ABA Staff Analysis: OTS prpsed supplement t Overdraft Guidance April 2010 On April 23, 2010, the OTS released fr cmment a prpsed supplemental guidance n verdraft prtectin 1 t update its Overdraft Guidance issued in February 2005. It says the prpsal is designed t cmplement rather than replace the 2005 Overdraft Guidance, and encurages institutins t review verdraft prgrams t cnfirm that they are perated in a manner that is effective, cmpliant with the law, and fair t cnsumers. In effect, the OTS is prpsing t equate unfair r deceptive practices with failure t fllw sme f its best practices. Much f the prpsal reflects a recent settlement with Wdfrest Bank regarding verdraft practices. The OTS s apprach raises imprtant issues and cncerns as the prpsal: Classifies certain practices as unfair r deceptive including: Marketing accunts with verdraft prtectin t thse with previus difficulty managing financial accunts as accunts that will help avid future financial challenges; Marketing an accunt r accunt feature as free withut describing infrmatin abut the cst f verdraft transactins; Nt prmptly ntifying custmers f verdraft usage each time it is used; and Nt impsing daily limits n aggregate verdraft fees. Abslves custmers f basic management respnsibilities in sme cases. Fails t prvide meaningful r useful analysis s as t create uncertainty and legal vulnerability with regard t cmmn practices. Cntrary t recent trends, leans tward adding significant new disclsures that will tend t clutter disclsures and lead t infrmatin verlad. Creates supervisry expectatins at dds with the recent Federal Reserve Bard rulemaking. In additin, the OTS is sliciting cmment n whether it shuld adpt a regulatin requiring that verdraft fees be reasnable and prprtinal. Cmments are due 60 days after publicatin in the Federal Register. Specific Overdraft Practices: 1. Fairly represent verdraft prtectin prgrams. 2 The OTS here fcuses n cncerns abut marketing verdraft prgrams t thse wh have had difficulty managing accunts in the past and stresses that the need t review the cnsequences f veruse f verdraft services is heightened where assciatins target cnsumers wh have experienced financial difficulties. It advises that institutins shuld avid marketing accunts cvered by verdraft prtectin in a manner that leaves the impressin that the accunts are designed t help avid future financial challenges, especially when cntrary infrmatin is mitted. The prpsal cntinues, Fr example, it wuld be a material misrepresentatin t market an accunt as particularly suitable fr thse with prir credit r bank accunt prblems withut infrming cnsumers f significant verdraft fees assciated with an accunt... Failing t prvide such cnsumers with fee infrmatin appears t significantly impair their ability t determine whether an accunt meets their needs. Failure t prvide infrmatin abut fees in these circumstances (i.e., marketing that accunts are designed t help avid financial prblems withut 1 G t: http://www.ts.treas.gv/_files/482132.pdf All page references will refer t the riginal release 2 Page 13 1
disclsing fees) is a deceptive practice. It appears that clear disclsure f verdraft fees at accunt pening r in accunt agreements is nt sufficient t infrm cnsumer chice if marketing materials excluded mentin f such fees. The prpsal prvides little detail abut hw fees shuld be disclsed and whether a disclsure abut the per item fee in these cases is sufficient. In additin, it verlks the new pt in requirement under Regulatin E. 2. Prvide infrmatin abut alternatives when they are ffered. The prpsal suggests that in additin t prviding infrmatin abut alternatives when infrming cnsumers abut an verdraft prtectin prgram as suggested in the current Overdraft Guidance, institutins shuld address hw the terms, including fees, fr these services r prducts differ. In additin it suggests that an affrdable small dllar term lan might serves as an alternative t fee based verdraft prtectin, and references the FDIC s small dllar lan mdel. The mst recent FDIC reprt (2009) fund these prgrams s far t be unprfitable generally. 3. Clearly explain the discretinary nature f the prgram. 3 Regulatin DD requirements t explain the discretinary nature f verdraft payments are referenced, but nthing additinal is prpsed. 4. Distinguish verdraft prtectin prgrams frm free accunt features. 4 Regulatin DD prhibits institutins frm prmting free accunts and verdraft prtectin prgrams in the same advertisement in a way that suggests verdraft prtectin is free. The prpsed guidance ges further, prviding: [I]t wuld be a material misrepresentatin t use marketing that fcuses n accunt features that are free r inexpensive, but mits infrmatin abut the cst f each verdraft transactin. This is particularly true when cnsumers have been autmatically enrlled in prgrams that charge a significant fee fr each verdrawn transactin. The net impressin f such marketing may be t mislead cnsumers acting reasnably under the circumstances t believe that the ttal cst f the accunt (including verdraft prtectin ) is free r inexpensive and t be unaware that engaging in verdraft transactins will result in the assessment f significant verdraft fees. (Emphasis added.) The prpsal cncludes that such circumstances are deceptive and vilate UDAP and the OTS advertising rule. First, it is nt clear why the prpsed language includes instances where custmers have been autmatically enrlled in verdraft prgrams as this is n lnger permitted under Regulatin E. Secnd, it is nt clear whether this prvisin nly applies t advertisements r marketing that includes infrmatin abut verdraft prgrams r any accunt advertisement. Finally, the meaning f significant is nt clear and pens the analysis t being applied t the failure t reveal NSF fees when marketing free accunts. 5. Clearly disclse prgram fees. 5 The prpsal makes references t Regulatin DD requirements that peridic statements include a ttal dllar fr all fees r charges impsed n the accunt fr paying verdrafts. 3 Page 14 4 Page 15 5 Page 16 2
6. Clarify that fees will reduce the amunt f verdraft prtectin prvided. 6 The prpsal restates the current Overdraft Guidance that institutins alert cnsumers that verdraft fees and verdraft items will be subtracted frm the verdraft prtectin limit disclsed. The prpsal deems failure t d s t be deceptive because failure t d s might cause a cnsumer t prceed with a transactin n the basis that it will be cvered by the verdraft prtectin, when in fact the transactin will be denied r the item returned. What is unclear frm the prpsal is whether this is different frm the bligatin t disclse prgram fees as required by Regulatin DD. It is als unclear whether this explanatin is required t be cntained in marketing materials. 7. Demnstrate when multiple fees will be charged. 7 The current Overdraft Guidance recmmends that institutins clearly disclse that mre than ne verdraft fee may be charged each day. The prpsal prvides that mitting such infrmatin is deceptive, whether r nt the institutin prmtes verdraft prtectin. It is nt clear frm the analysis whether this explicit disclsure must be included in marketing materials. 8. Explain the impact f transactin clearing plicies. 8 The current Overdraft Guidance recmmends clearly disclsing prcessing and clearing plicies. The prpsal prvides that failure t d s is deceptive. Applicatin f this cnclusin wuld make many prgrams illegal as they are described tday. Given that these explanatins are ntriusly difficult t explain clearly and accurately and that there has been significant litigatin n the matter, cmpliance wuld be virtually impssible and wuld likely lead t cnsumer cnfusin. 9. Illustrate the type f transactins cvered. 9 The prpsal re-states the current Overdraft Guidance that disclsures make clear that verdraft fees may be impsed n ATM and ther debit card transactins and the Regulatin DD prvisin that expressly requires the disclsure. 10. Disclse accunt balances in a manner that distinguishes cnsumer funds frm funds made available thrugh verdraft prtectin. 10 The prpsal restates the current Overdraft Guidance and Regulatin DD that requires where an institutin disclses balance infrmatin thrugh an autmated system, it must disclse a balance that excludes mney available thrugh a discretinary verdraft prtectin service, line f credit, r linked accunt. The OTS cntinues t encurage assciatin t make use f this apprach whenever accunt balances are disclsed, nt just when autmated systems are emplyed. 11. Prmptly ntify cnsumer f verdraft prtectin prgram usage each time used. 11 The current Overdraft Guidance advises institutins t prmptly ntify cnsumers f verdraft prtectin prgram usage each time used. The prpsed Overdraft Guidance prvides that failing t d s, including failing t prvide a cnsumer with the infrmatin necessary t return the accunt t a psitive balance is deceptive. The ratinale is that cnsumers may be misled int believing that the balance is psitive and influence their decisin whether t make a depsit r prceed with a transactin that may cause an verdraft and fee. In additin, the prpsal adds, Where technlgically feasible t d s, real 6 Page 17 7 Page 17 8 Page 18 9 Page 18 10 Page 19 11 Page 20 3
time ntificatin shuld be prvided. It is nt clear whether institutin must ffer, fr example, e-mail alerts r text r phne messages. This standard exceeds requirements under Regulatins E r DD. 12. Infrm cnsumers when access t verdraft services will be r has been reinstated after suspensin. 12 The prpsal adds a new prvisin that it is deceptive t fail t ntify cnsumers abut the circumstances in which verdraft prtectin may be reinstated after suspensin, e.g. when a depsit clears the utstanding verdraft and fee balance, n the basis that the cnsumer may be led t believe that verdraft will: [D]efinitely nt be available, when in fact it is r may be available. As a result, a cnsumer may verdraw an accunt withut appreciating that significant verdraft fees may result. Fr example, a cnsumer may attempt a pint f sale transactin believing that it will be denied withut charge if sufficient funds are nt available. Hwever, if verdraft prtectin has been reinstated and the transactin is paid despite insufficient funds, the cnsumer wuld be charged ptentially significant verdraft fees. It appears that an initial disclsure that verdraft prtectin is reinstated when a depsit clears is sufficient. Prgram Features and Operatin 1. Prvide cnsumer chice 13 The prpsal ntes the new Regulatin E requirements that custmers prvide affirmative cnsent befre an institutin may impse an verdraft fee fr an ATM r ne-time debit card verdraft. The OTS recmmends in the prpsal that as a best practice, institutins als prvide pt-in t transactins utside the scpe f Regulatin E s requirement, i.e., check and ACH transactins. The prpsed guidance des nt state that failure t d s is unfair r deceptive. Hwever, it des relate pt-in t ensuring an infrmed chice. This premise pens up the pssibility that failure t have pt-in fr check verdrafts impairs the cnsumer s decisin and is cnsequently deceptive r unfair. 2. Reasnably limit aggregate verdraft fees. 14 Nting that a small number f custmers pay mst f the verdraft fees, that the current Overdraft Guidance advises institutins cnsider a daily cap n verdraft fees, and that histrically the OTS and its predecessr agency have said that fees charged by savings assciatins are t be reasnable, the prpsal states, In sme circumstances, failure t impse a reasnable limit n aggregate verdraft fees is an unfair practice under the FTC Act. It cntinues: The risk f engaging in an unfair practice is heightened when an assciatin fails t limit fees fr cnsumers wh frequently verdraw their accunts, and, as a result, such cnsumers incur substantial injury in the frm f unreasnable and excessive verdraft fees... Fr example, where verdraft prtectin is marketed deceptively, cnsumers may lack the infrmatin needed t make a reasnable chice amng prgrams. Regardless f hw verdraft prtectin is prmted, thse wh frequently verdraw accunts may simply nt have ther ptins in the market, as they may have credit histries and ther characteristics that prevent them frm btaining less expensive 12 Page 21 13 Page 22 14 Page 23 4
services. Ntably yung cnsumers and thse with lwer incmes tend t exhibit a pattern f recurring verdrafts and a high vlume f fees. The prpsal specifically highlights tw circumstances where the harm utweigh the benefit: where the cnsumers aggregate verdraft fees exceed: the average daily balance f their accunts r the verdraft limit n their accunts. It appears that the prpsal is referring t the daily aggregate verdraft fees, as, even thugh nt qualified specifically, the earlier reference is t daily caps. Hwever, the prpsal des nt indicate ver what perid the average daily balance is t be calculated. Assuming it the previus mnth s average daily balance, fr example, if the average daily balance f an accunt was $250, the aggregate daily verdraft fee limit is $250. Similarly, if the verdraft limit is $300, the mst that culd be charged in a single day is $300.The prpsal ntes that the OTS wuld nt expect mst institutins t reach such levels. There is n indicatin f why r hw these standards were selected. In additin, the prpsal prvides that institutins shuld als mnitr custmer usage f verdraft prtectin as utlined in the subsequent sectin. Where use becmes excessive, assciatins shuld either limit it r ffer cnsumers any lwer cst services that may be available. 3. D nt manipulate transactin-clearing rules. 15 Nting the current Overdraft Guidance warning that psting rder shuld nt be unfair r manipulated t inflate fees, the prpsal explains, Such a situatin wuld ccur, if fr example, a savings assciatin varied its transactin-clearing rules n a daily, custmer-by-custmer basis in rder t maximize each custmer s fees. The OTS adds that such fee generatin nt nly fails t benefit the market, it suggests a lack f transparency: ecnmically ratinal cnsumers wuld likely mve their accunts t ther institutins if they understd that their transactins were being psted in an unfair manner. Accrdingly, such practices are unfair. 4. Mnitr verdraft prtectin prgram usage. 16 The prpsal restates the imprtance f mnitring verdraft prtectin usage as bth a safety and sundness cnsideratin and best practice. 5. Fairly reprt prgram usage. 17 The prpsal ntes that the current Overdraft Guidance advises savings assciatins against furnishing negative infrmatin t credit reprting agencies. Hwever, in fact, the current guidance refers t cnsumer reprting agencies, which include nt nly credit reprting agencies, but als, fr example, ChexSystems, a negative date base fr depsit accunts. The prpsal warns institutins f new rules t g int effect July 1, 2010 that will require furnishers t implement written plicies and prcedures regarding the accuracy and integrity f the infrmatin furnished t cnsumer reprting agencies. The prpsal adds, Furnishing negative infrmatin t CRAs when verdrafts are paid under the terms f an verdraft prtectin prgram may nt be accurate because such infrmatin may nt reflect the terms f the accunt r the cnsumer s perfrmance and ther cnduct with respect t the accunt. 15 Page 25 16 Page 26 17 Page 26 5
Specific request fr cmment regarding limits n fees. 18 The OTS is asking whether it shuld adpt standards regarding the verdraft fees similar t thse adpted by Cngress fr credit card penalty fees. Cngress amended the Truth in Lending Act t require that credit card penalty fees be reasnable and prprtinal t such missin r vilatin. It is nt clear what the plicy mtivatin r statutry authrity fr OTS t adpt a similar standard fr verdraft fees. 18 Page 7 6