Compliance Blog

Posted by Anthony Demangone

Editor's apology: This is a long post.  Especially for a Friday.  But I think it is important enough to merit the length.

Yesterday, the Federal Reserve held a tele-conference to offer guidance about recent amendments to Regulation E that affect overdraft protection programs. You can access the presentation materials here. 

The teleconference revealed a very important, and potentially costly, clarification.  But first, let me give a wee bit of background.

In short, the changes to Regulation E will mean that after July 1, 2010, you may not charge a fee when a non-recurring debit card or ATM transaction overdraws an account unless you have given that member disclosures describing your overdraft program - and the member opts in.  Again - unless the member opts in, you will not be able to charge a fee for such debit card and ATM transactions that overdraw an account.

There is an exception, though.  If your credit union has a policy that it only pays those non-recurring debit card or ATM transactions when funds are available when the authorization comes in, you will not need to comply with the opt-in requirements.  But does that exception allow you to charge fees as well, or just it just relieve you from the notification and opt-in requirements?  And that's a bid deal.

Even for credit unions that do not have overdraft programs and fit within that exception, some non-recurring debit card and ATM transactions will sneak through.  Examples?  Your ATM network goes offline and the member makes a withdrawal that exceeds the account balance.  Or the gas station only sends an authorization through for $1, before the member pumps $100 of gas into his Hummer.  Collectively, I'll call these "gas station" transactions. But, the exception still stands.  You don't have to comply with the opt-in requirements in order to process them.  If you can charge fees for those, that's a good deal of revenue.  If not, you might have a big revenue hole to fill.

Here's the clarification that caught everyone's attention.  You'll find it on pages 14 and 15 of the Fed's presentation via the link above.  The exception is only for the opt-in disclosure.  The exception does not allow you to charge a fee. The presentation clarifies that there is no exception that allows a credit union to charge a fee for any non-recurring debit card or ATM transaction that overdraws an account.  You to have the opt-in.  So, for the "offline ATM" transaction, or the "gas station" transaction that takes the account negative, you cannot charge a fee without that opt-in.

Enter Troy.  I don't know who Troy is, but his question summed up everyone's frustration.  You could practically hear his teeth grind as he spoke.

His bank does not have an overdraft program.  They do not pay any transaction unless funds are available when the check, ATM transaction or debit card authorization comes in.  So he fits within the exception.  His bank does not have to send the "opt-in" form to its customers.

But his bank has charged, and wishes to continue charging, a fee when those "gas station" transactions hit accounts.  Those transactions take accounts negative, and he wants to charge a fee to mitigate the risk of the negative account.  How does he go about charging that fee after July 1. 

One of the Fed speakers said to use the opt-in form.  But Troy correctly pointed out that an opt-in form won't really work, because what would the member be opting into?  His bank has no choice but to clear the "gas station" transaction, even if the member does not opt in.  The member is really only opting into the fee! 

The other Fed speaker paused, and said that they just never considered that a financial institution would want to charge fees for "gas station" transactions. (As my colleague Steve said during the training session, perhaps the Fed should spend a little less time on consumer testing, and spend a little bit more on learning how our industry does business.)

Troy followed up and said that this whole debacle has created an unintended consequence.  Credit unions or banks that want to charge fees for "gas station" transactions may have to consider creating a full-blown overdraft protection program for debit and ATM cards.  Something Troy does not want to do. 

We're sending a letter to the Fed to underscore our concerns on the subject.

Happy Friday, everyone.

Editors's Note: Reportedly, the Fed will issue some clarifying guidance on this issue in January.