A significant amendment to Federal Reserve Board Regulation E, 12 C.F.R. § 205.1, et seq., will affect the manner in which banks and other financial institutions assess overdraft fees for honoring one-time debit card transactions and ATM withdrawal requests that overdraw customers’ bank accounts. Regulation E is the Federal Reserve Board’s implementation of the Electronic Funds Transfer Act of 1978 (“EFTA”), 15 U.S.C. § 1693, et seq., which regulates financial transactions made electronically, such as transactions through ATM’s, point of sale terminals and remote banking services. Under the amended Regulation E, financial institutions will be prohibited from assessing overdraft fees for honoring such one-time transaction requests unless customers affirmatively request payment of these transactions by opting-in to their institution’s overdraft services ahead of time. Further, the Amendment provides that financial institutions cannot discriminate against customers on the basis of whether or not they elect to opt-in to the institution’s overdraft services. This Amendment to Regulation E is slated to take effect on July 1, 2010.
The Federal Reserve Board’s actions are in direct response to most financial institutions’ current practice of honoring customers’ transactions even if doing so will result in an overdrawn account for which overdraft fees are assessed. Typically, customers are automatically enrolled in their financial institution’s overdraft protection services, usually with notice of the service and the institution’s practice of honoring the transactions, despite the fact that the requested amount exceeds the accounts’ available funds. In recent years, financial institutions have expanded overdraft protection services to a variety of non-check transactions, such as ATM withdrawals and debit card transactions. From the financial institution’s perspective, the practice of automatically enrolling its customers and charging a pre-determined overdraft fee helps the institution control costs and ensure that customers are treated consistently, not to mention saving its customers the embarrassment often attendant with the declination of an attempted transaction if available funds are insufficient. Overdraft fees are estimated to amount to approximately $20 billion annually.
The amended Regulation E will substantially alter the rules for the provision of overdraft services. Further to the Amendment, financial institutions must provide customers with the ability to affirmatively opt-in to the institution’s overdraft protection service for ATM and one-time debit card transactions. Such consent must be obtained before fees or charges may be assessed on customers’ accounts for the institution’s honoring of overdrafts. The opt-in requirement applies to both existing and new accounts. Financial institutions must provide customers who do not opt-in the same account terms, conditions and features that are provided to customers who elect to participate. For example, a financial institution cannot charge a customer who opts out a higher interest rate than a customer who opts in to the institution’s overdraft services.
Some financial institutions are now opting out of charging overdraft fees altogether. For example, one nationally-known bank recently announced that it will no longer impose fees for honoring overdrafts on ATM and debit card transactions. Such a decision is likely in response, at least in part, to an increasing number of lawsuits filed against financial institutions regarding their practices of assessing fees for overdraft services. A consolidated multi-district class action suit is currently pending against a number of financial institutions in the United States District Court for the Southern District of Florida, MDL No. 2036. And, similar cases have been filed in federal courts around the country, including in California and Illinois.
With an increasing number of lawsuits and the Amendment to Regulation E taking effect on July 1, 2010, it is imperative for financial institutions to review their current policies and practices for overdraft protection services. In order to comply with revised Regulation E, financial institutions must provide written notice to their customers of their right to opt in or out of overdraft protection services for ATM and one-time debit card transactions, and ensure that their services and policies are applied consistently regardless of customers’ elections on overdraft protection.
As technology continues to develop, banks and other financial institutions must likewise evolve to develop new services for their customers. Accordingly, Regulation E is frequently amended to address changes in services provided by financial institutions.