ABA Bank Compliance - May/June 2019

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 Rules

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 account.”

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.