Alert November 17, 2009

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.