Consumer Financial Services Alert - November 17, 2009 November 17, 2009
In This Issue

Fed Finalizes Overdraft Rule

The FRB issued a final rule that prohibits banks from charging overdraft fees on ATM and one-time debit card transactions without consumer consent. The rule requires banks to provide consumers with the right to opt in, or affirmatively consent, to the bank’s overdraft service for ATM and one-time debit card transactions. The rule does not adopt the proposed opt-out alternative. Other types of transactions, such as check and ACH transactions are not subject to the opt-in requirement. Under the rule, notice of the opt-in right must be provided, and the consumer’s affirmative consent obtained, before fees or charges may be assessed on the consumer’s account for paying overdrafts on ATM and one-time debit card transactions. The opt-in requirement applies to both existing and new accounts. The rule adopts a model form that banks may use to satisfy the notice requirement. The rule requires that consumers be provided a “reasonable opportunity” to opt in, and the rule contains a number of examples on how this standard may be satisfied in its commentary.

The rule also prohibits banks from conditioning the payment of overdrafts for checks, ACH transactions, or other types of transactions on the consumer also opting into the bank’s payment of overdrafts for ATM and one-time debit card transactions. Banks are also prohibited from declining to pay checks, ACH transactions, or other types of transactions that overdraw the consumer’s account because the consumer has not opted into the bank’s overdraft service for ATM and one-time debit card transactions.

For consumers who do not opt into the bank’s overdraft service for ATM and one-time debit card transactions, the rule requires banks to provide those consumers with the same account terms, conditions and features that they provide to consumers who do opt in, except for the overdraft service for ATM and one-time debit card transactions. The rule does not adopt the proposed alternative that would have allowed banks to vary the terms, conditions or features of the “no opt-in” account if the differences were not so substantial as to effectively compel a reasonable consumer to opt in.

The rule does not adopt the proposed exception to the overdraft fee prohibition for transactions authorized on a bank’s reasonable belief that the consumer’s account has sufficient funds to cover the transaction. The rule also does not adopt the proposed exception for transactions where a merchant or other payee presents a debit card transaction by paper-based means, rather than electronically using a card terminal, and the bank has not previously authorized the transaction.

The FRB decided not to include the debit holds proposal in the rule, believing that a more comprehensive approach among banks, card networks and merchants may be required to effectively address this issue. The FRB also stated that it is not taking action now on transaction posting order concerns, and it will continue to assess this issue.

The rule is effective July 1, 2010. Click here for the rule and here for the model notice.

HUD to “Restrain” Enforcement of New RESPA Rule for Four Months

HUD announced that it will exercise "restraint" in enforcing provisions in its new Real Estate Settlement Procedures Act rule set to become effective on January 1, 2010 during the first four months of 2010. According to HUD, it will exercise such restraint for FHA-approved lenders having demonstrated that they are making a "good faith effort" to comply with the rule. In determining whether a lender has made a good faith effort, HUD will consider (1) whether the lender has relied on the rule and other written guidance issued by HUD (e.g., the FAQs), and (2) the extent to which the lender has made sufficient investment and commitment in technology, training, and quality control designed to comply with the rule. HUD is asking other federal and state enforcement agencies to exercise the same enforcement restraint for non-FHA lenders and other settlement service providers who demonstrate a good faith effort to implement the rule. Click here for HUD’s related press release.

FDIC Adopts Final Rule Implementing SAFE Act Requirements

The FDIC adopted a final rule implementing the Secure and Fair Enforcement for Mortgage Licensing Act. The SAFE Act requires employees of depository institutions (and certain depository institution subsidiaries) regulated by one of the federal banking agencies to (1) register with the Nationwide Mortgage Licensing System and Registry, (2) obtain a unique identifier, and (3) maintain this registration in order to act as a residential mortgage loan originator. To be registered with the Registry, an employee must submit fingerprints for background check purposes, as well as information on personal history and experience. The rule provides an exception to the registration requirement for employees of agency-regulated institutions who have never been registered or licensed through the Registry as a mortgage loan originator and who have acted as a mortgage loan originator for five or fewer residential mortgage loans during the last 12 months. The rule also provides that employees who engage in loan modification activities are not considered mortgage loan originators and, therefore, are not required to register, provided that these employees do not otherwise act as mortgage loan originators. Employees are not required to obtain registrations until the Registry has been modified to accommodate these types of registrations. Once modified, employees must register within 180 days. The rule will be issued jointly by the FDIC, OCC, FRB, OTS and NCUA. Click here for a draft of the rule.

Federal Regulatory Agencies Release Final Model Privacy Notice Form

The federal banking agencies and other federal regulatory agencies, including the FTC, published final amendments to their rules that implement the privacy provisions of the Gramm-Leach-Bliley Act. The rules require financial institutions to provide initial and annual privacy notices to their customers. The amendments adopt a model privacy form that financial institutions may rely on as a safe harbor to provide disclosures under the privacy rules. The rule is generally effective 30 days after publication in the Federal Register, with certain provisions effective January 1, 2012. Click here for the rule which includes the new model privacy form.

FRB Publishes Interim Rule on Mortgage Loan Transfer Disclosures

The FRB published an interim final rule that implements a recent amendment to the Truth in Lending Act requiring new creditors to provide certain disclosures to borrowers upon the sale or assignment of their mortgage loans no later than 30 days after the acquisition date. Under the interim rule, any person or organization that acquires legal title to more than one existing mortgage loan in any 12-month period must provide the disclosures, regardless of whether that person or organization originates mortgage loans. In addition, the interim rule clarifies that disclosures are required when mortgage loans are transferred to a different legal entity, even when the transfer is a result of the original holder of the loan being subject to a merger, acquisition, or reorganization. The interim rule, however, provides an exception to the disclosure requirement for creditors that transfer or assign the loan to another party before the 30-day period lapses. The FRB notes that this exception is meant to prevent the confusion that could result if consumers receive information from creditors that no longer own their mortgage loans. The rule is effective immediately upon publication in the Federal Register. Compliance with the rule is optional until 60 days after the rule is published in the Federal Register, at which time public comments on the interim final rule are due. Click here for the rule.

FRB Proposes Gift Card Rule

The FRB proposed rules under Regulation E that would restrict the fees and expiration dates that may apply to gift cards and require certain disclosures. The proposal would prohibit dormancy, inactivity, and service fees on gift cards unless: (1) there has been at least one year of inactivity on the certificate or card; (2) no more than one such fee is charged per month; and (3) the consumer is given clear and conspicuous disclosures about the fees. Expiration dates for funds underlying gift cards must be at least five years after the date of issuance, or five years after the date when funds were last loaded. The proposal generally cover retail gift cards, which can be used to buy goods or services at a single merchant or affiliated group of merchants, and network-branded gift cards, which are redeemable at any merchant that accepts the card brand.  Comments on the proposal must be submitted within 30 days after publication in the Federal Register. Click here for the notice.