Overdraft Opt-In Notices: What about Checks?
Hi, Compliance Friends! It's already March, so we are busy preparing for our semi-annual Regulatory Compliance School. Every year NCUA publishes its annual supervisory priorities. Amongst this year's priorities, the NCUA has identified Overdraft Services as an area of interest. This blog presents an analysis for when opt-in notices are required, especially for checks that have been returned for insufficient funds.
One-time Debit Card and ATMs
Pursuant to section 1005.17(b)(1), Regulation E's opt-in requirement only applies to ATM and one-time debit card transactions. From a plain-reading of the regulatory text, there is no regulatory requirement for an opt-out with regard to overdrafts for paper checks. However, interagency guidance has indicated that offering an election or opt-out of services is a best practice, both from a safety and soundness perspective and to avoid potential UDAAP issues with regard to overdrafts.
To begin this analysis, we are going to want to look at section 1005.17(b)(1):
(b) Opt-in requirement—
(1) General. Except as provided under paragraph (c) of this section, a financial institution holding a consumer's account shall not assess a fee or charge on a consumer's account for paying an ATM or one-time debit card transaction pursuant to the institution's overdraft service, unless the institution:
(i) Provides the consumer with a notice in writing, or if the consumer agrees, electronically, segregated from all other information, describing the institution's overdraft service;
(ii) Provides a reasonable opportunity for the consumer to affirmatively consent, or opt in, to the service for ATM and one-time debit card transactions;
(iii) Obtains the consumer's affirmative consent, or opt-in, to the institution's payment of ATM or one-time debit card transactions; and
(iv) Provides the consumer with confirmation of the consumer's consent in writing, or if the consumer agrees, electronically, which includes a statement informing the consumer of the right to revoke such consent.
(emphasis added). As the excerpt notes above, the prohibition is specific to a credit union's ability to charge a fee for the overdraft payment, not to the credit union's payment of the overdraft. The commentary to section 1005.17(b) states that a credit union "may pay overdrafts for ATM and one-time debit card transactions even if a consumer has not affirmatively consented or opted in to the institution's overdraft service. If the credit union pays such an overdraft without the member's affirmative consent, however, it may not impose a fee or a charge for doing so." Note, Regulation E does not prohibit the credit union from debiting the member's account for the overdrawn amount.
From reviewing the quoted text from the commentary above, Regulation E uses the term "overdraft service." Taking this a step further, it seems this requirement applies for any courtesy pay, bounce protection or overdraft program that meets the definition of an "overdraft service" in Regulation E, regardless of how the program is titled by a credit union. Let's review the definition of overdraft service below from section 1005.17(a):
(a) Definition. For purposes of this section, the term “overdraft service” means a service under which a financial institution assesses a fee or charge on a consumer's account held by the institution for paying a transaction (including a check or other item) when the consumer has insufficient or unavailable funds in the account…
(emphasis added). Thus, an opt-in is not required for overdraft service generally, only to assess a fee in connection with one-time debit card and ATM transactions.
However, in NCUA Letter to Credit Unions 2005-03 and the Interagency Guidance on Overdraft Protection Programs, NCUA stated that best practices for overdraft programs include providing election or opt-out services:
"Program Features and Operation
- Provide election or opt-out of service. Obtain affirmative consent of consumers to receive overdraft protection. Alternatively, where overdraft protection is automatically provided, permit consumers to "opt out" of the overdraft program and provide a clear consumer disclosure of this option." NCUA Letter to Credit Unions 2005-03, pp. 19.
In general, additional scrutiny from examiners is mostly rooted in giving members insufficient information and control regarding overdraft services. Consequentially, offering additional information and control can be a key step in compliance risk mitigation. Below is additional generalized language from the guidance:
Clear disclosures and explanations to consumers of the operation, costs, and limitations of an overdraft protection program and appropriate management oversight of the program are fundamental to enabling responsible use of overdraft protection. Such disclosures and oversight can also minimize potential consumer confusion and complaints, foster good customer relations, and reduce credit, legal, and other potential risks to the institution. Institutions that establish overdraft protection programs should, as applicable, take in to consideration the following best practices, many of which have been recommended or implemented by financial institutions and others, as well as practices that may otherwise be required by applicable law. While the Agencies are concerned about promoted overdraft protection programs, the best practices may also be useful for other methods of covering overdrafts. These best practices currently observed in or recommended by the industry include: […]"
Providing these additional opt-outs can help the credit union avoid allegations of unfair, deceptive or abusive practices. From a reputation risk perspective, it clearly establishes the rules and expectations of account ownership with the credit, thus mitigating possible unrest amongst the membership.
Below are several resources from the NCUA and CFPB to assist credit unions in reviewing their overdraft programs in advance of examination:
- Regulation E's requirements for overdraft services found at 12 C.F.R. § 1005.17, its commentary, and Model Form A-9 illustrating these requirements.
- NCUA guidance:
- NCUA AIRES Exam Questionnaires, Overdraft (Bounce) worksheet;
- Risk Alert 10-RA-12, "Member Notice Requirements for Overdraft Services";
- Letter to Credit Unions 05-CU-03, "Overdraft Protection (Bounce Protection) Programs";
- Interagency Overdraft Services Consumer Compliance Discussion Outlook Live Webinar.