[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]
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Proposed Rules
Federal Register
________________________________________________________________________
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.
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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
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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
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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.
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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