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FDIC Federal Register Citations

[Federal Register: February 24, 2005 (Volume 70, Number 36)]
[Page 9127-9132]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



Office of the Comptroller of the Currency

[Docket No. 05-03]


[Docket No. OP-1198]



Joint Guidance on Overdraft Protection Programs

AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); Federal
Deposit Insurance Corporation (FDIC); and National Credit Union
Administration (NCUA).

ACTION: Final guidance.


SUMMARY: The OCC, Board, FDIC, and NCUA (the Agencies), are issuing
final Joint Guidance on Overdraft Protection Programs (guidance). This
guidance is intended to assist insured depository institutions in the
responsible disclosure and administration of overdraft protection

OCC: Michael Bylsma, Director, Margaret Hesse, Special Counsel, or
Deana Lee, Attorney, Community and Consumer Law Division, (202) 874-
5750; or Kim Scherer, National Bank Examiner/Credit Risk Specialist,
Credit Risk Policy, (202) 874-5170.
Board: Minh-Duc T. Le, Senior Attorney, Daniel Lonergan, Counsel,
or Elizabeth Eurgubian, Attorney, Division of Consumer and Community
Affairs, (202) 452-3667; or William H. Tiernay, Supervisory Financial
Analyst, Division of Bank Supervision and Regulation, (202) 452-2412.
For users of Telecommunications Device for the Deaf (``TDD'') only,
contact (202) 263-4869.
FDIC: Mark Mellon, Counsel, (202) 898-3884, Legal Division; James
Leitner, Examination Specialist, (202) 898-6790; Patricia Cashman,
Senior Policy Analyst, (202) 898-6534; or April Breslaw, Chief,
Compliance Section, (202) 898-6609, Division of Supervision and
Consumer Protection.
NCUA: Elizabeth A. Habring, Program Officer, Office of Examination
and Insurance, (703) 518-6392; or Ross P. Kendall, Staff Attorney,
Office of the General Counsel, (703) 518-6562.


I. Background

The Agencies have developed this final joint guidance to address a
service offered by insured depository institutions commonly referred to
as ``bounced-check protection'' or ``overdraft protection.'' This
service is sometimes offered to transaction account customers as an
alternative to traditional ways of covering overdrafts (e.g., overdraft
lines of credit or linked accounts).
While both the availability and customer acceptance of these
overdraft protection services have increased, aspects of the marketing,
disclosure, and implementation of some of these programs have raised
concerns with the Agencies. In a 2001 letter, the OCC identified some
of these particular concerns.\1\ In November 2002, the Board sought
comment about the operation of overdraft protection programs.\2\

\1\ OCC Interpretive Letter 914, September 2001.
\2\ 67 FR 72618, December 6, 2002. The Board received
approximately 350 comments; most were from industry representatives
describing how the programs work.

In response to concerns raised about overdraft protection products,
the Agencies published for comment proposed Interagency Guidance on
Overdraft Protection Programs, 69 FR 31858 (June 7, 2004).\3\ The
proposed guidance identified the historical and traditional approaches
to providing consumers with protection against account overdrafts, and
contrasted these approaches with the more recent overdraft protection
programs that are marketed to consumers. The Agencies also identified
some of the existing and potential concerns surrounding the offering
and administration of such overdraft protection programs that have been
identified by federal and state bank regulatory agencies, consumer
groups, financial institutions, and their trade representatives.

\3\ The Office of Thrift Supervision joined the Agencies
proposing the interagency guidance.

In response to these concerns, the Agencies provided guidance in
three primary sections: Safety and Soundness Considerations, Legal
Risks, and Best Practices. In the section on Safety and Soundness
Considerations, the Agencies sought to ensure that financial
institutions offering overdraft protection services adopt adequate
policies and procedures to address the credit, operational, and other
risks associated with these services. The Legal Risks section of the
proposed guidance outlined several federal consumer compliance laws,
generally alerted institutions offering overdraft protection services
of the need to comply with all applicable federal and state laws, and
advised institutions to have their overdraft protection programs
reviewed by legal counsel to ensure overall compliance prior to
implementation. Finally, the proposed guidance set forth best practices
that serve as positive examples of practices that are currently
observed in, or recommended by, the industry. Broadly, these best
practices address the marketing and communications that accompany the
offering of overdraft protection services, as well as the disclosure,
and operation, of program features.
The Agencies together received over 320 comment letters in response
to the proposed guidance. Comment letters were received from depository
institutions, trade associations, vendors offering overdraft protection
products, and other industry representatives, as well as government
officials, consumer and community groups, and individual consumers.

II. Overview of Public Comments

The Agencies received comments that addressed broad aspects of the
guidance, as well as its specific provisions. Many industry commenters,
for instance, were concerned about the overall scope of the guidance
and whether it would apply to financial institutions that do not market
overdraft protection programs to consumers but do cover the occasional
overdraft on a case-by-case basis. Commenters also addressed the three
specific sections of the proposed guidance.
In regard to the Safety and Soundness section, for example, many
industry commenters suggested extending the proposed charge-off period
from 30 days to a longer period such as 45 or 60 days, in part because
they believed a longer charge-off period would provide consumers with
more time to repay overdrafts and avoid being reported to credit
bureaus as delinquent on their accounts. Comments were also received
addressing technical reporting and accounting issues.
The Agencies received numerous comments regarding the Legal Risks
section--particularly the Equal Credit Opportunity Act and Truth in
Lending Act (TILA) discussions. For instance, many consumer and
consumer group comments stated that overdraft protection should be
considered credit covered by TILA's disclosures and other required
protections. Some of these comments likened the product to payday
lending, which is covered by TILA. Many industry commenters argued
against the coverage of overdraft programs by TILA and Regulation Z,
and argued that the payment of

[[Page 9128]]

overdrafts does not involve credit and finance charges requiring TILA
disclosures and protections.
Lastly, many commenters also offered specific criticism or
recommended edits with respect to particular best practices identified
in the proposal. Several industry commenters sought general
clarification on whether examiners would treat the best practices as
law or rules when examining institutions offering overdraft protection

III. Final Joint Guidance

The final joint guidance incorporates changes made by the Agencies
to provide clarity and address many commenter concerns. In particular,
language has been added to clarify the scope of the guidance. The
Safety and Soundness section expressly states that it applies to all
methods of covering overdrafts. The introduction to the Best Practices
section clarifies that while the Agencies are concerned about promoted
overdraft protection programs, the best practices may also be useful
for other methods of covering overdrafts.
In response to the comments regarding the Safety and Soundness
section, the Agencies have extended the charge-off requirement to 60
days.\4\ Other technical edits have been made to further clarify
reporting and accounting aspects of this section of the guidance.

\4\ Federal credit unions are required by regulation to
establish a time limit, not to exceed 45 calendar days, for a member
to either deposit funds or obtain an approved loan from the credit
union to cover each overdraft. 12 CFR 701.21(c)(3).

The discussion regarding the applicability of TILA has been
shortened to more closely focus on the relevant, existing regulatory
provisions. In the proposed guidance, the discussion of TILA and
Regulation Z, like the individual discussions of other laws and
regulations (e.g., the Federal Trade Commission Act), was not intended
to represent a full explication of the scope, terms, and exceptions to
those provisions. Rather, it was intended to highlight that, commonly,
fees charged in connection with overdraft protection programs and
traditional methods of paying overdrafts fall within an existing
regulatory exception to the ``finance charge'' definition. Disparate
commenters urged the Board to take positions on various aspects of TILA
and Regulation Z that are unnecessary in light of the exception
addressed and the appropriate scope of the guidance. The revisions to
this section, and the addition of language to the Safety and Soundness
section to address the credit nature of overdrafts, is not intended as
a commentary on the statute, nor the adoption of any particular
commenter point of view. As indicated in the proposal, the existing
regulatory exceptions were created for the occasional payment of
overdrafts, and as such could be reevaluated by the Board in the
future, if necessary. Were the Board to address these issues more
specifically, it would do so separately under its clear authority.
Lastly, in the final joint guidance, the Agencies reaffirm that the
best practices are practices that have been recommended or implemented
by financial institutions and others, as well as practices that may
otherwise be required by applicable law. The best practices, or
principles within them, are enforceable to the extent they are required
by law. In addition, as mentioned above, the final guidance explicitly
states that while the Agencies are particularly concerned about
promoted overdraft protection programs, these practices may be useful
in connection with other methods of covering overdrafts. The Agencies
have also revised numerous best practices for clarity, in response to
particular commenter suggestions.
The text of the final Joint Guidance on Overdraft Protection
Programs follows:

Joint Guidance on Overdraft Protection Programs

The Office of the Comptroller of the Currency (OCC), Board of
Governors of the Federal Reserve System (Board), Federal Deposit
Insurance Corporation (FDIC), and National Credit Union Administration
(NCUA), collectively ``the Agencies,'' are issuing this joint guidance
concerning a service offered by insured depository institutions that is
commonly referred to as ``bounced-check protection'' or ``overdraft
protection.'' This credit service is sometimes offered on both consumer
and small business transaction accounts as an alternative to
traditional ways of covering overdrafts. This joint guidance is
intended to assist insured depository institutions in the responsible
disclosure and administration of overdraft protection services,
particularly those that are marketed to consumers.\5\

\5\ Federal credit unions are already subject to certain
regulatory requirements governing the establishment and maintenance
of overdraft programs. 12 CFR 701.21(c)(3). This regulation requires
a federal credit union offering an overdraft program to adopt a
written policy specifying the dollar amount of overdrafts that the
credit union will honor (per member and overall); the time limits
for a member to either deposit funds or obtain a loan to cover an
overdraft; and the amount of the fee and interest rate, if any, that
the credit union will charge for honoring overdrafts. This joint
guidance supplements but does not change these regulatory
requirements for federal credit unions.


To protect against account overdrafts, some consumers obtain an
overdraft line of credit, which is subject to the disclosure
requirements of the Truth in Lending Act (TILA). If a consumer does not
have an overdraft line of credit, the institution may accommodate the
consumer and pay overdrafts on a discretionary, ad-hoc basis.
Regardless of whether the overdraft is paid, institutions typically
have imposed a fee when an overdraft occurs, often referred to as a
nonsufficient funds or ``NSF'' fee. Over the years, this accommodation
has become automated by many institutions. Historically, institutions
have not promoted this accommodation. This approach has not raised
significant concerns.
More recently, some depository institutions have offered
``overdraft protection'' programs that, unlike the discretionary
accommodation traditionally provided to those lacking a line of credit
or other type of overdraft service (e.g., linked accounts), are
marketed to consumers essentially as short-term credit facilities.
These marketed programs typically provide consumers with an express
overdraft ``limit'' that applies to their accounts.
While the specific details of overdraft protection programs vary
from institution to institution, and also vary over time, those
currently offered by institutions incorporate some or all of the
following characteristics:
Institutions inform consumers that overdraft protection is
a feature of their accounts and promote the use of the service.
Institutions also may inform consumers of their aggregate dollar limit
under the overdraft protection program.
Coverage is automatic for consumers who meet the
institution's criteria (e.g., account has been open a certain number of
days; deposits are made regularly). Typically, the institution performs
no credit underwriting.
Overdrafts generally are paid up to the aggregate limit
set by the institution for the specific class of accounts, typically
$100 to $500.
Many program disclosures state that payment of an
overdraft is discretionary on the part of the institution, and may
disclaim any legal obligation of the institution to pay any overdraft.
The service may extend to check transactions as well as
other transactions, such as withdrawals at automated teller machines
(ATMs), transactions using debit cards, pre-authorized automatic debits
from a consumer's account, telephone-initiated

[[Page 9129]]

funds transfers, and on-line banking transactions.\6\

\6\ Transaction accounts at credit unions are called share draft
accounts. For purposes of this joint guidance, the use of the term
``check'' includes share drafts.

A flat fee is charged each time the service is triggered
and an overdraft item is paid. Commonly, a fee in the same amount would
be charged even if the overdraft item was not paid. A daily fee also
may apply for each day the account remains overdrawn.
Some institutions offer closed-end loans to consumers who
do not bring their accounts to a positive balance within a specified
time period. These repayment plans allow consumers to repay their
overdrafts and fees in installments.


Aspects of the marketing, disclosure, and implementation of some
overdraft protection programs, intended essentially as short-term
credit facilities, are of concern to the Agencies. For example, some
institutions have promoted this credit service in a manner that leads
consumers to believe that it is a line of credit by informing consumers
that their account includes an overdraft protection limit of a
specified dollar amount without clearly disclosing the terms and
conditions of the service, including how fees reduce overdraft
protection dollar limits, and how the service differs from a line of
In addition, some institutions have adopted marketing practices
that appear to encourage consumers to overdraw their accounts, such as
by informing consumers that the service may be used to take an advance
on their next paycheck, thereby potentially increasing the
institutions' credit exposure with little or no analysis of the
consumer's creditworthiness. These overdraft protection programs may be
promoted in a manner that leads consumers to believe that overdrafts
will always be paid when, in reality, the institution reserves the
right not to pay some overdrafts. Some institutions may advertise
accounts with overdraft protection coverage as ``free'' accounts, and
thereby lead consumers to believe that there are no fees associated
with the account or the overdraft protection program.
Furthermore, institutions may not clearly disclose that the program
may cover instances when consumers overdraw their accounts by means
other than check, such as at ATMs and point-of-sale (POS) terminals.
Some institutions may include overdraft protection amounts in the sum
that they disclose as the consumer's account ``balance'' (for example,
at an ATM) without clearly distinguishing the funds that are available
for withdrawal without overdrawing the account. Where the institution
knows that the transaction will trigger an overdraft fee, such as at a
proprietary ATM, institutions also may not alert the consumer prior to
the completion of the transaction to allow the consumer to cancel the
transaction before the fee is triggered.
Institutions should weigh carefully the risks presented by the
programs including the credit, legal, reputation, safety and soundness,
and other risks. Further, institutions should carefully review their
programs to ensure that marketing and other communications concerning
the programs do not mislead consumers to believe that the program is a
traditional line of credit or that payment of overdrafts is guaranteed,
do not mislead consumers about their account balance or the costs and
scope of the overdraft protection offered, and do not encourage
irresponsible consumer financial behavior that potentially may increase
risk to the institution.

Safety and Soundness Considerations

When overdrafts are paid, credit is extended. Overdraft protection
programs may expose an institution to more credit risk (e.g., higher
delinquencies and losses) than overdraft lines of credit and other
traditional overdraft protection options to the extent these programs
lack individual account underwriting. All overdrafts, whether or not
subject to an overdraft protection program, are subject to the safety
and soundness considerations contained in this section.
Institutions providing overdraft protection programs should adopt
written policies and procedures adequate to address the credit,
operational, and other risks associated with these types of programs.
Prudent risk management practices include the establishment of express
account eligibility standards and well-defined and properly documented
dollar limit decision criteria. Institutions also should monitor these
accounts on an ongoing basis and be able to identify consumers who may
represent an undue credit risk to the institution. Overdraft protection
programs should be administered and adjusted, as needed, to ensure that
credit risk remains in line with expectations. This may include, where
appropriate, disqualification of a consumer from future overdraft
protection. Reports sufficient to enable management to identify,
measure, and manage overdraft volume, profitability, and credit
performance should be provided to management on a regular basis.
Institutions also are expected to incorporate prudent risk
management practices related to account repayment and suspension of
overdraft protection services. These include the establishment of
specific timeframes for when consumers must pay off their overdraft
balances. For example, there should be established procedures for the
suspension of overdraft services when the account holder no longer
meets the eligibility criteria (such as when the account holder has
declared bankruptcy or defaulted on another loan at the bank) as well
as for when there is a lack of repayment of an overdraft. In addition,
overdraft balances should generally be charged off when considered
uncollectible, but no later than 60 days from the date first
overdrawn.\7\ In some cases, an institution may allow a consumer to
cover an overdraft through an extended repayment plan when the consumer
is unable to bring the account to a positive balance within the
required time frames. The existence of the repayment plan, however,
would not extend the charge-off determination period beyond 60 days (or
shorter period if applicable) as measured from the date of the
overdraft. Any payments received after the account is charged off (up
to the amount charged off against allowance) should be reported as a

\7\ Federal credit unions are required by regulation to
establish a time limit, not to exceed 45 calendar days, for a member
to either deposit funds or obtain an approved loan from the credit
union to cover each overdraft. 12 CFR 701.21(c)(3).

Some overdrafts are rewritten as loan obligations in accordance
with an institution's loan policy and supported by a documented
assessment of that consumer's ability to repay. In those instances, the
charge-off timeframes described in the Federal Financial Institutions
Examination Council (FFIEC) Uniform Retail Credit Classification and
Account Management Policy would apply.\8\

\8\ For federally insured credit unions, charge-off policy for
booked loans is described in NCUA Letter to Credit Unions No. 03-CU-
01, ``Loan Charge-off Guidance,'' dated January 2003.

With respect to the reporting of income and loss recognition on
overdraft protection programs, institutions should follow generally
accepted accounting principles (GAAP) and the instructions for the
Reports of Condition and Income (Call Report), and NCUA 5300 Call
Report. Overdraft balances should be reported on

[[Page 9130]]

regulatory reports as loans. Accordingly, overdraft losses should be
charged off against the allowance for loan and lease losses. The
Agencies expect all institutions to adopt rigorous loss estimation
processes to ensure that overdraft fee income is accurately measured.
Such methods may include providing loss allowances for uncollectible
fees or, alternatively, only recognizing that portion of earned fees
estimated to be collectible.\9\ The procedures for estimating an
adequate allowance should be documented in accordance with the Policy
Statement on the Allowance for Loan and Lease Losses Methodologies and
Documentation for Banks and Savings Institutions.\10\

\9\ Institutions may charge off uncollected overdraft fees
against the allowance for loan and lease losses if such fees are
recorded with overdraft balances as loans and estimated credit
losses on the fees are provided for in the allowance for loan and
lease losses.
\10\ Issued by the Board, FDIC, OCC, and Office of Thrift
Supervision. The NCUA provided similar guidance to credit unions in
Interpretive Ruling and Policy Statement 02-3, ``Allowance for Loan
and Lease Losses Methodologies and Documentation for Federally
Insured Credit Unions,'' 67 FR 37445, May 29, 2002.

If an institution advises account holders of the available amount
of overdraft protection, for example, when accounts are opened or on
depositors' account statements or ATM receipts, the institution should
report the available amount of overdraft protection with legally
binding commitments for Call Report, and NCUA 5300 Call Report
purposes. These available amounts, therefore, should be reported as
``unused commitments'' in regulatory reports.
The Agencies also expect proper risk-based capital treatment of
outstanding overdrawn balances and unused commitments.\11\ Overdraft
balances should be risk-weighted according to the obligor. Under the
federal banking agencies' risk-based capital guidelines, the capital
charge on the unused portion of commitments generally is based on an
off-balance sheet credit conversion factor and the risk weight
appropriate to the obligor. In general, these guidelines provide that
the unused portion of a commitment is subject to a zero percent credit
conversion factor if the commitment has an original maturity of one
year or less, or a 50 percent credit conversion factor if the
commitment has an original maturity over one year. Under these
guidelines, a zero percent conversion factor also applies to the unused
portion of a ``retail credit card line'' or ``related plan'' if it is
unconditionally cancelable by the institution in accordance with
applicable law.\12\ The phrase ``related plans'' in these guidelines
includes overdraft checking plans. The Agencies believe that the
overdraft protection programs discussed in this joint guidance fall
within the meaning of ``related plans'' as a type of ``overdraft
checking plan'' for the purposes of the federal banking agencies''
risk-based capital guidelines. Consequently, overdraft protection
programs that are unconditionally cancelable by the institution in
accordance with applicable law would qualify for a zero percent credit
conversion factor.

\11\ Federally insured credit unions should calculate risk-based
net worth in accordance with the rules contained in 12 CFR Part 702.
\12\ See 12 CFR Part 3, Appendix A, Section 3 (b)(5) (OCC); 12
CFR Part 208, Appendix A, Section III.D.5 (Board); and 12 CFR Part
325, Appendix A, Section II.D.5 (FDIC).

Institutions entering into overdraft protection contracts with
third-party vendors must conduct thorough due diligence reviews prior
to signing a contract. The interagency guidance contained in the
November 2000 Risk Management of Outsourced Technology Services
outlines the Agencies' expectations for prudent practices in this area.

Legal Risks

Overdraft protection programs must comply with all applicable
federal laws and regulations, some of which are outlined below. State
laws also may be applicable, including usury and criminal laws, and
laws on unfair or deceptive acts or practices. It is important that
institutions have their overdraft protection programs reviewed by
counsel for compliance with all applicable laws prior to
implementation. Further, although the guidance below outlines federal
laws and regulations as of the date this joint guidance is published,
applicable laws and regulations are subject to amendment. Accordingly,
institutions should monitor applicable laws and regulations for
revisions and to ensure that their overdraft protection programs are
fully compliant.

Federal Trade Commission Act/Advertising Rules

Section 5 of the Federal Trade Commission Act (FTC Act) prohibits
unfair or deceptive acts or practices.\13\ The banking agencies enforce
this section pursuant to their authority in section 8 of the Federal
Deposit Insurance Act, 12 U.S.C. 1818.\14\ An act or practice is unfair
if it causes or is likely to cause substantial injury to consumers that
is not reasonably avoidable by consumers themselves and not outweighed
by countervailing benefits to consumers or to competition. An act or
practice is deceptive if, in general, it is a representation, omission,
or practice that is likely to mislead a consumer acting reasonably
under the circumstances, and the representation, omission, or practice
is material.

\13\ 15 U.S.C. 45.
\14\ See OCC Advisory Letter 2002-3 (March 2002); and joint
Board and FDIC Guidance on Unfair or Deceptive Acts or Practices by
State-Chartered Banks (March 11, 2004).

In addition, the NCUA has promulgated similar rules that prohibit
federally insured credit unions from using advertisements or other
representations that are inaccurate or misrepresent the services or
contracts offered.\15\ These regulations are broad enough to prohibit
federally insured credit unions from making any false representations
to the public regarding their deposit accounts.

\15\ 12 CFR 740.2.

Overdraft protection programs may raise issues under either the FTC
Act or, in connection with federally insured credit unions, the NCUA's
advertising rules, depending upon how the programs are marketed and
implemented. To avoid engaging in deceptive, inaccurate,
misrepresentative, or unfair practices, institutions should closely
review all aspects of their overdraft protection programs, especially
any materials that inform consumers about the programs.

Truth in Lending Act

TILA and Regulation Z require creditors to give cost disclosures
for extensions of consumer credit.\16\ TILA and the regulation apply to
creditors that regularly extend consumer credit that is subject to a
finance charge or is payable by written agreement in more than four
Under Regulation Z, fees for paying overdraft items currently are
not considered finance charges if the institution has not agreed in
writing to pay overdrafts.\18\ Even where the institution agrees in
writing to pay overdrafts as part of the deposit account agreement,
fees assessed against a transaction account for overdraft protection
services are finance charges only to the extent the fees exceed the
charges imposed for paying or returning overdrafts on a similar

[[Page 9131]]

account that does not have overdraft protection.

\16\ 15 U.S.C. 1601 et seq. TILA is implemented by Regulation Z,
12 CFR Part 226.
\17\ See 15 U.S.C. 1602(f) and 12 CFR 226.2(a)(17). Institutions
should be aware that whether a written agreement exists is a matter
of state law. See, e.g., 12 CFR 226.5.
\18\ See 12 CFR 226.4(c)(3). Traditional lines of credit, which
generally are subject to a written agreement, do not fall under this

Some financial institutions also offer overdraft repayment loans to
consumers who are unable to repay their overdrafts and bring their
accounts to a positive balance within a specified time period.\19\
These closed-end loans will trigger Regulation Z disclosures, for
example, if the loan is payable by written agreement in more than four
installments. Regulation Z will also be triggered where such closed-end
loans are subject to a finance charge.\20\

\19\ For federal credit unions, this time period may not exceed
45 calendar days. 12 CFR 701.21(c)(3).
\20\ See 12 CFR 226.4.

Equal Credit Opportunity Act

Under the Equal Credit Opportunity Act (ECOA) and Regulation B,
creditors are prohibited from discriminating against an applicant on a
prohibited basis in any aspect of a credit transaction.\21\ This
prohibition applies to overdraft protection programs. Thus, steering or
targeting certain consumers on a prohibited basis for overdraft
protection programs while offering other consumers overdraft lines of
credit or other more favorable credit products or overdraft services,
will raise concerns under the ECOA.

\21\ 15 U.S.C. 1691 et seq. The ECOA is implemented by
Regulation B, 12 CFR Part 202. The ECOA prohibits discrimination on
the basis of race, color, religion, national origin, sex, marital
status, age (provided the applicant has the capacity to contract),
the fact that all or part of the applicant's income derives from a
public assistance program, and the fact that the applicant has in
good faith exercised any right under the Consumer Credit Protection

In addition to the general prohibition against discrimination, the
ECOA and Regulation B contain specific rules concerning procedures and
notices for credit denials and other adverse action. Regulation B
defines the term ``adverse action,'' and generally requires a creditor
who takes adverse action to send a notice to the consumer providing,
among other things, the reasons for the adverse action.\22\ Some
actions taken by creditors under overdraft protection programs might
constitute adverse action but would not require notice to the consumer
if the credit is deemed to be ``incidental credit'' as defined in
Regulation B. ``Incidental credit'' includes consumer credit that is
not subject to a finance charge, is not payable by agreement in more
than four installments, and is not made pursuant to the terms of a
credit card account.\23\ Overdraft protection programs that are not
covered by TILA would generally qualify as incidental credit under
Regulation B.

\22\ See 12 CFR 202.2(c) and 9.
\23\ See 12 CFR 202.3(c).

Truth in Savings Act

Under the Truth in Savings Act (TISA), deposit account disclosures
must include the amount of any fee that may be imposed in connection
with the account and the conditions under which the fee may be
imposed.\24\ In addition, institutions must give advance notice to
affected consumers of any change in a term that was required to be
disclosed if the change may reduce the annual percentage yield or
adversely affect the consumer.

\24\ 12 U.S.C. 4301 et seq. TISA is implemented by Regulation DD
at 12 CFR Part 230 for banks and savings associations, and by NCUA's
TISA regulation at 12 CFR Part 707 for federally insured credit

When overdraft protection services are added to an existing deposit
account, advance notice to the account holder may be required, for
example, if the fee for the service exceeds the fee for accounts that
do not have the service.\25\ In addition, TISA prohibits institutions
from making any advertisement, announcement, or solicitation relating
to a deposit account that is inaccurate or misleading or that
misrepresents their deposit contracts.

\25\ An advance change in terms notice would not be required if
the consumer's account disclosures stated that their overdraft check
may or may not be paid and the same fee would apply.

Since these automated and marketed overdraft protection programs
did not exist when most of the implementing regulations were issued,
the regulations may be reevaluated.

Electronic Fund Transfer Act

The Electronic Fund Transfer Act (EFTA) and Regulation E require an
institution to provide consumers with account-opening disclosures and
to send a periodic statement for each monthly cycle in which an
electronic fund transfer (EFT) has occurred and at least quarterly if
no transfer has occurred.\26\ If, under an overdraft protection
program, a consumer could overdraw an account by means of an ATM
withdrawal or POS debit card transaction, both are EFTs subject to EFTA
and Regulation E. As such, periodic statements must be readily
understandable and accurate regarding debits made, current balances,
and fees charged. Terminal receipts also must be readily understandable
and accurate regarding the amount of the transfer. Moreover, readily
understandable and accurate statements and receipts will help reduce
the number of alleged errors that the institution must investigate
under Regulation E, which can be time-consuming and costly to

\26\ 15 U.S.C. 1693 et seq. The EFTA is implemented by
Regulation E, 12 CFR Part 205.

Best Practices

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
into 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:

Marketing and Communications With Consumers

Avoid promoting poor account management. Institutions
should not market the program in a manner that encourages routine or
intentional overdrafts. Institutions should instead present the program
as a customer service that may cover inadvertent consumer overdrafts.
Fairly represent overdraft protection programs and
alternatives. When informing consumers about an overdraft protection
program, inform consumers generally of other overdraft services and
credit products, if any, that are available at the institution and how
the terms, including fees, for these services and products differ.
Identify for consumers the consequences of extensively using the
overdraft protection program.
Train staff to explain program features and other choices.
Train customer service or consumer complaint processing staff to
explain their overdraft protection program's features, costs, and
terms, including how to opt out of the service. Staff also should be
able to explain other available overdraft products offered by the
institution and how consumers may qualify for them.
Clearly explain discretionary nature of program. If
payment of an overdraft is discretionary, make this clear. Institutions
should not represent that the payment of overdrafts is guaranteed

[[Page 9132]]

or assured if the institution retains discretion not to pay an
Distinguish overdraft protection services from ``free''
account features. Institutions should not promote ``free'' accounts and
overdraft protection programs in the same advertisement in a manner
that suggests the overdraft protection program is free of charges.
Clearly disclose program fees. In communications about
overdraft protection programs, clearly disclose the dollar amount of
the fee for each overdraft and any interest rate or other fees that may
apply. For example, rather than merely stating that the institution's
standard NSF fee will apply, institutions should restate the dollar
amount of any applicable fee or interest charge.
Clarify that fees count against the disclosed overdraft
protection dollar limit. Consumers should be alerted that the fees
charged for covering overdrafts, as well as the amount of the overdraft
item, will be subtracted from any overdraft protection limit disclosed.
Demonstrate when multiple fees will be charged. If
promoting an overdraft protection program, clearly disclose, where
applicable, that more than one overdraft fee may be charged against the
account per day, depending on the number of checks presented on, and
other withdrawals made from, the consumer's account.
Explain impact of transaction clearing policies. Clearly
explain to consumers that transactions may not be processed in the
order in which they occurred, and that the order in which transactions
are received by the institution and processed can affect the total
amount of overdraft fees incurred by the consumer.
Illustrate the type of transactions covered. Clearly
disclose that overdraft fees may be imposed on transactions such as ATM
withdrawals, debit card transactions, preauthorized automatic debits,
telephone-initiated transfers or other electronic transfers, if
applicable, to avoid implying that check transactions are the only
transactions covered.

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.
Alert consumers before a transaction triggers any fees.
When consumers attempt to withdraw or transfer funds made available
through an overdraft protection program, provide a specific consumer
notice, where feasible, that completing the withdrawal may trigger the
overdraft fees (for example, it presently may be feasible at a branch
teller window). This notice should be presented in a manner that
permits consumers to cancel the attempted withdrawal or transfer after
receiving the notice. If this is not feasible, then post notices (e.g.,
on proprietary ATMs) explaining that transactions may be approved that
overdraw the account and fees may be incurred. Institutions should
consider making access to the overdraft protection program unavailable
through means other than check transactions, if feasible.
Prominently distinguish balances from overdraft protection
funds availability. When disclosing a single balance for an account by
any means, institutions should not include overdraft protection funds
in that account balance. The disclosure should instead represent the
consumer's own funds available without the overdraft protection funds
included. If more than one balance is provided, separately (and
prominently) identify the balance without the inclusion of overdraft
Promptly notify consumers of overdraft protection program
usage each time used. Promptly notify consumers when overdraft
protection has been accessed, for example, by sending a notice to
consumers the day the overdraft protection program has been accessed.
The notification should identify the date of the transaction, the type
of transaction, the overdraft amount, the fee associated with the
overdraft, the amount necessary to return the account to a positive
balance, the amount of time consumers have to return their accounts to
a positive balance, and the consequences of not returning the account
to a positive balance within the given timeframe. Notify consumers if
the institution terminates or suspends the consumer's access to the
service, for example, if the consumer is no longer in good standing.
Consider daily limits on the consumer's costs. Consider
imposing a cap on consumers' potential daily costs from the overdraft
program. For example, consider limiting daily costs from the program by
providing a numerical limit on the total overdraft transactions that
will be subject to a fee per day or by providing a dollar limit on the
total fees that will be imposed per day.
Monitor overdraft protection program usage. Monitor
excessive consumer usage, which may indicate a need for alternative
credit arrangements or other services, and inform consumers of these
available options.
Fairly report program usage. Institutions should not
report negative information to consumer reporting agencies when the
overdrafts are paid under the terms of overdraft protection programs
that have been promoted by the institutions.
This concludes the text of the final Joint Guidance on Overdraft
Protection Programs.

Dated: February 15, 2005.
Julie L. Williams,
Acting Comptroller of the Currency.

By order of the Board of Governors of the Federal Reserve
System, February 17, 2005.
Robert deV. Frierson,
Deputy Secretary of the Board.

Dated at Washington, DC, the 16th day of February, 2005.

By order of the Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.

By the National Credit Union Administration Board on February
17, 2005.
Mary F. Rupp,
Secretary of the Board.
[FR Doc. 05-3499 Filed 2-23-05; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 7535-01-P

Last Updated 02/24/2005 Regs@fdic.gov