[Federal Register Volume 69, Number 109 (Monday, June 7, 2004)]
[Proposed Rules]
[Pages 31760-31767]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-12521]


 ========================================================================
 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 69, No. 109 / Monday, June 7, 2004 / Proposed 
Rules  

[[Page 31760]]



FEDERAL RESERVE SYSTEM

12 CFR Part 230

[Regulation DD; Docket No. R-1197]


Truth in Savings

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Board proposes to amend Regulation DD, which implements 
the Truth in Savings Act, and the staff commentary to the regulation, 
to address concerns about the uniformity and adequacy of information 
provided to consumers when they overdraw their accounts. The proposed 
amendments, in part, address a specific service offered by depository 
institutions, commonly referred to as ``bounced-check protection'' or 
``courtesy overdraft protection.''
    Bounced-check protection is an automated service that is sometimes 
provided to deposit account consumers as an alternative to a 
traditional line of credit. To address concerns about the marketing of 
bounced-check protection services, a proposed revision to the 
regulation would expand the prohibition against misleading 
advertisements to cover communications with current consumers about 
existing accounts; the staff commentary would provide examples. 
Proposed revisions to Regulation DD would require additional fee and 
other disclosures about automated overdraft services, including in 
advertisements. The Board also is proposing amendments of general 
applicability that would require institutions to provide more uniform 
disclosures about overdraft and returned-item fees.

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

ADDRESSES: You may submit comments, identified by Docket No. R-1197, by 
any of the following methods:

     Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include 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 http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm 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 
electronically or in paper 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.

FOR FURTHER INFORMATION CONTACT: Elizabeth A. Eurgubian, Attorney, or 
Ky Tran-Trong or Krista P. DeLargy, Senior Attorneys, Division of 
Consumer and Community Affairs, Board of Governors of the Federal 
Reserve System, at (202) 452-3667 or 452-2412; for users of 
Telecommunications Device for the Deaf (``TDD'') only, contact (202) 
263-4869.

SUPPLEMENTARY INFORMATION:

I. The Truth in Savings Act

    The Truth in Savings Act (TISA), 12 U.S.C. 4301 et seq., is 
implemented by the Board's Regulation DD (12 CFR part 230). The purpose 
of the act and regulation is to assist consumers in comparing deposit 
accounts offered by depository institutions, principally through the 
disclosure of fees, the annual percentage yield (APY), the interest 
rate, and other account terms. An official staff commentary interprets 
the requirements of Regulation DD (12 CFR part 230 (Supp. I)). Credit 
unions are governed by a substantially similar regulation issued by the 
National Credit Union Administration.
    Under TISA and Regulation DD, disclosures must be given upon a 
consumer's request and before an account is opened. Institutions are 
not required to provide periodic statements; but if they do, the act 
requires that fees, yields, and other information be provided on the 
statements. Notice must be given to accountholders before an adverse 
change in account terms occurs and prior to the renewal of certificates 
of deposit (time accounts).
    TISA and Regulation DD contain rules for advertising deposit 
accounts. There is a prohibition against advertisements, announcements, 
or solicitations that are inaccurate or misleading, or that 
misrepresent the deposit contract. Institutions are also prohibited 
from describing an account as free (or using words of similar meaning) 
if a regular service or transaction fee is imposed, if a minimum 
balance must be maintained, or if a fee is imposed when a customer 
exceeds a specified number of transactions. In addition, the act and 
regulation impose substantive restrictions on institutions' practices 
regarding the payment of interest on accounts and the calculation of 
account balances.

II. Concerns About Bounced-Check Protection Services

    Historically, depository institutions have used their discretion on 
an ad hoc basis to pay overdrafts for consumers on transaction 
accounts, usually imposing a fee. Over the years, some institutions 
automated the process for considering whether to honor overdrafts to 
reduce the costs of reviewing individual items, but generally 
institutions did not inform customers of their internal policies for 
determining whether an item would be paid or returned. More recently, 
third-party vendors have developed and sold automated programs to 
institutions, particularly to smaller ones. What generally 
distinguishes the vendor programs from institutions' in-house automated 
processes is the addition of marketing plans that appear designed to 
promote the generation of fee income by stating a dollar amount that 
consumers would be allowed to overdraw and by encouraging consumers to 
overdraw their accounts and use the service as a line of credit.
    While bounced-check protection services vary among institutions, 
many programs have 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

[[Page 31761]]

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.
     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.

    In November 2002, when it published the annual proposed update to 
the staff commentary to Regulation Z, the Board solicited comment and 
information from the public about how bounced-check protection services 
are designed and operated, to determine the need for guidance to 
depository institutions under Regulation Z or other laws (67 FR 72618, 
December 6, 2002). The Board received approximately 350 comment 
letters; most were from industry representatives describing how the 
services work.
    Consumer advocates, state agency representatives, and others 
believed that bounced-check protection services should be subject to 
TILA and Regulation Z. They noted that in addition to warning consumers 
about the high cost of the service, Truth in Lending disclosures would 
apprise consumers about the true nature of the service as a credit 
transaction. Industry commenters opposed coverage under TILA, stating 
that the current disclosure requirements under TISA are adequate, and 
that coverage under TILA would be burdensome. The Board believes that 
consumers would benefit from more uniform and complete information 
about the costs and terms of overdraft services not covered under TILA, 
including in advertisements. Improvements in the disclosures provided 
to consumers could aid them in understanding the costs associated with 
overdrawing their accounts and promote better account management. The 
Board is not proposing at this time to cover these services under TILA 
and Regulation Z, although further consideration of the need for such 
coverage may be appropriate if concerns about these overdraft programs 
persist in the future.
    Paying consumers' occasional or inadvertent overdrafts is a long-
established customer service provided by depository institutions. The 
Board recognized this longstanding practice when it initially adopted 
Regulation Z in 1969; the regulation provided that these transactions 
are generally exempt from coverage under Regulation Z where there is no 
written agreement between the consumer and institution to pay an 
overdraft and impose a fee. See Sec.  226.4(c)(3). The exemption was 
designed to facilitate depository institutions' ability to accommodate 
consumers on an ad-hoc basis.
    The Board's study of bounced-check protection services has 
identified a number of concerns about some programs. One major concern 
relates to the adequacy of information provided to consumers whose 
accounts are eligible for bounced-check protection services. The 
proposed revisions to Regulation DD and the staff commentary are 
intended to improve the information provided to consumers about these 
overdraft services.
    Other concerns center on institutions' marketing practices. 
Although the service is designed to protect consumers against 
occasional inadvertent overdrafts, some institutions' promotional 
materials make the service appear to be a line of credit, apparently to 
promote a consumer's repeated use of the service. Many of the marketing 
plans include material that informs consumers of the availability of 
the bounced-check protection service, and also of the maximum aggregate 
dollar amount of overdrafts the institution will pay. Some marketing 
plans encourage consumers to use the service to meet short-term credit 
needs, and not just as protection against inadvertent overdrafts. Some 
institutions have encouraged consumers specifically to use an overdraft 
as an advance on their next paycheck. Notwithstanding the marketing 
promises, however, qualifying language disclaims any legal obligation 
by the institution to pay any overdraft. In some cases, deposit 
accounts that are promoted as being ``free'' also promote bounced-check 
protection services that involve substantial fees. In addition, some 
institutions do not clearly inform consumers that ATM withdrawals, 
debit card transactions, or other electronic transfers may routinely be 
authorized under these overdraft services and that fees will be imposed 
in such cases. Proposed revisions to Regulation DD's advertising rules 
and disclosure requirements are intended to address these concerns.
    In addition to the Board's proposed revisions to Regulation DD and 
the staff commentary, the member agencies of the Federal Financial 
Institution Examination Council (FFIEC) have developed proposed 
supervisory guidance for institutions that offer bounced-check 
protection services. The proposed interagency guidance, which is being 
published for comment, would include best practices addressing the 
marketing and operation of bounced-check protection services. For 
example, institutions would be encouraged to obtain customers consent 
to receive overdraft protection or inform customers how they may ``opt 
out'' of the service, avoid encouraging routine or intentional 
overdrafts, and to promptly notify consumers when they access an 
overdraft protection service.

III. Concerns About Uniform Disclosure of Overdraft Fees

    The Board has concerns about the uniformity and adequacy of cost 
disclosures provided to consumers regarding overdraft and returned-item 
fees under Regulation DD. Many institutions already provide timely 
information to consumers about overdrafts in their accounts and the 
fees imposed, including notices that are sent at the time the overdraft 
occurs and on periodic statements. These practices and disclosures are 
not uniform among institutions, however, and some consumers may not 
receive adequate information on a timely basis.
    Fees for paying overdrafts and for returned items are typically 
flat fees unrelated to the amount of the item. These amounts may be 
significant when there are multiple overdrafts although the items may 
represent relatively small dollar amounts. Even when consumers are 
aware that an account is or may become overdrawn, they do not 
necessarily know the number of overdraft items that will result or the 
total fees that will be imposed, both of which are determined by the 
order in

[[Page 31762]]

which items drawn on the account are presented and the institution's 
policies regarding the order in which items are paid. Accordingly, some 
consumers may not be aware of the total amount of fees being imposed 
and the amount by which the account is overdrawn until the next 
periodic statement is received. And when the periodic statement is 
provided, it may intersperse fees among other items rather than 
providing a total. As a result, the overall cost of obtaining credit 
through an overdraft service is not clearly presented to consumers.
    TISA was enacted, in part, for the purpose of requiring clear and 
uniform disclosures regarding deposit account terms and fees assessable 
against these accounts. Such disclosures allow consumers to make 
meaningful comparisons among different accounts and to make informed 
judgments about the use of their accounts. To further the purposes of 
TISA, the Board is proposing uniform requirements for notifying 
consumers about returned-item fees and overdraft fees (whether the 
overdraft is created by check, by ATM withdrawal or other electronic 
transfer, or by other means). These rules will also help ensure that 
where an overdraft is paid, consumers are uniformly notified about the 
account's status. Information about overdrafts and returned items that 
is provided on a regular and timely basis may enable consumers to avoid 
unnecessary fees; it may assist consumers to better consider their 
approach to account management and determine whether the account's 
terms and features are suited to their needs or whether other types of 
accounts or services would be more appropriate.

IV. Summary of Proposed Revisions

    Pursuant to its authority under Section 269(a) of TISA, the Board 
is proposing the following revisions to Regulation DD and the staff 
commentary to address concerns about the uniformity and adequacy of 
institutions' disclosure of overdraft fees generally, and to address 
concerns about advertised automated overdraft services (``bounced-check 
protection services'') in particular:

Disclosures Concerning Overdraft Fees Generally

    Periodic statements. Institutions that provide periodic statements 
would be required to include the total amount of fees imposed for 
overdrafts and the total amount of fees for returned items for the 
statement period and for the calendar year to date.
    Account-opening disclosures. Institutions would be required to 
specify in the account-opening disclosures provided under the Truth in 
Savings Act whether overdraft protection fees may be imposed in 
connection with checks, automated teller machine (ATM) withdrawals, or 
other electronic fund transfers.

Additional Protections for Accounts With Certain Overdraft Protection 
Services (Bounced-Check Protection)

    Additional advertising disclosures. To reduce consumer confusion 
about the nature of the overdraft service and how it differs from a 
traditional line of credit, institutions that market automated 
overdraft payment services that are not covered by TILA would have to 
include in their advertisements about the service: the fee for the 
payment of each overdraft item, the types of transactions covered, the 
time period consumers have to repay or cover any overdraft, and the 
circumstances under which the institution would not pay an overdraft. 
An exemption in Regulation DD for broadcast media, billboards, and 
telephone response machines, which applies to other types of 
advertising disclosures, would also apply here.
    Prohibiting misleading advertisements. TISA prohibits 
advertisements, announcements, or solicitations that are misleading or 
that misrepresent the deposit contract. Currently, Regulation DD 
applies the prohibition only to advertisements for prospective 
accounts. To address concerns about overdraft protection services, 
Regulation DD would be amended to also apply the prohibition to 
communications with consumers about the terms of their current 
accounts.
    Examples of misleading advertisements. The staff commentary would 
also be revised to provide five examples of advertisements that would 
ordinarily be deemed misleading: (1) Representing an overdraft 
protection service as a ``line of credit;'' (2) representing that the 
institution will honor all checks or transactions, when the institution 
retains discretion at any time not to honor any transaction; (3) 
representing that consumers may overdraw their accounts and maintain a 
negative balance for an indefinite or extended period when the terms of 
the service require consumers to promptly return the deposit account to 
a positive balance; (4) describing a service solely as protection 
against bounced checks when the overdraft service may be imposed in 
connection with ATM withdrawals and other electronic fund transfers 
that permit consumers to overdraw their account; and (5) describing an 
account as ``free'' or ``no cost'' and also promoting a service for 
which there is a fee (including a bounced-check protection service), 
unless the advertisement clearly and conspicuously indicates there is a 
cost associated with the service.

V. Section-by-Section Analysis

Section 230.2 Definitions

2(b) Advertisements
    TISA prohibits institutions from making any advertisement, 
announcement, or solicitation relating to a deposit account that is 
inaccurate or misleading or that misrepresents its deposit contract. 12 
U.S.C. 4302(e). Regulation DD defines ``advertisement'' to include ``a 
commercial message appearing in any medium, that promotes directly or 
indirectly the availability of, or a deposit in, an account.'' See 
Sec.  230.2(b). Under the existing staff commentary, institutions' 
communications with consumers about existing accounts are not 
considered ``advertisements'' under Regulation DD. See comment 2(b)-
2.iii. The Board is proposing to revise the definition of an 
advertisement to cover communications with existing consumers for some 
purposes. The revised definition does not affect rules for triggering 
additional disclosures when an advertisement states an APY or bonus; 
the existing definition of ``advertisement,'' which would continue to 
apply for this purpose, would be redesignated as Sec.  230.2(b)(1) and 
would also be modified for stylistic consistency; no substantive change 
is intended.
    Proposed Sec.  230.2(b)(2) applies TISA's prohibition against 
misleading or inaccurate advertisements or misrepresentations of the 
deposit contract to communications with consumers about existing 
accounts. The expanded definition of an advertisement that covers 
existing accounts would also apply in determining whether a 
communication is an advertisement that triggers additional disclosures 
about overdraft protection services.
    An advertisement includes a commercial message that invites, 
offers, or otherwise promotes a deposit or other service in connection 
with an account or class of accounts. The revision to the definition of 
``advertisement'' does not affect providing required disclosures on an 
account, such as at account opening, on a periodic statement, or on an 
electronic terminal receipt (as required by TISA or the Electronic Fund 
Transfer Act, 15 U.S.C. 1693 et seq.), for example. See new comment 
2(b)-2. Current comment 2(b)-2 would be redesignated as comment 2(b)-3.

[[Page 31763]]

Section 230.4 Account Disclosures

4(b) Content of Account Disclosures
4(b)(4) Fees
    Under TISA and Regulation DD, before an account is opened, 
institutions must provide a schedule describing all fees that may be 
charged in connection with the account. The schedule must also disclose 
the amount of the fee and the conditions under which the fee will be 
imposed. 12 U.S.C. 4303; Sec.  230.4(b)(4). When terms required to be 
disclosed in the schedule change and adversely affect accountholders, 
notice of the change must be provided 30 days in advance. 12 U.S.C. 
4305; Sec.  2305(a).
    Currently the guidance for describing fees is quite general, 
providing that ``naming and describing the fee will typically satisfy 
these requirements.'' See comment 4(b)(4)-3. Proposed comment 4(b)(4)-5 
would require institutions to state in their account-opening 
disclosures the types of transactions for which an overdraft protection 
fee may be imposed. Solely describing an overdraft protection fee as a 
``fee for overdrafts'' or ``fee for overdraft items'' would not provide 
sufficient notice to consumers as to whether the fee applies to 
overdrafts by check only or whether it also applies to overdrafts by 
other means. The proposed comment would clarify that the disclosure 
must indicate that a fee may be imposed in connection with checks, ATM 
withdrawals, or other electronic fund transfers that overdraw the 
account, if that is the case.

Section 230.6 Periodic Statement Disclosures

6(a) General Rule
6(a)(3) Fees Imposed
    Although periodic statements are not required by TISA, an 
institution that provides such statements must disclose any fees or 
charges imposed on the account during the statement period. To assist 
consumers in better understanding the costs associated with overdrawing 
their accounts, the Board is proposing to revise the requirements for 
providing cost disclosures on periodic statements.
    Under Regulation DD, fees must be itemized on a periodic statement 
by type, for example, by separately listing the monthly service charge, 
ATM fees, and returned check fees. When multiple fees of the same type 
are charged in a single period, comment 6(a)(3)-2 in the current staff 
commentary to the regulation states that institutions have the option 
of showing each fee as a separate charge or, alternatively, aggregating 
all fees of the same type and disclosing a single dollar amount for 
that category. For clarity, this guidance would be moved to Sec.  
230.6(a)(3)(i) of the regulation.
    Under proposed Sec.  230.6(a)(3)(ii), institutions would be 
required to disclose overdraft fees or returned-item fees on periodic 
statements on an aggregate basis for the statement period. Institutions 
that currently disclose each fee as a separate charge on periodic 
statements could continue to do so as an additional voluntary 
disclosure. Comment 6(a)(3)-2 provides guidance on itemizing and 
describing fees on periodic statements. The comment would be revised to 
reflect the proposed revisions to the regulation concerning overdraft 
fees and returned-item fees and to clarify that these two types of fees 
may not be grouped together as fees for insufficient funds.
    To highlight the overall cost to consumers of presenting items on 
an account with insufficient funds on a routine basis, proposed Sec.  
230.6(a)(3)(ii) would require institutions' periodic statements to show 
the total amounts for overdraft fees and returned-item fees for the 
calendar year to date. The Board believes that disclosure of year-to-
date totals would better inform consumers about the cumulative effect 
of using an overdraft service on a regular basis. An institution's 
disclosures regarding the total overdraft fees paid by a consumer 
during the calendar year might also serve as a source of information 
for financial institutions seeking to monitor consumers' frequency in 
overdrawing their accounts. The Board requests comment on whether the 
requirement to disclose cumulative year-to-date fee totals should be 
limited to institutions that market overdraft payment services, and 
thereby encourage the routine use of the service.

Section 230.8 Advertising

    Under the proposal, Sec.  230.8(a) of Regulation DD would be 
reorganized for clarity. The regulation and staff commentary would be 
revised to specifically address the promotion of bounced-check 
protection services.
8(a) Misleading or Inaccurate Advertisements
8(a)(1)
    Some bounced-check protection services, typically those provided 
under programs developed by third-party vendors, include marketing 
plans that appear designed to increase customer usage of overdrafts. 
Some marketing plans include materials that encourage consumers to 
overdraw their accounts and use the service as a line of credit by 
stating that overdrafts up to a specific dollar amount will be paid. 
Some marketing plans also include statements suggesting that consumers 
may treat the service as a line of credit, for example, to take an 
advance on their next paycheck or to cover unexpected expenses.
    Notwithstanding the marketing promises, the vendors' programs 
include qualifying language disclaiming any legal obligation by the 
institution to pay any individual overdraft, regardless of the amount. 
The institutions' reservation of the right not to pay overdrafts may 
not appear prominently or conspicuously in the marketing materials. 
Moreover, unlike traditional lines of credit, consumers using bounced-
check protection services generally are not permitted to carry a credit 
balance forward at a predetermined and disclosed rate of interest. 
Instead, consumers using the service are generally charged a flat fee 
for each overdraft item and are expected to repay the entire overdraft 
amount within a short period. Under these circumstances, implying that 
the overdraft service is a traditional line of credit or suggesting 
that the service can be used like a line of credit may be inconsistent 
with the actual terms and limitations of the service.
    As discussed above, Regulation DD would be revised to apply TISA's 
prohibition against misrepresentations and misleading advertisements to 
communications with consumers about their existing accounts, to cover 
institutions' marketing of deposit-related services, including bounced-
check protection services. A new comment 8(a)-10 would be added to 
provide guidance on the types of advertisements that may violate the 
rule.
    Five new examples would be added to the commentary relating to the 
promotion of overdraft payment services. The staff commentary would be 
revised to state that institutions may not mislead consumers by 
representing an overdraft service as a ``line of credit'' unless the 
service is subject to the Board's Regulation Z. An advertisement could 
also mislead consumers if it represents that the institution will honor 
all checks or authorize all transactions that overdraw an account, with 
or without a specified dollar limit, when the institution retains 
discretion at any time not to honor checks or authorize transactions.
    A third example would state that an advertisement could mislead 
consumers by representing that consumers with overdrawn accounts are 
allowed to maintain a negative balance when the

[[Page 31764]]

terms of the account's overdraft service require consumers to promptly 
return the deposit account to a positive balance. The fourth example 
provides that promotional materials describing a service solely as 
protection against bounced checks could mislead consumers if the 
service also applies to ATM withdrawals and other debit card 
transactions and electronic fund transfers.
    A fifth new example of misleading advertisements relates to the 
advertisement of free accounts. Under Regulation DD, an institution may 
not describe an account as ``free'' (or use a similar term) if any 
maintenance or activity fee may be imposed on the account. Examples of 
fees that trigger the prohibition against advertising an account as 
free are listed in comment 8(a)-3.
    Comment 8(a)-4 lists certain account-related fees that are not 
considered to be maintenance or activity fees, for example, check-
printing fees, stop-payment fees, or fees associated with checks that 
are returned unpaid. Likewise, fees for bounced-check protection 
services would not be considered maintenance or activity fees, because 
the fees relate to the institution's provision of credit as opposed to 
fees related to the use of the consumer's own funds in the account. 
Nevertheless, there has been concern that some institutions promote 
bounced-check protection services as a feature of their free checking 
accounts, and that consumers may be misled into thinking that overdraft 
protection on such accounts is without costs.
    The commentary would be revised to state that an advertisement 
would be deemed misleading if the account is described as ``free'' and 
also promotes account-related services for which there is a fee, unless 
the advertisement clearly and conspicuously indicates there is a cost 
associated with the advertised service. Under proposed comment 8(a)-10, 
the advertisement may, but need not, state the actual cost of the 
service, although such a disclosure may be required under proposed 
Sec.  230.8(f) for certain advertisements. The proposed comment applies 
to fees for account-related services that are not considered 
``maintenance or activity fees'' (such as fees for bounced-check 
protection or for specially designed checks). Regulation DD's 
prohibition against advertising an account as ``free'' if the 
institution imposes a ``maintenance or activity fee'' is unaffected by 
the proposal.
    Comment is also solicited on other types of advertisements of 
overdraft protection services that would potentially mislead consumers 
about (i) the terms, limitations, costs, or nature of the service and 
(ii) the fact that the service is not a traditional line of credit. For 
example, where an institution's payment of overdrafts is automated, 
does advertising to consumers that the institution will pay overdrafts 
up to a specified dollar amount mislead consumers about the nature of 
the service? Furthermore, would such an advertisement potentially 
mislead consumers about whether the bank may not pay an overdraft? Does 
encouraging consumers to use the service to obtain credit instead of 
using it to cover inadvertent overdrafts mislead consumers about the 
actual terms of the service? Do advertisements that encourage the 
regular or routine use of the service mislead consumers about the cost 
of the service?
    Section 230.8(a)(1) is revised for stylistic consistency, without 
substantive change.

8(a)(2)

    TISA's limitation on advertising an account as free is implemented 
in Sec.  230.8(a). This provision would be redesignated as Sec.  
230.8(a)(2), without any substantive change.
8(f) Additional Disclosures in Connection With Automated Overdraft 
Services
    TISA and Regulation DD require additional information to be 
provided if an advertisement for a deposit account refers to a specific 
rate of interest, yield, or rate of earnings. 12 U.S.C. 4302; Sec.  
230.8(c). Advertisements for bonuses on deposit accounts also trigger 
additional information. Sec.  230.8(d). TISA authorizes the Board to 
exempt ``broadcast and electronic media and outdoor advertising from 
stating some additional information, if the Board finds the disclosures 
to be unnecessarily burdensome.'' 12 U.S.C. 4302(b). These limited 
disclosure rules are implemented in Sec.  230.8(e)(1). The exemptions 
for broadcast and electronic media do not extend to advertisements 
posted on the Internet or sent by e-mail.
    A principal concern about institutions' promotion of overdraft 
protection services is that consumers may be led to believe that the 
service represents a traditional line of credit. Some marketing 
materials focus on the dollar amount of the overdraft limit, which may 
lead consumers to believe that a line of credit is being provided. Some 
advertisements create the impression that the service can be relied 
upon to obtain short term extensions of credit from time to time (up to 
a given amount) at minimal cost. These promotions may mislead or 
confuse consumers regarding the nature, costs, terms, and limitations 
of the service. This problem may be magnified somewhat because marketed 
automated overdraft services are relatively new.
    Where consumers are targeted with advertisements about overdraft 
protection services, additional disclosures could reduce the potential 
that some consumers would be misled, and generally educate consumers 
about the nature of the service to enable them to compare the terms 
offered by different financial institutions. Accordingly, in order to 
ensure that advertisements promoting overdraft protection services are 
not misleading, the Board is proposing to revise Regulation DD to 
require certain disclosures in advertisements for automated overdraft 
payment services. To reduce consumer confusion about the costs, terms, 
and limitations of the service and how it differs from a traditional 
line of credit, advertisements would be required to disclose (1) the 
fee for the payment of each overdraft item; (2) the types of 
transactions covered; (3) the amount of time the consumer has to repay 
or cover any overdraft; and (4) the circumstances under which the 
institution would not pay an overdraft.
    The proposed rule would provide an exemption for certain types of 
advertisements to mirror exemptions provided for other types of 
advertising disclosures. Under TISA and Regulation DD, advertisements 
that state the annual percentage yield for an account must also 
disclose certain other information. The regulation specifically exempts 
from these disclosure requirements, advertisements using broadcast 
media, outdoor billboards, and telephone response machines. These 
exemptions were based on concerns about the practical limitations of 
time and space for these types of media; these concerns are not as 
significant for print advertising or marketing on Internet Web sites. 
These exemptions would also apply to the advertising rules for 
automated overdraft payment services under proposed Sec.  230.8(f). 
Proposed comment 8(f)-1 would clarify that for purposes of the 
advertising disclosures, institutions may describe the types of 
transactions covered in the same manner as the disclosures required 
before account-opening (see proposed comment 4(b)(4)-5).
    Comment 8(f)-2 provides that in describing the circumstances under 
which an institution will not pay an overdraft, a general description 
will typically satisfy the requirement, for example, statements such as 
``overdrafts will not be paid if your account is not in good standing, 
you are not making

[[Page 31765]]

regular deposits, or you have too many overdrafts.''
    Comment 8(f)-3 clarifies the relationship between the general 
guidance in comment 8(a)-10.v. (the rules for advertisements that 
promote free accounts as well as an account-related service for which a 
fee is charged) and the requirements of Sec.  230.8(f) when the 
account-related service being advertised is an automated overdraft 
service.

VI. Form of Comment Letters

    Comment letters should refer to Docket No. R-1197 and, when 
possible, should use a standard typeface with a font size of 10 or 12; 
this will enable the Board to convert text submitted in paper form to 
machine-readable form through electronic scanning, and will facilitate 
automated retrieval of comments for review. Comments may be mailed 
electronically to [email protected].

VII. Solicitation of Comments Regarding the Use of ``Plain Language''

    Section 722 of the Gramm-Leach-Bliley Act of 1999 requires the 
Board to use ``plain language'' in all proposed and final rules 
published after January 1, 2000. The Board invites comments on whether 
the proposed rules are clearly stated and effectively organized, and 
how the Board might make the proposed text easier to understand.

VIII. Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires 
federal agencies to publish an initial regulatory flexibility analysis 
to describe the impact of proposed rules on small entities. A final 
regulatory flexibility analysis will be prepared and will consider 
comments received during the public comment period.
    1. Statement of the objectives of the proposal. The Board is 
proposing revisions to Regulation DD to address the uniformity and 
adequacy of insitutions' disclosure of overdraft fees generally, and to 
address concerns about advertised automated overdraft services 
(``bounced-check protections services'') in particular. As stated more 
fully above, the existing regulation would be amended to provide that 
depository institutions offering certain overdraft payment services 
would be required to provide more complete information regarding those 
services. Account-opening disclosures and other marketing materials 
would describe more completely how fees may be triggered. The total 
dollar amount of overdraft and returned-item fees for the period and 
for the calendar year to date would be required on periodic statements. 
Certain advertising practices would be prohibited, and additional 
disclosures would be required.
    TISA was enacted, in part, for the purpose of requiring clear and 
uniform disclosures regarding deposit account terms and fees assessable 
against these accounts. Such disclosures allow consumers to make 
meaningful comparisons between different accounts and also allow 
consumers to make informed judgments about the use of their accounts. 
12 U.S.C. 4301. TISA authorizes the Board to prescribe regulations to 
carry out the purpose and provisions of the statute. 12 U.S.C. 
4308(a)(1). The act expressly states that the Board's regulations may 
contain ``such classifications, differentiations, or other provisions, 
* * * as, in the judgment of the Board, are necessary or proper to 
carry out the purposes of [the Act], to prevent circumvention or 
evasion of the requirements of [the Act], or to facilitate compliance 
with the requirements of [the Act].'' 12 U.S.C. 4308(a)(3). The Board 
believes that the proposed revisions to Regulation DD discussed above 
are within the Congress' broad grant of authority to the Board to adopt 
provisions that carry out the purposes of the statute.
    2. Small entities affected by the proposal. The number of small 
entities affected by this proposal is unknown. Approximately 14,580 
depository institutions in the United States that must comply with the 
Truth in Savings Act have assets of $150 million or less and thus are 
considered small entities for purposes of the Regulatory Flexibility 
Act, based on 2003 call report data. Approximately 5,900 are 
institutions that must comply with the Board's Regulation DD; 
approximately 8,860 are credit unions that must comply with National 
Credit Union Administration regulations, which must be substantially 
similar to the Board's Regulation DD. The Board believes small 
depository institutions that offer accounts where overdraft or 
returned-item fees are imposed currently send periodic statements on 
those accounts. Periodic statement disclosures would need to be revised 
to display aggregate overdraft and aggregate returned-item fees for the 
statement period and year to date. Account-opening disclosures and 
marketing materials would have to be reviewed, and perhaps revised.
    3. Other federal rules. The Board believes no federal rules 
duplicate, overlap, or conflict with the proposed revisions to 
Regulation DD.
    4. Significant alternatives to the proposed revisions. As discussed 
above, the Board requests comment on whether the requirement to 
disclose cumulative year-to-date totals for overdraft and returned-item 
fees should be limited to institutions that market overdraft payment 
services, and thereby encourage the routine use of the service.

IX. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1), the Board reviewed the rule under the 
authority delegated to the Board by the Office of Management and 
Budget. The Federal Reserve may not conduct or sponsor, and an 
organization is not required to respond to, this information collection 
unless it displays a currently valid OMB control number. The OMB 
control number is 7100-0271.
    The collection of information that is revised by this rulemaking is 
found in 12 CFR part 230 and in Appendix B. This collection is 
mandatory (15 U.S.C. 4301 et seq.) to evidence compliance with the 
requirements of Regulation DD and the Truth in Savings Act (TISA). 
Institutions are required to retain records for twenty-four months. The 
respondents/recordkeepers are for-profit depository institutions, 
including small businesses. This regulation applies to all types of 
depository institutions, not just state member banks. Under Paperwork 
Reduction Act regulations, however, the Federal Reserve accounts for 
the burden of the paperwork associated with the regulation only for 
state member banks. Other agencies account for the paperwork burden on 
their respective constituencies under this regulation.
    The proposed revisions provide that depository institutions 
offering certain overdraft payment services would be required to 
provide more complete information regarding those services. Account-
opening disclosures and other marketing materials would describe more 
completely how fees may be triggered. The total dollar amount of 
overdraft and returned-item fees for the period and for the calendar 
year to date would be required on periodic statements, and year-to-date 
totals would be required. Certain advertising practices would be 
prohibited, and additional disclosures would be required. Although the 
proposal adds these requirements, it is expected that these revisions 
would not significantly increase the paperwork burden of depository 
institutions. With respect to state member banks, it is estimated that 
there are 976 respondent/recordkeepers. Current annual burden is 
estimated to be 146,644 hours.
    Because the records are maintained at state member banks and the 
notices are

[[Page 31766]]

not provided to the Federal Reserve, no issue of confidentiality arises 
under the Freedom of Information Act.
    The Federal Reserve requests comments from depository institutions, 
especially state member banks, that will help to estimate burden of the 
various disclosures that would be made in the first year this proposed 
regulation would be effective. Comments are invited on: (a) The cost of 
compliance; (b) ways to enhance the quality, utility, and clarity of 
the information to be disclosed; and (c) ways to minimize the burden of 
disclosures on respondents, including through the use of automated 
disclosure techniques or other forms of information technology. 
Comments on the collection of information should be sent to the Office 
of Management and Budget, Paperwork Reduction Project (7100-0271), 
Washington, DC 20503, with copies of such comments sent to Cynthia 
Ayouch, Federal Reserve Board Clearance Officer, Division of Research 
and Statistics, Mail Stop 97, Board of Governors of the Federal Reserve 
System, Washington, DC 20551.

Text of Proposed Revisions

    Certain conventions have been used to highlight the proposed 
revisions. New language is shown inside bold-faced arrows while 
language that would be deleted is set off with bold-faced brackets.

List of Subjects in 12 CFR Part 230

    Advertising, Banks, Banking, Consumer protection, Reporting and 
recordkeeping requirements, Truth in savings.
    For the reasons set forth in the preamble, the Board proposes to 
amend Regulation DD, 12 CFR part 230, as set forth below:

PART 230--TRUTH IN SAVINGS (REGULATION DD)

    1. The authority citation for part 230 continues to read as 
follows:

    Authority: 12 U.S.C. 4301 et seq.

    2. Section 230.2 is amended by revising paragraph (b) to read as 
follows:


Sec.  230.2  Definitions.

* * * * *
    (b) Advertisement means a commercial message, appearing in any 
medium, that promotes directly or indirectly:
    [rtrif](1)[ltrif] The availability [rtrif]or terms[ltrif] of, or a 
deposit in, a [rtrif]new[ltrif] account [rtrif]; and
    (2) For purposes of Sec.  230.8(a) and (f) of this part, the terms 
of, or a deposit in, a new or existing account.[ltrif]
* * * * *
    3. Section 230.6 is amended by republishing the introductory text 
and revising paragraph (a)(3) to read as follows:


Sec.  230.6  Periodic statement disclosures.

    (a) General rule. If a depository institution mails or delivers a 
periodic statement, the statement shall include the following 
disclosures:
* * * * *
    (3) Fees imposed. Fees required to be disclosed under Sec.  
230.4(b)(4) of this part that were debited to the account during the 
statement period. The fees shall be itemized by type and dollar 
amounts.
    [rtrif](i) General. Except as provided in paragraph (a)(3)(ii) of 
this section, when fees of the same type are imposed more than once in 
a statement period, a depository institution may itemize each fee 
separately or group the fees together and disclose a total dollar 
amount for all fees of that type.
    (ii) Overdraft and returned-item fees. Institutions must disclose a 
total dollar amount for all overdraft fees and a total dollar amount 
for all returned-item fees for the statement period and for the 
calendar year to date. The total dollar amount for overdraft fees shall 
include all overdrafts on the account, whether created by check, by ATM 
withdrawal or other electronic transfer, or by other means. 
Institutions may itemize each overdraft fee or returned-item fee, in 
addition to providing the disclosures required by this 
paragraph.[ltrif]
* * * * *
    4. Section 230.8 is amended by revising paragraph (a) and adding a 
new paragraph (f) to read as follows:


Sec.  230.8  Advertising.

    (a) Misleading or inaccurate advertisements. An advertisement shall 
not:
    [rtrif](1)[ltrif] Be misleading or inaccurate [rtrif]or[ltrif] 
[lsqbb]and shall not[rsqbb] misrepresent a depository institution s 
deposit contract.
    [rtrif](2)[ltrif] [lsqbb]An advertisement shall not[rsqbb] Refer to 
or describe an account as ``free'' or ``no cost'' (or contain a similar 
term) if any maintenance or activity fee may be imposed on the account. 
The word ``profit'' shall not be used in referring to interest paid on 
an account.
* * * * *
    [rtrif](f) Additional disclosures in connection with automated 
overdraft services. Except for an advertisement subject to paragraph 
(e)(1) of this section, any announcement, solicitation, or 
advertisement promoting an automated overdraft service that is not 
subject to the Board's Regulation Z (12 CFR part 226) shall disclose in 
a clear and conspicuous manner:
    (1) The fee for the payment of each overdraft;
    (2) The types of transactions for which a fee for overdrawing an 
account may be imposed;
    (3) The time period by which the consumer must repay or cover any 
overdraft; and
    (4) The circumstances under which the institution would not pay an 
overdraft.[ltrif]
* * * * *
    5. In Supplement I to part 230:
    a. Under Section 230.2 Definitions, under (b) Advertisement, 
existing paragraph 2. is redesignated as paragraph 3.; a new paragraph 
2. is added; and newly designated paragraph 3.iii. is revised.
    b. Under Section 230.4 Account disclosures, under (b)(4) Fees, a 
new paragraph 5. is added.
    c. Under Section 230.6 Periodic statement disclosures, under (a)(3) 
Fees imposed, paragraph 2. is revised.
    d. Under Section 230.8 Advertising, under (a) Misleading or 
inaccurate advertisements, a new paragraph 10. is added, a new 
paragraph title (f) Additional disclosures in connection with automated 
overdraft services is added, and new paragraph (f) 1. through (f) 3. 
are added.

Supplement I To Part 230--Official Staff Interpretations

    Section 230.2 Definitions
* * * * *
    (b) Advertisement
* * * * *
    [rtrif]2. Existing accounts. For purposes of the prohibition on 
misleading advertisements in Sec.  230.8(a) of this part and disclosure 
requirements under Sec.  230.8(f) of this part, an advertisement 
includes a commercial message in visual, oral, or print media that 
invites, offers, or otherwise promotes a deposit in, or other service 
available in connection with, an existing consumer account or class of 
accounts. An institution is not promoting a deposit or service solely 
by providing disclosures required by Federal or other applicable law at 
account opening, on a periodic statement, or on an electronic terminal 
receipt.[ltrif]
    [rtrif]3.[ltrif] * * *
    iii. [rtrif]For purposes of Sec.  230.8(b) of this part through 
Sec.  230.8(e) of this part,[ltrif] information given to consumers 
about existing accounts, such as current rates recorded on a voice-
response machine or notices for automatically renewable time account 
sent before renewal.
* * * * *

[[Page 31767]]

Section 230.4 Account disclosures
* * * * *
    (b) Content of account disclosures
* * * * *
    (b)(4) Fees
* * * * *
    [rtrif]5. Fees for overdrawing an account. Under Sec.  230.4(b)(4) 
of this part institutions must disclose the conditions under which a 
fee may be imposed. In satisfying this requirement institutions must 
specify the types of transactions for which an overdraft fee may be 
imposed. In describing the conditions, an institution must state 
whether the fee applies to overdrafts created by check, or by ATM 
withdrawal or other electronic transfer, as applicable. For example, 
where a fee may be imposed in such circumstances, disclosing a fee for 
covering an overdraft ``created by check, or by ATM withdrawal or other 
electronic transfer'' would typically satisfy this requirement; 
disclosing a fee ``for overdraft items'' would not.[ltrif]
* * * * *
    Section 230.6 Periodic statement disclosures
    (a) General rule
* * * * *
    (a)(3) Fees imposed
* * * * *
    2. Itemizing fees by type. In itemizing fees imposed more than once 
in the period, institutions may group fees if they are the same type. 
[rtrif](But overdraft and returned-item fees each must be separately 
totaled for the statement period and cumulatively for the calendar 
year. See Sec.  230.6(a)(3)(ii).)[ltrif] [lsqbb]But[rsqbb] [rtrif] When 
fees of the same type are grouped together[ltrif] the description must 
make clear that the dollar figure represents more than a single fee, 
for example, ``total fees for checks written this period.'' Examples of 
fees that may not be grouped together are--
    i. Monthly maintenance and excess-activity fees.
    ii. ``Transfer'' fees, if different dollar amounts are imposed--
such as $.50 for deposits and $1.00 for withdrawals.
    iii. Fees for electronic fund transfers and fees for other 
services, such as balance-inquiry or maintenance fees.
    [rtrif]iv. Fees for transactions that overdraw an account and fees 
for returning checks or other items unpaid.[ltrif]
* * * * *
Section 230.8 Advertising
    (a) Misleading or inaccurate advertisements
* * * * *
    [rtrif]10. Examples. Examples of advertisements that would 
ordinarily be misleading, inaccurate, or misrepresent the deposit 
contract are:
    i. Representing an overdraft protection service as a ``line of 
credit,'' unless the service is subject to the Board's Regulation Z, 12 
CFR part 226.
    ii. Representing that the institution will honor all checks or 
authorize all transactions that overdraw an account, with or without a 
specified dollar limit, when the institution retains discretion at any 
time not to honor checks or authorize transactions.
    iii. Representing that consumers with an overdrawn account are 
allowed to maintain a negative balance when the terms of the account's 
overdraft service require consumers to promptly return the deposit 
account to a positive balance.
    iv. Describing a service solely as protection against bounced 
checks when the service being promoted allows consumers to overdraw 
their accounts by other means, such as ATM withdrawals, debit card 
transactions, or other electronic fund transfers.
    v. Advertising an account-related service for which a fee will be 
charged in an advertisement that also uses the word ``free'' or ``no 
cost'' (or a similar term) to describe the account, unless the 
advertisement clearly and conspicuously indicates that there is a cost 
associated with the service. If the fee is a maintenance or activity 
fee under Sec.  230.8(a)(2) of this part, however, an advertisement may 
not describe the account as ``free'' or ``no cost'' (or contain a 
similar term) even if the fee is disclosed in the advertisement.[ltrif]
* * * * *
    [rtrif](f) Additional disclosures in connection with automated 
overdraft services.
    1. Types of transactions. Disclosing that a fee may be imposed for 
covering overdrafts on an account ``created by check, or by ATM 
withdrawal or other electronic transfer'' would typically satisfy the 
requirements of Sec.  230.8(f)(2) of this part where the fee may be 
imposed in these circumstances. See comment 4(b)(4)-5.
    2. Circumstances for nonpayment. In describing the circumstances 
under which an institution will not pay an overdraft, a general 
description will typically satisfy the requirement, for example, 
statements such as ``overdrafts will not be paid if your account is not 
in good standing, or you are not making regular deposits, or you have 
too many overdrafts.''
    3. Advertising an account as ``free.'' Comment 8(a)-10.v. provides 
general guidance to institutions that advertise free accounts with an 
account-related service for which a fee will be charged, and requires 
that the advertisement state that a cost is associated with the 
service. If the advertised account-related service is an overdraft 
service subject to the requirements of Sec.  230.8(f) of this part, 
institutions must disclose the fee for the payment of each overdraft, 
not merely that a cost is associated with the overdraft service, as 
well as other required information.[ltrif]
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, May 27, 2004.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 04-12521 Filed 6-4-04; 8:45 am]
BILLING CODE 6210-01-P