The Federal Reserve, along with the Office of Thrift Supervision (OTS) and the National Credit Union Administration (NCUA) (collectively, the “agencies”) in May 2008 initially proposed regulations that would have imposed notice requirements and a broad opt-out option for consumer overdraft programs reaching all consumer account transactions, including checking, automated clearinghouse (ACH), recurring, POS debit and ATM transactions and a more limited opt-out option as well (the “May 2008 Proposed Rules”). The May 2008 Proposed Rules also addressed the issue of debit holds placed on consumer accounts. Apparently unable to decide exactly which type of proposal is the government’s preferred response to the issues of overdrafts, the Agencies recently abandoned the May 2008 Proposed Rules and, instead, proposed new rules that contain both opt-in and opt-out alternatives for bank overdraft services(the “January 2009 Proposed Rules”).
If one accepts the need for either an opt-in or opt-out alternative for overdraft services, there remain considerable issues about the extent to which banks will be able to nevertheless encourage consumers, subtly or overtly, to choose overdraft protection that covers the ATM and POS debit transactions that incur the highest amount of fees. No matter which program the Agencies adopt, issues of the extent to which consumers will understand the model forms provided by the Agencies is also of concern. Because the Agencies do not propose to treat overdraft fees as loans subject to the Truth-In-Lending Act (TILA), consumers may not understand that a $27 overdraft fee charged on a $20 debit transaction for two weeks represents 3520% APR. The APR on $4 cup of coffee would be substantially more, especially if a consumer makes the account right the very next day.
Moreover, even if the Agencies adopt the more stringent opt-in proposal, a number of other issues still remain. First, under either approach consumers who choose are not enrolled in overdraft protection may find that banks will impose less favorable terms on those accounts. Second, the January 2009 Proposed Rules only address the holds that are placed by banks on POS transactions occurring at gasoline stations, restaurants and similar short term holds. It fails to address the issue in all cases and does not attempt to address issues related to check deposit holds that might cause funds availability problems and overdraft fees to consumers. Finally, the January 2009 Proposed Rules do not attempt to alter current bank practices such as batch reordering which will result in the highest number of overdraft fees for consumers who do ultimately want some overdraft protection.
All of this said, it is good for the Agencies to have scrapped the May 2008 Proposed Rules as they wouldn't have done much for consumers. And, the January 2009 Proposed Rules, even with their failings, are a step forward.