"Free" Accounts and Overdraft Fees
Written by Jennifer Aguilar, Regulatory Compliance Counsel, NAFCU
As I am sure you are all aware, the Truth in Savings regulation has strict rules on when credit unions may advertise an account as “free.” Essentially, if a maintenance or activity fee may be imposed on the account, the account cannot be advertised as free. The commentary provides a number of examples of fees that are and are not maintenance or activity fees. However, the commentary does not address all the potential types of fees that a credit union may impose, leaving credit unions to make a determination whether its fee is a maintenance or activity fee. Today's blog addresses a common fee that is not directly addressed in the commentary: fees for overdraft protection programs.
Determining whether an overdraft fee is a maintenance or activity can be a rather challenging analysis as you have to read through several scattered portions of the commentary. First, let’s start with the commentary on which fees are maintenance and activity fees. Comment 3 to section 707.8(a) explains that “transaction and service fees that members reasonably expect to be imposed on an account on a regular basis” are maintenance and activity fees. The commentary points specifically to comments 1 and 2 to section 707.4(b)(4) to determine which fees are transaction and service fees.
So, let’s looks at these comments. Comment 1 explains that fees such as maintenance fees, fees related to share deposits or withdrawals, overdraft line of credit access fees that are assessed against the share account and fees to open or close an account are included. Comment 2 explains that fees such as fees for services offered to both members and nonmembers, garnishment fees, name change fees or wrong address fees are not included. As you will notice, the only reference to an overdraft fee is an overdraft line of credit access fee, but general overdraft fees are not discussed. This does not really get us anywhere, so we need to keep going.
Next, let’s look at the overdraft advertising rules. Comment 8 to section 707.11(b) covers “advertising an account as ‘free.’” The commentary explains that when the advertised account-related service is an overdraft service, the fee for paying the overdraft must be disclosed along with the other required disclosures. The commentary then points back to comment 10.v to section 707.8(a).
Finally, let’s go back to the commentary to section 707.8(a). Comment 10.v explains that an advertisement describing a “free” account may also advertise an account-related service for which a fee is charged only if the advertisement indicates that there is a fee for the service.
Putting all these pieces together – that overdraft fees are not discussed in the commentary on maintenance and activity fees and are described as an account-related service – seems to suggest that credit unions may advertise an account as “free” even if it may impose an overdraft fee on the account. The preamble to a 2005 NCUA final rule seems to support this analysis. The NCUA provided the following discussion of comment 10.v to section 707.8(a):
“The staff interpretation is revised to provide five examples of advertisements that would ordinarily be deemed misleading:
(5) Describing an account as “free” or “no cost” in an advertisement that also promotes a service for which there is a fee, including an overdraft service, unless the advertisement clearly and conspicuously indicates the cost associated with the service.”
The final rule also points back to the Federal Reserve’s rule. The preamble to the NCUA’s rule explains that the Truth in Savings Act requires the NCUA’s Truth in Savings rule to be substantially similar to the Regulation DD and that the NCUA issued the 2005 rule to meet this requirement. The preamble goes on to state that it’s final rule “tracks closely the Federal Reserve’s recent amendments to Regulation DD” and cites to the Federal Reserve’s rule. In its discussion of comment 10.v, the Federal Reserve provided the following explanation:
“The fifth example of misleading advertisements relates to the advertisement of free accounts. Under Regulation DD, an institution may not describe an account as “free” (or use a similar term) if any maintenance or activity fee may be imposed on the account. As the Board noted in the proposal, fees for overdraft services are not considered maintenance or activity fees, because the fees do not relate to the use of the consumer's own funds in the account. Thus, institutions may impose overdraft fees in connection with “free” accounts. The example addresses concerns about institutions that advertise overdraft services (or other services) as a feature of their free checking accounts in a manner that could mislead consumers to believe that the service is without cost.”
Despite this rather clear guidance from the Federal Reserve, Regulation DD has since been ported over to the CFPB. While the CFPB has not taken any formal efforts to that indicate a change in this interpretation, the CFPB has taken a hard look at overdraft programs in general. Ultimately, credit unions will need to take into consideration all the commentary and guidance addressed above, as well as UDAAP and state law, in determining whether it may impose overdraft fees on “free” accounts.