5555 Bankers Avenue, Baton Rouge, LA 70808, Phone: (225) , Fax: (225) Regulatory Review RR JUNE 19, 2008

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1 5555 Bankers Avenue, Baton Rouge, LA 70808, Phone: (225) , Fax: (225) PROPOSED RULES Regulatory Review RR JUNE 19, 2008 ***************IN THIS ISSUE*************** Truth-in-Savings Overdraft Services...1 Amendments to Regulation Z... 4 ******************* PROPOSED RULES ******************* TRUTH-IN-SAVINGS OVERDRAFT SERVICES * Applies to: All financial institutions. * Summary: The Federal Reserve Board has issued a proposed rule that would amend Regulation DD and the regulation s staff commentary. The proposed amendments relate to the content and timing requirements for notices to consumers about the right to opt-out of an overdraft service offered by a financial institution. The proposed amendments expand the requirements for disclosing overdraft fees on periodic statements and address balance disclosures provided in response to inquiries from consumers. Comments must be received by the Federal Reserve Board on or before July 18, * Details: The Truth-in-Savings Act is implemented by the Federal Reserve Board s Regulation DD. The Act and regulation are intended to assist consumers in comparing deposit accounts offered by depository institutions, principally through the disclosure of fees, the annual percentage yield, interest rate, and other terms. The regulation s

2 Page 2 provisions are further explained by an official staff commentary which interprets the requirements of Regulation DD. Historically, if a consumer overdrew his or her demand account, the consumer s depository institution used its discretion to determine whether to pay the overdraft. If an item creating the overdraft was paid, a fee was imposed. In recent years, decisions regarding the payment of items creating overdrafts has become largely automated and many depository institutions now offer overdraft services to consumers. Although overdraft services vary among institutions, they generally share certain characteristics. Under most overdraft programs, coverage is automatic for consumers who meet certain criteria (e.g., the account has been open for a certain number of days, is in good standing, and deposits are made regularly). Overdraft services, although widely used by consumers, have been the subject of some confusion and misunderstanding among consumers. In 2005, the Federal Reserve Board revised its Regulation DD and staff commentary to address concerns about the uniformity and adequacy of disclosures of overdraft fees generally and overdraft services in particular. The final rule, which became effective on July 1, 2006, required all depository institutions to specify in their account disclosures the categories of transactions for which an overdraft fee may be imposed, and to include in their advertisements about overdraft services certain information about the costs associated with the service and the circumstances under which the institution would not pay an overdraft. Institutions that promoted the payment of overdrafts in an advertisement were also required to disclose separately on their periodic statements the total amount of fees and charges imposed on the account for paying overdrafts and the total amount of fees charged for returning items unpaid. Concerned that consumers still may not adequately understand the cost of overdraft services or how such services operate generally, the Board has published for comment additional disclosure requirements relating to overdraft services. The following is an overview of the Board s proposed revisions to Regulation DD and the regulation s staff commentary. Opt-Out Disclosure Requirements for Overdraft Services A proposed new section of Regulation DD sets forth the general rule that if a depository institution provides a consumer the right to opt-out of the institution s payment of overdrafts pursuant to the institution s overdraft service, the consumer must be provided a notice of such right in writing. The notice must use a format that is substantially similar to the Sample Form B-10 that is included with the proposed new section (a copy of sample Form B-10 is attached to this issue of Regulatory Review). The notice must contain the following information: Overdraft Policy The categories of transactions for which a fee for paying an overdraft may be imposed (i.e., check, ATM withdrawals, and point of sale debit card transactions);

3 Page 3 Fees Imposed The dollar amount of any fees or charges for paying overdraft items; Potential Impact of Fee in Relation to Overdraft Amount A statement that a fee may be charged for overdrafts as low as $1, or the lowest dollar amount for which the institution may charge an overdraft fee; Limits on Fees Charged The maximum amount of overdraft fees or charges that may be assessed per day or per statement period, or that there is not limit to the fees that may be imposed; Disclosure of Opt-Out Right An explanation of the consumer s right to opt-out of the overdraft service and the manner in which such right may be exercised; and Alternative Payment Options A statement that the institution offers other alternatives for the payment of overdrafts, if applicable. If an institution offers a line of credit for the payment of overdrafts, such fact must also be stated in the notice. The opt-out notice required by the proposed new section must initially be provided before the overdraft service is provided and overdraft fees are imposed on a consumer s account. Notice may be given at the time of account opening. The proposed rule permits institutions that do not enroll consumers in their overdraft service until the consumer s account has been maintained in good standing for a certain period of time to provide the opt-out notice closer to the time in which overdraft services would be added to the consumer s account. Under such circumstances, the consumer must be provided a reasonable opportunity to exercise the opt-out right before any fees are imposed in connection with paying an overdraft. The opt-out notice must also be provided on each periodic statement that reflects any fees or charges for paying an overdraft or at least once per statement period on any notice sent promptly after the institution s payment of an overdraft. Additional Disclosure Requirements Regarding Overdraft Services Although periodic statements are not required by the Truth-in-Savings Act, institutions that provide such statements must disclose fees or charges imposed on an account during the statement period. Regulation DD further requires institutions that promote the payment of an overdraft in an advertisement to provide aggregate dollar amount totals for overdraft fees and for returned item fees. Such amounts must be provided for the statement period as well as for the calendar year to date. A proposed amendment would require all institutions to provide such fee disclosures, whether or not they promote the payment of overdrafts. The amendment is intended to provide all consumers that use overdraft services additional information about fees in order that they may better understand the costs associated with their accounts. The aggregate account fee disclosures must be made using a format substantially similar to Sample Form B-11 in Appendix B of

4 Page 4 Regulation DD (a copy of Sample Form B-11 is attached to this issue of Regulatory Review). Currently, Regulation DD requires institutions that promote the payment of overdrafts to include certain disclosures in their advertisements about their service to avoid confusion between overdraft services and traditional lines of credit. The Board proposes to require that institutions generally disclose only the amount of funds available for the consumer s immediate use or withdrawal, without incurring an overdraft, when a balance request is made by a consumer. The rule would apply to balance inquiries made through any automated system, including an ATM, Internet Web site, and telephone response system. Institutions may provide a second balance that includes any additional funds that an institution may advance to cover an overdraft if such fact is prominently disclosed to the consumer, along with that balance information. AMENDMENTS TO REGULATION Z * Applies to: All financial institutions. * Summary: The Federal Reserve Board is publishing for comment a series of proposed amendments to Regulation Z. The revisions build upon and make some revisions to an earlier set of proposed amendments to Regulation Z s rules for open-end (not homesecured) credit issued on June 14, Comments must be received on or before July 18, * Details: On June 14, 2007, the Federal Reserve Board (the Board) published proposed amendments to Regulation Z, which implements the Truth in Lending Act (TILA). The proposal followed a review of the TILA s rules for open-end credit that is not homesecured. The June, 2007 amendments were discussed in RR The Board is now seeking comment on additional proposed revisions to Regulation Z. The 2008 proposal would change the format and content of credit and charge card applications and solicitation disclosures as follows: Grace Period Labels. The use of the term grace period in certain tabular labels and associated disclosures would be replaced with the phrase how to avoid paying interest, or paying interest if no grace period exists, or substantially similar terminology. The Board cites prior comments that argued the term grace period is confusing for consumers. Minimum Interest Charge. Currently, card issuers must disclose in the summary table at application and account opening any minimum interest or finance charge. The Board proposes to add a de mimimis dollar amount trigger of $1.00 for disclosing minimum interest or finance charges. The trigger would be adjusted when changes to the Consumer Price Index added to the $1.00 trigger equals or exceeds the next whole dollar.

5 Page 5 Foreign Transaction Fees. The June 2007 proposal required creditors to disclose fees for purchase transactions in a foreign currency or conducted outside the United States in the summary table provided at account opening but excluded the disclosures from the table provided at application or solicitation. In response to comments received and to promote uniformity, the Board has revised its position and in the 2008 proposal is now also extending the disclosure requirement to the table provided at application or solicitation. Penalty Rate When Credit Privileges Are Terminated. Currently, card issuers are not required to disclose in the application summary table increased rates that apply when credit privileges are terminated; the 2008 proposal eliminates the exception. Oral Disclosures. With regard to oral applications or solicitations initiated by a card issuer, the 2008 proposal would require additional oral disclosures for issuers that require fees or a security deposit to issue the card that are 25 percent or more of the minimum credit limit offered for the account. Specifically, they would be required to provide the amount of available credit the consumer would have after paying the fees or security deposit, assuming the consumer receives the minimum credit limit. Account-Opening Disclosures. The 2008 proposal would require creditors assessing fess at account opening that are 25% or more of the minimum credit limit to provide a notice of the consumer s right to reject the plan after receiving disclosures if the consumer has not used the account or paid a fee after receiving a billing statement (other than an application fee that is charged to all consumers who apply for the account whether or not they are accepted for credit). Checks that Access Credit Card Accounts. The June 2007 proposal required creditors to disclose on the front of the page containing checks that access credit card accounts information such as the rates that apply if the checks are used, any transaction fees, and whether a grace period exists. The 2008 proposal would add a requirement to disclose any deadline for when consumers must use the check to receive the advertised rates. Changes in Consumer s Interest Rate and Other Account Terms. Under the 2008 proposal, a creditor is required to provide written notice to a consumer when: (1) a rate is increased due to the consumer s delinquency or default; or (2) a rate is increased as a penalty for one or more events specified in the account agreement, such as making a late payment or obtaining an extension of credit that exceeds the credit limit. The notice must be provided after the occurrence of the event that triggered the imposition of the rate increase and at least 45 days prior to the effective date of the increase. The notice would need to clarify how existing or new balances would be affected by any rate increase. Crediting Payments. The 2008 proposal deems a cut-off hour for mailed payments before 5 p.m. on the due date to be an unreasonable instruction. Creditors that set due dates on a weekend or holiday but do not accept mailed payments on those days would

6 Page 6 not be able to consider a payment received on the next business day as late for any reason. Investigating Claims of Unauthorized Transactions or Allegations of Billing Errors. The 2008 proposal clarifies that, as part of the investigation into an allegedly unauthorized transaction, a creditor may not deny a claim solely on the basis that the consumer failed to submit a signed statement or affidavit or file a police report. Advertising Provisions. In the context of plans that advertise no interest or similar terms, the 2008 proposal would require that the deferred interest period or the date by which the consumer must pay the balance or transaction in full to avoid finance charges be disclosed clearly and conspicuously in immediate proximity to each statement of no interest or similar terms. If applicable, the creditor would also need to disclose that the minimum payments required will not pay off the balance in full by the end of the deferral period. Additional details concerning the 2008 proposal can be found from the notice published in the Federal Register (Vol. 73, No. 97, beginning on page 28866; Comments must be received on or before July 18, *************** The Regulatory Review is provided to you as a member service by the Louisiana Bankers Association in cooperation with the North Carolina Bankers Association. The publication is intended to provide a concise summary rather than complete analysis of the regulations covered. Reference should be made to the regulation itself for a determination of its application to your particular circumstances. Louisiana Bankers Association P.O. Box 2871 Baton Rouge, LA Phone: (225) Fax: (225) Robert T. Taylor, Chief Executive Officer taylor@lba.org David J. Boneno, General Counsel boneno@lba.org Joseph V. Gendron, Director of Government Relations gendron@lba.org