed backed away from the approach it proposed in May 2008 (with the Office of Thrift Supervision and the National Credit Union Administration) that drew on “UDAP”—unfair and deceptive practices—provisions of the Federal Trade Commission Act. Instead, it adopted disclosure requirements under Regulation DD, which will become effective Jan. 10, 2010, and proposed changes under Regulation E in relation to overdrafts resulting from ATM and POS/ debit use. The Reg E proposal involves alternative opt-in/opt-out concepts as well as important potential limitations on debit holds at the point of sale. FDIC overdraft study drills down ate last year FDIC issued its Study of Bank Overdraft Programs, a massive report based on a 2007 survey of 462 banks of all sizes. Key findings: L F excludes linked- account-transfer service. Another requirement: If a bank provides balances through electronic means, such as ATMs, websites, and phone banking, the rule will require that reported balances exclude monies from automated overdraft or linked-account-transfer service. A supplemental balance that includes such services can be provided so long as it is explained in a prominent manner. ■ Promotion. Nearly eight in ten banks offering automated overdraft service promote it. More than half of the survey sample (54%) use a vendor’s program to run their offering, and, of those banks, seven in ten pay their vendors based on a percentage of new fees generated. FDIC reported that the banks generally paid the vendors 10%-20% of additional fees generated. ■ Range of programs offered. Most institutions (88%) offer at least one formalized means of covering overdraft (versus ad hoc decisions), be it the newer, automated overdraft programs; linked-account-transfer service; or lines of credit. Among that group, 62% offered a linked program; 50% offered a line of credit program; and 40% offered an automated overdraft program. ■ Enrollment. Most banks offering automated overdraft programs enroll customers automatically. On the other hand, nearly every bank offering linked-account-transfer service required customers to opt in for that service. Line-of-credit service is subject to credit evaluation. Nearly three out of four banks set limits for automated overdraft customers. The average was $783.70, with a range of $85 to $10,000. ■ Opting in and out. The centerpiece of the Fed’s Regulation E proposal (main article) deals with opting in or opting out of overdraft service in relation to electronic transactions. The FDIC survey found that: among all banks offering automated overdraft service and linked-account service, FDIC STUDY continues on p.42 Subscribe at www.ababj.com Reg DD changes Current Fed regulations differentiate between banks that promote automated overdraft service and those that don’t. The new Reg DD rules do away with that difference, and add some new wrinkles, including format requirements. All banks will have to disclose overdraft fees on their periodic customer statements, including the total of both overdraft and NSF fees charged in that period and year to date. This includes both formal and informal programs, but By Steve Cocheo, executive editor 40 FEBRUARY 2009/ABA BANKING JOURNAL 1. Opt-in/opt-out for e-banking The Fed preamble to its proposal indicated that the agency found strong value in automated overdraft service for checking, but found the service less valuable for ATM withdrawals and POS/debit, based on consumer tests that the Fed had performed. Why the difference? The Fed noted that it could see the need for covering checks, which could help the consumer avoid merchant penalty fees. On the other hand, no such fees would be charged if an ATM or POS/debit transaction were denied. “Accordingly, the Board believes that a more targeted rule covering overdraft services is appropriate,” it stated. It also pointed out that for some debit transactions, the overdraft fee would exceed the debit purchase (e.g. paying $25 for bouncing after buying a chocolate bar). The Reg E proposal includes two alternative approaches to automated overdraft programs that include coverage for ATM withdrawals and POS/debit transactions. Opt-out alternative. A bank could not charge an overdraft coverage fee for paying ATM withdrawals or one-time POS/debit transactions that overdraw a
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