The Fed Notices an Overdraft – Decides to Close the ATM Window

This post was written by Roberta G. Torian and Joseph I. Rosenbaum.

On Nov. 12, the Federal Reserve Board released its final rule on overdrafts for ATM and one-time debit card transactions (the “Final Rule”), which amends Regulation E. Although it hasn’t been published in the Federal Register yet, Legal Bytes thought you might like a little heads-up as to what is in the new Final Rule.

To start, a financial institution will have to obtain a consumer’s consent – in advance – to assess a fee for paying an overdraft in an ATM or one-time debit card transaction. To get consent, the financial institution must provide a description, give the consumer an opportunity to opt-in; and if consent is given (which can be revoked at any time), give the consumer written or electronic confirmation. While existing customers who haven’t opted in to the overdraft program by then can’t be charged a fee for these overdrafts after Aug. 15, 2010, for everyone else, compliance is required by July 1, 2010.

Here’s one you might not have considered. What if the system in place with the financial institution doesn’t distinguish between various types of overdrafts (e.g., one-time debit card versus recurring debit card transactions)? Well there is a safe harbor, but you’ll have to call Roberta G. Torian (or read the Final Rule yourself).

Now, the Final Rule doesn’t mean a financial institution is required to pay overdrafts, whether or not a consumer has consented, and it still allows them to maintain policies on overdraft limits, frequency, and other factors that would restrict the customer’s overdraft privileges. In other words, it doesn’t change an institution’s right to manage its overdraft program or risk – only the situations where it can charge a fee to the consumer.

The Final Rule does, however, delve a bit more deeply into the marketing and cross-selling considerations financial institutions must comply with. For example, the Final Rule prohibits conditioning other account services on opting in to the overdraft service. Furthermore, the consumer must be offered the same account terms, conditions and features, whether or not they opt-in to the overdraft program.

The Federal Reserve Board has created a model form for use by financial institutions (one that can be modified to fit the individual programs available) to obtain the consumer’s opt-in consent, and that highlight the disclosures required by the Final Rule. The form was developed because the Final Rule also prohibits including this new overdraft "consent" as part of the basic account agreement when a consumer opens an account. In other words, you need to give the consumer a meaningful opportunity to decide whether to opt-in, and not simply bury the "consent" in a string of clauses and terms.

Although the rule has not yet been published in the Federal Register, you can download a copy of the Final Rule right here. But if you really want to know the (opt) ins and (opt) outs of Regulation E, contact Roberta G. Torian, Joe Rosenbaum or any of the lawyers at Rimon with whom you work. Rimon has a full service Financial Institutions Group that can help virtually any financial institution with legal support, service, and representation, whenever and wherever the need arises. Call us, we are happy to help.