FINANCIAL INSTITUTIONS HAVE STRUGGLED with overdraft compliance for more than a decade. What was once a revenue stream, has become a compliance challenge and expense. Nevertheless, institutions continue to offer overdraft services and customers welcome the option.
Overdraft program compliance is not merely satisfaction with a
single, clear-cut rule. Rather, compliance is riddled with multiple
laws (e.g., Regulations E, DD and O), doctrines of fairness, supervisory guidance, UDAAP, and safety and soundness implications.
The primary foundation of a compliant consumer overdraft program, particularly as applied to ATM and one-time point-of-sale
debit card transactions (POS), is unearthed in Regulation E ( 12
CFR 1005.17) where “overdraft service” is defined as:
“a service under which a financial institution assesses a fee
or charge on a consumer’s account held by the institution for
paying a transaction (including a check or other item) when
the consumer has insufficient or unavailable funds in the
Regulation E further defines that overdraft service does not
include: “any payment of overdrafts pursuant to:
1. a line of credit subject to Regulation Z ( 12 CFR part 1026),
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 Regulation
Z ( 12 CFR part 1026) pursuant to 12 CFR 1026.3(d).”
As of the April 1, 2019 effective date, what overdraft service
is not, also includes “a covered separate credit feature accessible
by a hybrid prepaid-credit card as defined in Regulation Z, 12
CFR 1026.61; or credit extended through a negative balance on
the asset feature of the prepaid account that meets the conditions
of 12 CFR 1026.61(a)( 4).”
Regulation E generally provides that a consumer must be pro-
vided a written notice (or one electronically subject to E-SIGN) that:
■ ■ ■ Describes the overdraft service;
■ ■ ■ Provides the consumer a reasonable opportunity to opt-in to
the service for ATM and POS transactions;
■ ■ ■ Obtains the consumer’s affirmative consent or opt-in to the
institution’s payment of ATM or POS transactions; and
■ ■ ■ The institution must provide the consumer a confirmation
in writing (electronically if consumer agrees) that includes a
statement that the consumer may opt out or revoke consent
at any time.
Because overdraft services are generally discretionary, an institution may terminate the service at any time. For example, a bank
could suspend the discretionary overdraft service due to abuse
of the service or lack of sufficient funds for an extended period.
BY LEAH M. HAMILTON, J.D.
ARE YOU COVERED
is not merely satisfaction
with a single, clear-cut rule.