Compliance Blog

Feb 19, 2020
Categories: Consumer Lending

Exploring Regulation Z’s Opt-In Requirement for Over-the-Limit Fees

NAFCU has covered many of the different credit card rules in past Compliance Blog posts. However, one topic we haven’t covered lately is the requirements around charging members for exceeding a credit limit. Section 1026.56 covers the rules for over-the-limit transactions on a credit card. An over-the-limit transaction is “any extension of credit by a card issuer to complete a transaction that causes a consumer’s credit card account balance to exceed the credit limit.” Today’s post addresses the opt in process for over-the-limit transactions and related fees.

Section 1026.56(b) provides a blanket prohibition on charging a fee when a member exceeds a credit limit unless the credit union has properly obtained the member’s consent. The rule provides a five-step process for obtaining consent:

1.      Providing a notice, segregated from all other information, describing the member’s right to opt-in to the credit union’s payment of over-the-limit transactions;

2.      Providing the member with a reasonable opportunity to opt-in;

3.      Obtaining the member’s affirmative consent;

4.      Providing a confirmation of the consent to the member; and

5.      Providing a notice of the member’s right to revoke consent each time an over-the-limit fee is assessed.

For those aware of the opt-in requirements for overdraft service fees under Regulation E, many of these steps may look very familiar and so will the additional guidance below. Like the overdraft rules, the over-the-limit rules do not require credit unions to pay over-the-limit transactions, even if the member opts in. The commentary to section 1026.56(b) goes a step further and explains if a credit union has a policy and practice to decline all transactions that it reasonably believes would cause the member to exceed a credit limit, it is not required to complete the opt-in process. Even in these cases though, a credit union could not charge a fee for paying a transaction that ultimately causes the member to exceed the credit limit without having that member’s affirmative consent.

The rule provides specific requirements for the three notices required as part of the opt-in process. The notice describing the opt in (Step 1 above) may be provided verbally, in writing or electronically and must be provided before an over-the-limit fee is assessed. Section 1026.56(e)(1) requires the notice to include the dollar amount of any over-the-limit fee, any increased APR that may apply if the member exceeds the credit limit, an explanation of the member’s right to opt-in and the methods the member may use to opt-in. Model Form G-25(A) in Appendix G provides a model notice for credit unions to use.

The notice confirming consent (Step 4 above) must be provided on or before the first periodic statement sent after the member has affirmatively consented to the payment of over-the-limit transactions. The commentary explains providing a copy of the member’s completed opt-in or a letter acknowledging the member’s opt-in are both sufficient to meet this requirement. A credit union may also provide notice on the first periodic statement, but it may not assess an over-the-limit fee until the statement has been provided.

The notice of the right to revoke consent (Step 5 above) must be provided on the front page of each periodic statement reflecting an over-the-limit fee. Section 1026.56(e)(2) requires the notice to include a description of the member’s right to revoke and the methods the member may use to revoke consent to the payment of over-the-limit transactions. Model Form G-25(B) in Appendix G provides a model notice for credit unions to use.

The rule also provides additional details on providing members with a reasonable opportunity to opt in (Step 2 above) and obtaining consent (Step 3 above). A credit union gives members a reasonable opportunity to opt-in when it provides a reasonable method for the member to do so. For example, providing notice on the application form that the member can request payment of over-the-limit transactions as part of the application or providing a form online where the member can opt-in. Comment 3 to section 1026.56(b) provides additional examples.

Section 1026.56(c) explains credit unions may permit members to opt-in verbally, in writing or electronically. The rule requires credit unions to permit members to revoke consent in the same methods it permitted them to opt-in. Consent and revocation can be provided electronically without E-SIGN consent. The commentary notes the opt-in must be obtained separately from all other consents. A signature on an application is not, by itself, sufficient but a signature on a line designated for opting in to the over-the-limit service can be sufficient.

While these requirements are not new, periodically reviewing opt in procedures may help ensure a credit union avoids any compliance violations or exam findings.

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