What's Been Proposed…

Concerns about the marketing, disclosure and implementation of overdraft protection programs led to the guidance issued by the federal financial institutions supervisory agencies (which includes the Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation; National Credit Union Administration; Office of the Comptroller of the Currency; and Office of Thrift Supervision). The full text of the overdraft guidance can be found at http://www.federalreserve.gov/boarddocs/press/ bcreg/2004/20040528/default.htm.

The guidance was published in May 2004 with comments (also available online) due August 6, 2004. Joint review of the comments was still underway as of press time, and there has yet to be an announcement on the timing of next steps.

Below is a paraphrased list of the specific recommendations that banks take issue with:

Safety & Soundness Considerations

"Overdraft balances should generally be charged off within 30 days from the date first overdrawn."

"When overdrafts are paid, credit is extended. However, fees for paying overdraft items currently are not considered finance charges under Regulation Z if the institution has not agreed in writing to pay overdrafts. Since this regulatory exception was created for the occasional ad-hoc payment of overdrafts, its application to these automated and marketed overdraft protection programs could be re-evaluated in the future."

Best Practices

Marketing and Communications with Consumers

• Avoid promoting poor account management.
• Fairly represent overdraft protection programs and alternatives (includes explanation of the costs and advantages of various alternatives to the overdraft protection, the risks and problems in relying on the program, and the consequences of abuse).
• Train staff to explain program features and other choices.
• Clearly explain discretionary nature of program.
• Distinguish overdraft protection services from "free" account features.
• Clearly disclose program fee amounts.
• Clarify that fees count against overdraft protection program limit.
• Demonstrate when multiple fees will be charged.
• Explain check-clearing policies. Clearly disclose to consumers the order in which the institution pays checks or processes other transactions (e.g., transactions at the ATM or point-of-sale terminal).
• Illustrate the type of transactions covered. Clearly disclose that overdraft protection fees may be imposed in connection with transactions such as ATM withdrawals, debit card transactions, preauthorized automatic debits, telephone-initiated transfers or other electronic transfers, if applicable.

Program Features and Operation

• Provide election or opt-out of service. Obtain affirmative consent of consumers to receive overdraft protection. Alternatively, where overdraft protection is automatically provided, permit consumers to "opt out" of the overdraft program and provide a clear consumer disclosure of this option.
• Alert consumers before a non-check transaction triggers any fees. When consumers attempt to use means other than checks to withdraw or transfer funds made available through an overdraft protection program, provide a specific consumer notice, where feasible, that completing the withdrawal will trigger the overdraft protection fees. This notice should be presented in a manner that permits consumers to cancel the attempted withdrawal or transfer after receiving the notice. If this is not possible, then post notices on proprietary ATMs explaining that withdrawals in excess of the actual balance will access the overdraft protection program and trigger fees for consumers who have overdraft protection services. Institutions may make access to the overdraft protection program unavailable through means other than check transactions.
• Prominently distinguish actual balances from overdraft protection funds availability.
• Promptly notify consumers of overdraft protection program usage each time used.
• Consider daily limits.
• Monitor overdraft protection program usage. Monitor excessive consumer usage, which may indicate a need for alternative credit arrangements or other services, and should inform consumers of these available options.
• Fairly report program usage.