Compliance Blog

Posted by Anthony Demangone

On Friday, I wrote about the recently issued final rule that amends Regulation E to provide new consumer protections concerning overdraft protection.  My phone and email box starting to overheat, and generally it was in reference to this question: What about those transactions where we have to pay a point of sale debit card transaction that overdrafts the account because the gas station only authorized $1, but the transaction posts for $60?

Please allow me to give you the 50-cent answer, because I think it is important to see how this new final rule will work. Here's a link to the final rule.  Please print it out or save it to your computer.  I'll reference certain pages of the final rule, so having a copy would be beneficial.

The general rule:  Outside of applicable exceptions, a financial institution holding a consumer's account, shall not assess a fee or charge on a consumer's account for paying an ATM or one-time debit card transaction pursuant to the institution's overdraft program, unless you comply with the notice and opt-in requirements. Section 205.17(b), pp. 79-80

Let's stop and think about that.

1. First, this only applies to consumer accounts. Commercial accounts need not be included.
2. Overdraft program.  Is it defined?  You bet.   At section 205.17(a).  It defines it 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."  It does not include a line of credit subject to Reg Z, transfers from savings accounts, or a line of credit or other transaction exempt from Regulation Z.  You'll find this on pp. 78-79.  This definition limits the new rule's scope.
3. Finally, there's an exception.  Let's explore that.

The exception.  Here it is, word for word.

The requirements of § 205.17(b)(1) do not apply to an institution that has a policy and practice of declining to authorize and pay any ATM or one-time debit card transactions when the institution has a reasonable belief at the time of the authorization request that the consumer does not have sufficient funds available to cover the transaction. Financial institutions may apply this exception on an account-by-account basis. Section 205.17(b)(4).  p. 80.

So, if your credit union has a policy and practice of declining to authorize and pay ATM or one-time debit card transactions when you have a reasonable belief at the time of the authorizationrequest that the consumer does not have sufficient funds available to cover the transaction - you do not have to send out the opt-in notification.

But why would you?  If you have a policy and procedure of only paying these transactions when funds are available, then you technically have a policy of not allowing members to overdraft their accounts using these transactions.  There'd be nothing for the member to opt-in to.  As we read the final rule, there's nothing that appears to prevent credit unions from charging fees in this situation.

If, on the other hand, you do have a policy and practice of paying such transactions when funds are not available pursuant to an overdraft program as defined by Reg E, then you do have to send an opt-in notice as required by the regulation.

So, what about those gas station transactions that we discussed earlier?

This is where it gets very hazy.  The following discussion comes from pp. 52-53.

...The Board believes that consumers who make the choice not to opt in may reasonably expect an ATM or one-time debit card transaction to be declined if there are insufficient funds in their account, and that they will not be charged overdraft fees. Adopting exceptions to the prohibition on fees would undermine the consumer’s ability to understand the institution’s overdraft practices and make an informed choice.

    The Board recognizes that financial institutions and consumers have imperfect information as to the balance in the account at the time of the transaction. Financial institutions face operational limitations in processing transactions, and in tracking the consumer’s actual balance, because transactions may not be processed in real-time. Similarly, even if a consumer checked his or her balance prior to a transaction, the balance may not be updated, so the consumer may inadvertently overdraw his or her account on the belief funds are available. On balance, the Board believes financial institutions are in a better position to mitigate the information gap by developing improved processing and updating systems, as they have in recent years, and as the Board expects they will continue to do over time.

    The rule does not, however, prohibit financial institutions from paying overdrafts for ATM and one-time debit card transactions even if a consumer has not affirmatively consented or opted in to the institution’s overdraft service, so long as a fee is not imposed. For example, under network rules, financial institutions must pay authorized debit card transactions, even if at settlement intervening transactions by the consumer have reduced the consumer’s available balance below the authorized amount of the transaction. To address any safety and soundness concerns, and as discussed above, institutions may debit the consumer’s account for the amount of the overdraft, provided that the institution is permitted to do so by applicable law.

So, where does that leave us?

Those without an overdraft program, who are eligible for the exception. If you look at the regulation itself and not the guidance, the regulation only says that an institution cannot charge a fee to a consumer's account pursuant to an overdraft protection program unless the consumer has opted in as outlined in the regulation.  Credit unions without an overdraft protection program as outlined by the rule (those who have a policy not to pay POS and ATM overdrafts when they reasonably determine that funds are not available) are not subject to the notice and opt-in requirement.  So it appears they have an argument that they can pay those gas station transactions and nothing appears to prohibit them from charging a fee.

Those with an overdraft program, who are ineligible for the exception.  They have to give the notice and opt-in. And the guidance above appears to show the Fed's thoughts that if a member chooses not to opt-in, these institutions can pay the "gas station" transaction - but cannot charge a fee.

The strange aspect of this is that there appears to be a disconnect between the guidance and the actual Reg.  The reg creates a clean exception, but that exception gets muddy when you read the explanatory language that comes with the regulation.  I wish this were an easy, clear issue - but it isn't. This rule is a big deal for many of you, so I urge you to do your own research.  We're digging through this as quickly as we can, but nothing compares to a legal opinion provided by competent legal counsel.

And remember that this analysis doesn't take into account the various legislative fixes that might address the number of possible overdrafts in a day or month and the amount of overdraft fees.