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FDIC Federal Register Citations

[Federal Register: June 7, 2004 (Volume 69, Number 109)]
[Page 31858-31864]
From the Federal Register Online via GPO Access []



Office of the Comptroller of the Currency

[Docket No. 04-14]


[Docket No. OP-1198]



Office of Thrift Supervision

[No. 2004-30]


Interagency 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); Office of Thrift Supervision,
Treasury (OTS); and National Credit Union Administration (NCUA).

ACTION: Proposed Guidance with request for comment.


SUMMARY: Member agencies of the Federal Financial Institutions
Examination Council (FFIEC), the OCC, Board, FDIC, OTS, and NCUA (the
Agencies), request comments on this proposed Interagency Guidance on
Overdraft Protection Programs (Guidance). This proposed Guidance is
intended to assist insured depository institutions in the responsible
disclosure and administration of overdraft protection services.

DATES: Comments must be submitted on or before August 6, 2004.

ADDRESSES: Because the Agencies will jointly review all of the comments
submitted, interested parties may send comments to any of the Agencies
and need not send comments (or copies) to all of the Agencies. Because
paper mail in the Washington area and at the Agencies is subject to
delay, please consider submitting your comments by e-mail or fax.
Commenters are encouraged to use the title ``Overdraft Protection
Guidance'' to facilitate the organization and distribution of comments
among the Agencies. Interested parties are invited to submit comments
OCC: Your comment must designate ``OCC'' and include Docket Number
04-14. In general, the OCC will enter all comments received into the
docket without change, including any business or personal information
that you provide. You may submit your comment by any of the following
Federal eRulemaking Portal:

Follow the instructions for submitting comments.
OCC Web Site: Click on ``Contact
the OCC.'' Next, scroll down and click on ``Comments on Proposed Regulations.''
E-Mail Address:
Fax: (202) 874-4448.
Mail: Office of the Comptroller of the Currency, 250 E
Street, SW., Public Information Room, Mailstop 1-5, Washington, DC
Hand Delivery/Courier: 250 E Street, SW., Attn: Public
Information Room, Mail Stop 1-5, Washington, DC 20219.
Docket Information: For access to the docket to read
comments received or background documents you may:
View Docket Information in Person: You may personally inspect and
photocopy docket information at the OCC's Public Information Room, 250
E Street, SW., Washington, DC. You can make an appointment to inspect
the docket by calling us at (202) 874-5043.
View Docket Information Electronically: You may request that we
send you an electronic copy of docket information via e-mail or CD-ROM
by contacting
Request Paper Copy: You may request that we send you a paper copy
of docket information by faxing us at (202) 874-4448, by calling us at
(202) 874-5043, or mailing the OCC at 250 E Street, SW., Attn: Public
Information Room, Mail Stop 1-5, Washington, DC 20219.
Board: You may submit comments, identified by Docket No. OP-1198,
by any of the following methods:
Agency Web Site: Follow the instructions for submitting comments at
Federal eRulemaking Portal:

Follow the instructions for submitting comments.
E-mail: Include the
docket number in the subject line of the message.
Fax: 202/452-3819 or 202/452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at as
submitted, except as necessary for technical reasons. Accordingly, your comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed in electronic or paper
form in Room MP-500 of the Board's Martin Building (20th and C Streets,
NW.) between 9 a.m. and 5 p.m. on weekdays.
FDIC: You may submit comments by any of the following methods:
Agency Web site:
Follow the instructions for submitting comments

on the Agency Web site.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7 a.m. and 5 p.m.
Instructions: All submissions received must include the agency
name. All comments received will be posted without change to
including any
personal information provided.
OTS: You may submit comments, identified by No. 2004-30, by any of
the following methods:
Federal eRulemaking Portal:

Follow the instructions for submitting comments.
E-mail address: Please
include No. 2004-30 in the subject line

[[Page 31859]]

of the message and include your name and telephone number in the
Fax: (202) 906-6518.
Mail: Regulation Comments, Chief Counsel's Office, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: No. 2004-30.
Hand Delivery/Courier: Guard's Desk, East Lobby Entrance,
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
Regulation Comments, Chief Counsel's Office, Attention: No. 2004-30.
Instructions: All submissions received must include the agency name
and No. 2004-30 for this proposed Guidance. All comments received will
be posted without change to the OTS Internet Site at
, including any
personal information provided.
Docket: For access to the docket to read background documents or
comments received, go to
In addition, you may inspect comments
at the Public Reading Room, 1700 G Street, NW., by appointment. To make an appointment for access, call (202) 906-5922, send an e-mail to, or send a facsimile transmission to (202)
906-7755. (Prior notice identifying the materials you will be requesting will assist us in serving you.) We schedule appointments on business days between 10 a.m. and 4 p.m. In most cases, appointments
will be available the next business day following the date we receive a
NCUA: You may submit comments by any of the following methods:
Federal eRulemaking Portal:

Follow the instructions for submitting comments.
NCUA Web site:
Follow the
instructions for submitting comments.
E-mail: Address to Include ``[Your
name] Comments on Overdraft Protection'' in the e-mail subject line.
Fax: (703) 518-6319. Use the subject line described above
for e-mail.
Mail: Address to Becky Baker, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314-3428.
Hand Delivery/Courier: Same as mail address.

OCC: Margaret Hesse, Special Counsel, Community and Consumer Law
Division, (202) 874-5750; Michael Bylsma, Director, 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: April Breslaw, Chief, Compliance Section (202) 898-6609;
Patricia Cashman, Senior Policy Analyst (202) 898-6534; James Leitner,
Examination Specialist (202) 898-6790, Division of Supervision and
Consumer Protection; and Mark Mellon, Counsel, (202) 898-3884.
OTS: Maurice McClung, Program Manager, Market Conduct, Consumer
Protection and Specialized Programs, (202) 906-6182; and Richard
Bennett, Counsel, Banking and Finance, (202) 906-7409.
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

Under the auspices of the FFIEC, the Agencies have developed this
proposed Guidance to address a service offered by insured depository
institutions commonly referred to as ``bounced-check protection'' or
``overdraft protection.'' This credit 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
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. For example, 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\ The Board received approximately 350 comments; most were
from industry representatives describing how the programs work. This
proposed Guidance is the result of information gleaned from public
comment letters and other publicly available material, and from
information provided by institutions, consumer groups, State
representatives, and vendors offering overdraft protection program.

\1\ OCC Interpretive Letter 914, September 2001.
\2\ 67 FR 72618, December 6, 2002.

II. Principal Elements of the Guidance

The proposed Guidance first identifies the historical and
traditional approaches to providing consumers with protection against
account overdrafts, and contrasts these approaches with the more recent
overdraft protection services that are marketed to consumers. The
Agencies then identify some of the existing and potential concerns
surrounding the offering and administration of such overdraft
protection services. That section of the proposed Guidance identifies
particular issues that previously have been identified by Federal and
State bank regulatory agencies, consumers groups, financial
institutions, and their trade representatives.
In response to these concerns, the Agencies provide guidance in the
three primary sections: Safety and Soundness Considerations, Legal
Risks, and Best Practices. In the section on Safety and Soundness
Considerations, the Agencies want 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. For example, the proposed Guidance
emphasizes the need for institutions to incorporate prudent risk
management practices related to account eligibility, repayment, and
suspension. The proposed Guidance specifically provides that overdraft
balances generally should be charged-off within 30 days from the date
first overdrawn. Institutions also are advised to monitor carefully
their programs on an ongoing basis and adjust them as needed to account
for credit risk.
The Legal Risks section of the proposed Guidance generally alerts
institutions offering overdraft protection services to the need to
comply with all applicable Federal and State laws, and advises
institutions to have their overdraft protection programs reviewed by
legal counsel to ensure overall compliance prior to implementation.
Several Federal consumer compliance laws are outlined in the proposed
Finally, the proposed Guidance sets forth best practices that serve
as positive

[[Page 31860]]

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.
Clear disclosures and explanations to consumers about the operation,
costs, and limitations of overdraft protection services should promote
consumer understanding, limit complaints, and encourage appropriate
consumer use. Credit and reputational risks to the institution can also
be minimized through the incorporation of these best practices.

III. Request for Comment

Comment is requested on all aspects of the proposed Guidance.
Interested commenters are also asked to address specifically the
proposed Guidance's expectation that institutions will generally charge
off overdraft balances following a 30-day timeframe.
The text of the proposed Interagency Guidance on Overdraft
Protection Programs follows:

Interagency 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), Office of Thrift Supervision (OTS), and
National Credit Union Administration (NCUA), collectively ``the
Agencies,'' are issuing this interagency 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 to transaction account consumers,
including small businesses, as an alternative to traditional ways of
covering overdrafts. This interagency 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.\3\

\3\ 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
interagency 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 some institutions. Historically, institutions
have not promoted this accommodation.
More recently, some depository institutions have begun offering
``overdraft protection'' programs. Unlike the discretionary
accommodation traditionally provided to those lacking a line of credit
or other type of overdraft service (e.g., linked accounts), these
overdraft protection programs are marketed to consumers essentially as
short-term credit facilities, and 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 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 funds transfers,
and on-line banking transactions.\4\

\4\ Transaction accounts at credit unions are called share draft
accounts. For purposes of this interagency 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 were 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 impact 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. Furthermore, institutions may not
clearly disclose that the program allows consumers to overdraw their
accounts by means other than check, such as at ATMs and point-of-sale
Institutions should weigh carefully the credit, legal, reputation,
and other risks presented by the programs. Further, institutions should
carefully review their programs to ensure they do not lead consumers to
believe the service is a traditional line of credit, do not encourage
irresponsible consumer

[[Page 31861]]

financial behavior that potentially may increase risk to the
institution, and do not mislead consumers about the costs or scope of
the overdraft protection offered.

Safety & Soundness Considerations

The overdraft protection programs discussed in this interagency
guidance may expose an institution to more credit risk (e.g., higher
delinquencies and losses) than overdraft lines of credit and other
traditional overdraft programs because of a lack of individual account
underwriting. Therefore, 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 individual consumers who may be excessively reliant on the
product or who may represent an undue credit risk to the institution.
The 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
participation in the program. Reports detailing product 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) as well as for when
there is a lack of repayment of an overdraft. In addition, overdraft
balances should generally be charged off within 30 days from the date
first overdrawn.\5\ The 30-day charge off timeframe applies to all
overdrafts created under the overdraft protection programs described in
this interagency guidance. Some overdrafts are individually
underwritten and supported by a documented assessment of that
consumer's ability to repay. In those instances, the charge off
timeframes described in the FFIEC Uniform Retail Credit Classification
and Account Management Policy would apply.\6\ For corporate and small
businesses, existing credit relationships may support exceptions to the
30-day charge off guidance.

\5\ 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).
\6\ 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.

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 an account to a positive balance within the required
time frames. Even in such cases, the existence of the repayment plan
would not extend the charge-off determination period beyond 30 days
measured from the date of the overdraft. Any payments received after
the account is charged off (up to the amount charged off against the
allowance) should be reported as a recovery.
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), Thrift Financial Report,
and NCUA 5300 Call Report. Overdraft balances should be reported as
loans. Accordingly, overdraft losses (other than the portion of the
loss attributable to uncollected overdraft fees) should be charged off
against the allowance for loan and lease losses and uncollected
overdraft fees should be reversed against overdraft fee income or an
associated earned fee loss allowance.\7\ Institutions should adopt
rigorous loss estimation processes to ensure that any allowances
related to earned fees reflect all estimated losses and that earned but
uncollected fees are accounted for accurately. 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.\8\

\7\ Institutions may also charge off uncollected overdraft fees
against the allowance for loan and lease losses if estimated credit
losses on the fees are provided for in that allowance.
\8\ Issued by the Board, FDIC, OCC, and OTS. 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.

When an institution routinely communicates the available amount of
overdraft protection to depositors, these available amounts 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.\9\ Overdraft balances should
be risk-weighted according to the obligor. Unused commitments that are
unconditionally cancelable at any time pursuant to applicable law and
those with an original maturity of one year or less, as defined in the
risk-based capital standards, are subject to a zero percent credit
conversion factor. Commitments with an original maturity of more than
one year are subject to a 50 percent credit conversion factor and the
resulting credit equivalent amount should be risk-weighted according to
the obligor.

\9\ Federally insured credit unions should calculate risk-based
net worth in accordance with the rules contained in 12 CFR part 702.

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 that may be applicable include usury and criminal laws, and laws
regarding 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
Federal Trade Commission Act/Advertising Rules
Section 5 of the Federal Trade Commission Act (FTC Act) prohibits
unfair or deceptive acts or practices.\10\ The Federal banking agencies
enforce this section pursuant to their authority in section 8 of the
Federal Deposit Insurance Act, 12 U.S.C. 1818.\11\ An act or practice
is unfair if it causes or is likely to cause substantial injury to
consumers that is not reasonably

[[Page 31862]]

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 it is material.

\10\ 15 U.S.C. 45.
\11\ 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 OTS and the NCUA have promulgated similar rules
that prohibit savings associations and federally insured credit unions,
respectively, from using advertisements or other representations that
are inaccurate or misrepresent the services or contracts offered.\12\
These regulations are broad enough to prohibit savings associations and
federally insured credit unions from making any false representations
to the public regarding their deposit accounts.\13\

\12\ 12 CFR 563.27 (OTS) and 12 CFR 740.2 (NCUA).
\13\ See OTS Op. Chief Counsel (September 3, 1993), 93-CC-21.

Overdraft protection programs may raise issues under either the FTC
Act or, in connection with savings associations or federally insured
credit unions, the OTS's or 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 in
connection with extensions of consumer credit.\14\ 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 installments.\15\

\14\ 15 U.S.C. 1601 et seq. TILA is implemented by Regulation Z,
12 CFR part 226.
\15\ Institutions should be aware that whether a written
agreement exists is a matter of State law. See, e.g., 12 CFR 226.5.

When overdrafts are paid, credit is extended. However, fees for
paying overdraft items currently are not considered finance charges
under Regulation Z if the institution has not agreed in writing to pay
overdrafts.\16\ Since this regulatory exception was created for the
occasional ad-hoc payment of overdrafts, its application to these
automated and marketed overdraft protection programs could be
reevaluated in the future. 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
transaction account that does not have overdraft protection.

\16\ Traditional lines of credit, which generally are subject to
a written agreement, do not fall under this exception.

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.\17\
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.

\17\ For Federal credit unions, this time period may not exceed
45 calendar days. 12 CFR 701.21(c)(3).

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.\18\ 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.

\18\ 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,'' \19\ 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.\20\
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.\21\ Overdraft protection programs that are not
covered by the TILA would generally qualify as incidental credit under
Regulation B.

\19\ See 12 CFR 202.2(c).
\20\ See 12 CFR 202.9.
\21\ 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.\22\ 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.

\22\ 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 accountholder may be required, for
example, if the fee for the service exceeds the fee for accounts that
do not have the service.\23\ Where the added overdraft protection fees
do not exceed previously disclosed NSF fees, a new disclosure may be
required if the previous disclosure did not adequately disclose that
the fees would be assessed for both paid checks and returned checks. 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.

\23\ For example, 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.\24\ If, under an overdraft protection
program, a consumer could

[[Page 31863]]

overdraw an account by means of an ATM withdrawal or point-of-sale
debit card transaction, both are electronic fund transfers 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

\24\ 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 and other
potential risks to the institution. Institutions that establish
overdraft protection programs should take into consideration the
following practices that have been implemented by institutions and that
may otherwise be required by applicable law. These best practices
currently observed in or recommended by the industry include:
Marketing and Communications With Consumers
Avoid promoting poor account management. Do not market the
program in a manner that encourages routine or intentional overdrafts;
rather 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 available overdraft
services or credit products, explain to consumers the costs and
advantages of various alternatives to the overdraft protection program,
and identify for consumers the risks and problems in relying on the
program and the consequences of abuse.
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 the
overdraft payment is discretionary, describe the circumstances in which
the institution would refuse to pay an overdraft or otherwise suspend
the overdraft protection program. Furthermore, if payment of overdrafts
is discretionary, information provided to consumers should not contain
any representations that would lead a consumer to expect that the
payment of overdrafts is guaranteed or assured.
Distinguish overdraft protection services from ``free''
account features. Avoid promoting ``free'' accounts and overdraft
protection services in the same advertisement in a manner that suggests
the overdraft protection service is free of charges.
Clearly disclose program fee amounts. Marketing materials
and information provided to consumers that mention overdraft protection
programs should clearly disclose the dollar amount of the overdraft
protection fees 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 fees in the overdraft protection
program literature or other communication that discloses the program's
Clarify that fees count against overdraft protection
program 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, if
Demonstrate when multiple fees will be charged. Clearly
disclose, where applicable, that more than one overdraft protection
program 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 check clearing policies. Clearly disclose to
consumers the order in which the institution pays checks or processes
other transactions (e.g., transactions at the ATM or point-of-sale
Illustrate the type of transactions covered. Clearly
disclose that overdraft protection fees may be imposed in connection
with transactions such as ATM withdrawals, debit card transactions,
preauthorized automatic debits, telephone-initiated transfers or other
electronic transfers, if applicable. If institutions' overdraft
protection programs cover transactions other than check transactions,
institutions should avoid language in marketing and other materials
provided to consumers 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 non-check transaction triggers
any fees. When consumers attempt to use means other than checks to
withdraw or transfer funds made available through an overdraft
protection program, provide a specific consumer notice, where feasible,
that completing the withdrawal will trigger the overdraft protection
fees. 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 possible, then post notices on
proprietary ATMs explaining that withdrawals in excess of the actual
balance will access the overdraft protection program and trigger fees
for consumers who have overdraft protection services. Institutions may
make access to the overdraft protection program unavailable through
means other than check transactions.
Prominently distinguish actual balances from overdraft
protection funds availability. When disclosing an account balance by
any means, the disclosure should 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 protection.
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 transaction, and disclose the
overdraft amount, any fees associated with the overdraft, 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. Institutions should also consider
reiterating the terms of the overdraft protection service when the
consumer accesses the service for the first time.

[[Page 31864]]

Where feasible, notify consumers in advance if the institution plans to
terminate or suspend the consumer's access to the service.
Consider daily limits. Consider limiting the number of
overdrafts or the dollar amount of fees that will be charged against
any one account each day while continuing to provide coverage for all
overdrafts up to the overdraft limit.
Monitor overdraft protection program usage. Monitor
excessive consumer usage, which may indicate a need for alternative
credit arrangements or other services, and should 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 protections programs
that have been promoted by the institutions.
This concludes the text of the proposed Interagency Guidance on
Overdraft Protection Programs.

Dated: May 26, 2004.
John D. Hawke, Jr.,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, May 27, 2004.
Jennifer J. Johnson,
Secretary of the Board.
Dated in Washington, DC, the 10th day of May, 2004. By order of
the Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: May 26, 2004.
By the Office of Thrift Supervision.
James E. Gilleran,
By the National Credit Union Administration Board on May 20,
Becky Baker,
Secretary of the Board.
[FR Doc. 04-12522 Filed 6-4-04; 8:45 am]
BILLING CODE 4810-33-6210-01-6714-01-6720-01-7535-01-P

Last Updated 06/07/2004

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