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Dec 07, 2009
Categories: Accounts

Scope of Overdraft Fees - Reg E

Posted by Steve Van Beek

As everyone works through the new Reg E Overdraft rules, I think it is important to remember which fees are being regulated.  In addition to the overdraft fee, a member must opt-in before the credit union could charge (for ATM and one-time debit card transactions):
  • Daily Overdraft Fee;
  • Sustained Overdraft Fee; 
  • Negative Account Fee; or 
  • Any other similar fees - no matter what the credit union calls the fee. 
Here is the Fed's rationale (from the preamble - page 9 of the PDF - middle column):

"A few commenters recommended that the Board define ‘‘overdraft fee’’ to exclude fees assessed on accounts that maintain a negative balance for an extended period (often referred to as ‘‘sustained’’ overdraft fees). The Board believes, however, that any fee charged on an account for an overdraft should be subject to the rule, including but not limited to a per item, per occurrence, daily, sustained overdraft, or negative balance fee. A consumer who inadvertently overdraws his or her account may not learn about the overdraft until several days after the occurrence of the overdraft and so may unknowingly accrue additional fees. Therefore, the Board believes all overdraft fees should be within the scope of the rule." (emphasis added).

    Additionally, these additional fees must be disclosed by financial institutions on the opt-in form.  See page 21 for 205.17(d) and the staff commentary to 205.17(d) on page 23.  

    Thus, we can result with the following situation.
    1. The credit union was forced to pay a one-time debit card transaction (based on its network rules) even though the transaction took the account into the negative.
    2. The credit union is prohibited from charging an overdraft fee because the member has not opted-in 
    3. The credit union can not charge a "sustained overdraft fee" even if the account is still negative after a certain period of time - because it was the one-time debit card transaction that triggered the account into the negative. 
    However, if a subsequent check, ACH, or recurring debit transaction hits the account (while still negative) - the credit union would be able to charge an overdraft fee for that transaction as it is not subject to the overdraft restrictions.  Could the credit union charge a sustained overdraft fee if the two transactions are keeping the account overdrawn?  It is unclear.  The credit union could argue that the sustained overdraft fee is being charged not for the one-time debit but for the subsequent transaction.  In essence, the argument is that the sustained overdraft fee is charged for the subsequent (non-protected) transaction still being overdrawn and not the protected transaction.  This would mean if the account only had protected transactions causing the account to be overdrawn - the credit union would not charge the sustained overdraft fee.  Unfortunately, at this point, I think we might need more information from the Fed before these questions are clear.  

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