Regulation E Lesser Known ODP and Compulsory Use Provisions
The compliance team has seen a recent upsurge in Regulation E questions regarding same account terms and conditions for non-overdraft program users and automatic loan repayment requirements so we thought it would be useful to round them up in this blog.
Overdraft Program- Different Terms
We have written many blogs on the requirements of overdraft programs (ODP)—a quick recap is that credit unions must provide appropriate disclosures and obtain a member's opt-in before charging a fee for paying overdrafts for one-time debit card and ATM transactions. A question we often get regarding overdraft programs is whether the credit union can refuse to provide a debit card if a member chooses not to opt in to the overdraft program for one-time debit card and ATM transactions. This is a popular question as transactions made while the system is offline or those that place a hold will be processed regardless of whether the member's account will be overdrawn. So members that have not opted in to the credit union's ODP will benefit from having their overdrafts paid without incurring a fee, while the credit union will be on the hook for collecting the overdraft funds or eat the loss. Unfortunately this may be another one of those 'cost of doing business' issues Regulation E's consumer protections have created.
Section 1005.17(b)(3) of the regulation states that credit unions must provide the same account terms, conditions and features for members who opt in to the credit union's ODP as those who do not. This means that regardless of whether or not Member A opts in, they should have access to the same type of account as Member B who did opt in to ODP. So if the only reason the credit union does not want to offer ATM/debit cards to Member A is because of their opt-out status, the credit union could be running afoul of Regulation E as it may be considered to be offering different account terms on the basis of ODP opt-in/out status. The official interpretations to this section of the regulation gives more insight into what other things the credit union may not do, such as imposing different minimum balance requirements or account fees or offering account services such as bill pay only to those that have opted in.
A variation of this question is whether the credit union can take away a member's debit/ATM card because the member overdrafted their account and refused to opt in to the credit union's ODP. While this is not one of the examples used in the commentary of the rule as a prohibited practice, it still seems to fit within the above analysis in that taking away a member's card for not opting in could be considered offering different account services. See, 12 C.F.R. § 1005.17(b)(3).
Something to consider for excessive overdraft users is that credit unions are not obligated to pay any transactions that would overdraw a member's accounts, regardless of whether the member has opted in or not. So the credit union may want to look at declining one-time debit card and ATM transactions when possible, instead of allowing transactions that overdraw accounts for those members that have not opted-in.
Also, for members that have caused the credit union a loss, the credit union may be able to remove the member's debit card or share checking account privileges through a limitation or suspension of services policy. For more details of limitation or suspension of services, see this blog or this member-only article. However, it is important to understand that taking away debit card/share checking account privileges would not be because the member did not opt-in to the credit union's ODP, but because the member has abused their account through excessive overdrafts or created a loss to the credit union. Credit unions considering this option may want to set up a procedure that addresses members who constantly overdraft their accounts, have cause the credit union a loss or stay overdrawn for a longer time than acceptable to the credit union; it is also important to apply the consequences uniformly to all members. Otherwise, the credit union may fall under the prohibition of giving members different account terms, conditions and features because of overdraft opt-in choices.
Automatic Loan Repayment- Compulsory Use
To make it easier for members, some credit unions offer to set up a member's account to automatically make biweekly, monthly or other payments to meet a borrower's loan repayment obligations. However, credit unions that offer these automatic repayment services should be aware that Regulation E, section 1005.10(e)(1) generally restricts offering extensions of credit conditioned on automatic repayments of the loan, specifically automatic payments that are preauthorized electronic funds transfers—this is what is referred to as compulsory use.
Regulation E does permit credit unions to offer incentives to members, such as a lower APR, if the member chooses to set-up automatic, recurring payments. The official interpretation to this section provides further clarification regarding this prohibition and permissible incentives. Here is a relevant excerpt:
Loan payments. Creditors may not require repayment of loans by electronic means on a preauthorized, recurring basis. A creditor may offer a program with a reduced annual percentage rate or other cost-related incentive for an automatic repayment feature, provided the program with the automatic payment feature is not the only loan program offered by the creditor for the type of credit involved.
12 C.F.R. § 1005, Supp. I, cmt. 1005.10(e)(1)-1. So while voluntary agreements to make reoccurring automatic payments are permissible, mandatory ones are not.
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