[Federal Register Volume 69, Number 109 (Monday, June 7, 2004)]
[Notices]
[Pages 31858-31864]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-12522]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket No. 04-14]

FEDERAL RESERVE SYSTEM

[Docket No. OP-1198]

FEDERAL DEPOSIT INSURANCE CORPORATION

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[No. 2004-30]

NATIONAL CREDIT UNION ADMINISTRATION


Interagency Guidance on Overdraft Protection Programs

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

ACTION: Proposed Guidance with request for comment.

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

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

ADDRESSES: Because the Agencies will jointly review all of the comments 
submitted, interested parties may send comments to any of the Agencies 
and need not send comments (or copies) to all of the Agencies. Because 
paper mail in the Washington area and at the Agencies is subject to 
delay, please consider submitting your comments by e-mail or fax. 
Commenters are encouraged to use the title ``Overdraft Protection 
Guidance'' to facilitate the organization and distribution of comments 
among the Agencies. Interested parties are invited to submit comments 
to:
    OCC: Your comment must designate ``OCC'' and include Docket Number 
04-14. In general, the OCC will enter all comments received into the 
docket without change, including any business or personal information 
that you provide. You may submit your comment by any of the following 
methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     OCC Web Site: http://www.occ.treas.gov. Click on ``Contact 
the OCC.'' Next, scroll down and click on ``Comments on Proposed 
Regulations.''
     E-Mail Address: [email protected].
     Fax: (202) 874-4448.
     Mail: Office of the Comptroller of the Currency, 250 E 
Street, SW., Public Information Room, Mailstop 1-5, Washington, DC 
20219.
     Hand Delivery/Courier: 250 E Street, SW., Attn: Public 
Information Room, Mail Stop 1-5, Washington, DC 20219.
     Docket Information: For access to the docket to read 
comments received or background documents you may:
    View Docket Information in Person: You may personally inspect and 
photocopy docket information at the OCC's Public Information Room, 250 
E Street, SW., Washington, DC. You can make an appointment to inspect 
the docket by calling us at (202) 874-5043.
    View Docket Information Electronically: You may request that we 
send you an electronic copy of docket information via e-mail or CD-ROM 
by contacting [email protected].
    Request Paper Copy: You may request that we send you a paper copy 
of docket information by faxing us at (202) 874-4448, by calling us at 
(202) 874-5043, or mailing the OCC at 250 E Street, SW., Attn: Public 
Information Room, Mail Stop 1-5, Washington, DC 20219.
    Board: You may submit comments, identified by Docket No. OP-1198, 
by any of the following methods:
     Agency Web Site: 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 the 
docket number in the subject line of the message.
     Fax: 202/452-3819 or 202/452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
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 in electronic or paper 
form in Room MP-500 of the Board's Martin Building (20th and C Streets, 
NW.) between 9 a.m. and 5 p.m. on weekdays.
    FDIC: You may submit comments by any of the following methods:
     Agency Web site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow the instructions for submitting comments 
on the Agency Web site.
     E-Mail: [email protected].
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
     Hand Delivery/Courier: Guard station at the rear of the 
550 17th Street Building (located on F Street) on business days between 
7 a.m. and 5 p.m.
    Instructions: All submissions received must include the agency 
name. All comments received will be posted without change to http://www.fdic.gov/regulations/laws/federal/propose.html including any 
personal information provided.
    OTS: You may submit comments, identified by No. 2004-30, by any of 
the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail address: [email protected]. Please 
include No. 2004-30 in the subject line

[[Page 31859]]

of the message and include your name and telephone number in the 
message.
     Fax: (202) 906-6518.
     Mail: Regulation Comments, Chief Counsel's Office, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention: No. 2004-30.
     Hand Delivery/Courier: Guard's Desk, East Lobby Entrance, 
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: 
Regulation Comments, Chief Counsel's Office, Attention: No. 2004-30.
    Instructions: All submissions received must include the agency name 
and No. 2004-30 for this proposed Guidance. All comments received will 
be posted without change to the OTS Internet Site at http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1, including any 
personal information provided.
    Docket: For access to the docket to read background documents or 
comments received, go to http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1. In addition, you may inspect comments 
at the Public Reading Room, 1700 G Street, NW., by appointment. To make 
an appointment for access, call (202) 906-5922, send an e-mail to 
public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile transmission to (202) 
906-7755. (Prior notice identifying the materials you will be 
requesting will assist us in serving you.) We schedule appointments on 
business days between 10 a.m. and 4 p.m. In most cases, appointments 
will be available the next business day following the date we receive a 
request.
    NCUA: You may submit comments by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web site: http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the 
instructions for submitting comments.
     E-mail: Address to [email protected]. Include ``[Your 
name] Comments on Overdraft Protection'' in the e-mail subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for e-mail.
     Mail: Address to Becky Baker, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.

FOR FURTHER INFORMATION CONTACT:
    OCC: Margaret Hesse, Special Counsel, Community and Consumer Law 
Division, (202) 874-5750; Michael Bylsma, Director, Community and 
Consumer Law Division, (202) 874-5750; or Kim Scherer, National Bank 
Examiner/Credit Risk Specialist, Credit Risk Policy, (202) 874-5170.
    Board: Minh-Duc T. Le, Senior Attorney, Daniel Lonergan, Counsel, 
or Elizabeth Eurgubian, Attorney, Division of Consumer and Community 
Affairs, (202) 452-3667; or William H. Tiernay, Supervisory Financial 
Analyst, Division of Bank Supervision and Regulation, (202) 452-2412. 
For users of Telecommunications Device for the Deaf (``TDD'') only, 
contact (202) 263-4869.
    FDIC: April Breslaw, Chief, Compliance Section (202) 898-6609; 
Patricia Cashman, Senior Policy Analyst (202) 898-6534; James Leitner, 
Examination Specialist (202) 898-6790, Division of Supervision and 
Consumer Protection; and Mark Mellon, Counsel, (202) 898-3884.
    OTS: Maurice McClung, Program Manager, Market Conduct, Consumer 
Protection and Specialized Programs, (202) 906-6182; and Richard 
Bennett, Counsel, Banking and Finance, (202) 906-7409.
    NCUA: Elizabeth A. Habring, Program Officer, Office of Examination 
and Insurance, (703) 518-6392; or Ross P. Kendall, Staff Attorney, 
Office of the General Counsel, (703) 518-6562.

SUPPLEMENTARY INFORMATION:

I. Background

    Under the auspices of the FFIEC, the Agencies have developed this 
proposed Guidance to address a service offered by insured depository 
institutions commonly referred to as ``bounced-check protection'' or 
``overdraft protection.'' This credit service is sometimes offered to 
transaction account customers as an alternative to traditional ways of 
covering overdrafts (e.g., overdraft lines of credit or linked 
accounts).
    While both the availability and customer acceptance of these 
overdraft protection services have increased, aspects of the marketing, 
disclosure, and implementation of some of these programs have raised 
concerns with the Agencies. For example, in a 2001 letter, the OCC 
identified some of these particular concerns.\1\ In November 2002, the 
Board sought comment about the operation of overdraft protection 
programs.\2\ The Board received approximately 350 comments; most were 
from industry representatives describing how the programs work. This 
proposed Guidance is the result of information gleaned from public 
comment letters and other publicly available material, and from 
information provided by institutions, consumer groups, State 
representatives, and vendors offering overdraft protection program.
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    \1\ OCC Interpretive Letter 914, September 2001.
    \2\ 67 FR 72618, December 6, 2002.
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II. Principal Elements of the Guidance

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

[[Page 31860]]

examples of practices that are currently observed in, or recommended 
by, the industry. Broadly, these best practices address the marketing 
and communications that accompany the offering of overdraft protection 
services, as well as the disclosure and operation of program features. 
Clear disclosures and explanations to consumers about the operation, 
costs, and limitations of overdraft protection services should promote 
consumer understanding, limit complaints, and encourage appropriate 
consumer use. Credit and reputational risks to the institution can also 
be minimized through the incorporation of these best practices.

III. Request for Comment

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

Interagency Guidance on Overdraft Protection Programs

    The Office of the Comptroller of the Currency (OCC), Board of 
Governors of the Federal Reserve System (Board), Federal Deposit 
Insurance Corporation (FDIC), Office of Thrift Supervision (OTS), and 
National Credit Union Administration (NCUA), collectively ``the 
Agencies,'' are issuing this interagency guidance concerning a service 
offered by insured depository institutions that is commonly referred to 
as ``bounced-check protection'' or ``overdraft protection.'' This 
credit service is sometimes offered to transaction account consumers, 
including small businesses, as an alternative to traditional ways of 
covering overdrafts. This interagency guidance is intended to assist 
insured depository institutions in the responsible disclosure and 
administration of overdraft protection services, particularly those 
that are marketed to consumers.\3\
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    \3\ Federal credit unions are already subject to certain 
regulatory requirements governing the establishment and maintenance 
of overdraft programs. 12 CFR 701.21(c)(3). This regulation requires 
a Federal credit union offering an overdraft program to adopt a 
written policy specifying the dollar amount of overdrafts that the 
credit union will honor (per member and overall); the time limits 
for a member to either deposit funds or obtain a loan to cover an 
overdraft; and the amount of the fee and interest rate, if any, that 
the credit union will charge for honoring overdrafts. This 
interagency guidance supplements but does not change these 
regulatory requirements for Federal credit unions.
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Introduction

    To protect against account overdrafts, some consumers obtain an 
overdraft line of credit, which is subject to the disclosure 
requirements of the Truth in Lending Act (TILA). If a consumer does not 
have an overdraft line of credit, the institution may accommodate the 
consumer and pay overdrafts on a discretionary, ad-hoc basis. 
Regardless of whether the overdraft is paid, institutions typically 
have imposed a fee when an overdraft occurs, often referred to as a 
nonsufficient funds or ``NSF'' fee. Over the years, this accommodation 
has become automated by some institutions. Historically, institutions 
have not promoted this accommodation.
    More recently, some depository institutions have begun offering 
``overdraft protection'' programs. Unlike the discretionary 
accommodation traditionally provided to those lacking a line of credit 
or other type of overdraft service (e.g., linked accounts), these 
overdraft protection programs are marketed to consumers essentially as 
short-term credit facilities, and typically provide consumers with an 
express overdraft ``limit'' that applies to their accounts.
    While the specific details of overdraft protection programs vary 
from institution to institution, and also vary over time, those 
currently offered by institutions incorporate some or all of the 
following characteristics:
     Institutions inform consumers that overdraft protection is 
a feature of their accounts and promote the use of the service. 
Institutions also inform consumers of their aggregate dollar limit 
under the overdraft protection program.
     Coverage is automatic for consumers who meet the 
institution's criteria (e.g., account has been open a certain number of 
days, deposits are made regularly). Typically, the institution performs 
no credit underwriting.
     Overdrafts generally are paid up to the aggregate limit 
set by the institution for the specific class of accounts, typically 
$100 to $500.
     Many program disclosures state that payment of an 
overdraft is discretionary on the part of the institution, and may 
disclaim any legal obligation of the institution to pay any overdraft.
     The service may extend to check transactions as well as 
other transactions, such as withdrawals at automated teller machines 
(``ATMs''), transactions using debit cards, pre-authorized automatic 
debits from a consumer's account, telephone-initiated funds transfers, 
and on-line banking transactions.\4\
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    \4\ Transaction accounts at credit unions are called share draft 
accounts. For purposes of this interagency guidance, the use of the 
term ``check'' includes share drafts.
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     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.

Concerns

    Aspects of the marketing, disclosure, and implementation of some 
overdraft protection programs, intended essentially as short-term 
credit facilities, are of concern to the Agencies. For example, some 
institutions have promoted this credit service in a manner that leads 
consumers to believe that it is a line of credit by informing consumers 
that their account includes an overdraft protection limit of a 
specified dollar amount without clearly disclosing the terms and 
conditions of the service including how fees impact overdraft 
protection dollar limits, and how the service differs from a line of 
credit.
    In addition, some institutions have adopted marketing practices 
that appear to encourage consumers to overdraw their accounts, such as 
by informing consumers that the service may be used to take an advance 
on their next paycheck, thereby potentially increasing the 
institutions' credit exposure with little or no analysis of the 
consumer's creditworthiness. These overdraft protection programs may be 
promoted in a manner that leads consumers to believe that overdrafts 
will always be paid when, in reality, the institution reserves the 
right not to pay some overdrafts. Furthermore, institutions may not 
clearly disclose that the program allows consumers to overdraw their 
accounts by means other than check, such as at ATMs and point-of-sale 
terminals.
    Institutions should weigh carefully the credit, legal, reputation, 
and other risks presented by the programs. Further, institutions should 
carefully review their programs to ensure they do not lead consumers to 
believe the service is a traditional line of credit, do not encourage 
irresponsible consumer

[[Page 31861]]

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

Safety & Soundness Considerations

    The overdraft protection programs discussed in this interagency 
guidance may expose an institution to more credit risk (e.g., higher 
delinquencies and losses) than overdraft lines of credit and other 
traditional overdraft programs because of a lack of individual account 
underwriting. Therefore, institutions providing overdraft protection 
programs should adopt written policies and procedures adequate to 
address the credit, operational, and other risks associated with these 
types of programs. Prudent risk management practices include the 
establishment of express account eligibility standards and well-defined 
and properly documented dollar limit decision criteria. Institutions 
also should monitor these accounts on an ongoing basis and be able to 
identify individual consumers who may be excessively reliant on the 
product or who may represent an undue credit risk to the institution. 
The programs should be administered and adjusted, as needed, to ensure 
that credit risk remains in line with expectations. This may include, 
where appropriate, disqualification of a consumer from future 
participation in the program. Reports detailing product volume, 
profitability, and credit performance should be provided to management 
on a regular basis.
    Institutions also are expected to incorporate prudent risk 
management practices related to account repayment and suspension of 
overdraft protection services. These include the establishment of 
specific timeframes for when consumers must pay off their overdraft 
balances. For example, there should be established procedures for the 
suspension of overdraft services when the account holder no longer 
meets the eligibility criteria (such as when the account holder has 
declared bankruptcy or defaulted on another loan) as well as for when 
there is a lack of repayment of an overdraft. In addition, overdraft 
balances should generally be charged off within 30 days from the date 
first overdrawn.\5\ The 30-day charge off timeframe applies to all 
overdrafts created under the overdraft protection programs described in 
this interagency guidance. Some overdrafts are individually 
underwritten and supported by a documented assessment of that 
consumer's ability to repay. In those instances, the charge off 
timeframes described in the FFIEC Uniform Retail Credit Classification 
and Account Management Policy would apply.\6\ For corporate and small 
businesses, existing credit relationships may support exceptions to the 
30-day charge off guidance.
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    \5\ Federal credit unions are required by regulation to 
establish a time limit, not to exceed 45 calendar days, for a member 
to either deposit funds or obtain an approved loan from the credit 
union to cover each overdraft. 12 CFR 701.21(c)(3).
    \6\ For federally insured credit unions, charge-off policy for 
booked loans is described in NCUA Letter to Credit Unions No. 03-CU-
01, ``Loan Charge-off Guidance,'' dated January 2003.
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    In some cases, an institution may allow a consumer to cover an 
overdraft through an extended repayment plan when the consumer is 
unable to bring an account to a positive balance within the required 
time frames. Even in such cases, the existence of the repayment plan 
would not extend the charge-off determination period beyond 30 days 
measured from the date of the overdraft. Any payments received after 
the account is charged off (up to the amount charged off against the 
allowance) should be reported as a recovery.
    With respect to the reporting of income and loss recognition on 
overdraft protection programs, institutions should follow generally 
accepted accounting principles (GAAP) and the instructions for the 
Reports of Condition and Income (Call Report), Thrift Financial Report, 
and NCUA 5300 Call Report. Overdraft balances should be reported as 
loans. Accordingly, overdraft losses (other than the portion of the 
loss attributable to uncollected overdraft fees) should be charged off 
against the allowance for loan and lease losses and uncollected 
overdraft fees should be reversed against overdraft fee income or an 
associated earned fee loss allowance.\7\ Institutions should adopt 
rigorous loss estimation processes to ensure that any allowances 
related to earned fees reflect all estimated losses and that earned but 
uncollected fees are accounted for accurately. The procedures for 
estimating an adequate allowance should be documented in accordance 
with the Policy Statement on the Allowance for Loan and Lease Losses 
Methodologies and Documentation for Banks and Savings Institutions.\8\
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    \7\ Institutions may also charge off uncollected overdraft fees 
against the allowance for loan and lease losses if estimated credit 
losses on the fees are provided for in that allowance.
    \8\ Issued by the Board, FDIC, OCC, and OTS. The NCUA provided 
similar guidance to credit unions in Interpretive Ruling and Policy 
Statement 02-3, ``Allowance for Loan and Lease Losses Methodologies 
and Documentation for Federally Insured Credit Unions,'' 67 FR 
37445, May 29, 2002.
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    When an institution routinely communicates the available amount of 
overdraft protection to depositors, these available amounts should be 
reported as ``unused commitments'' in regulatory reports. The Agencies 
also expect proper risk-based capital treatment of outstanding 
overdrawn balances and unused commitments.\9\ Overdraft balances should 
be risk-weighted according to the obligor. Unused commitments that are 
unconditionally cancelable at any time pursuant to applicable law and 
those with an original maturity of one year or less, as defined in the 
risk-based capital standards, are subject to a zero percent credit 
conversion factor. Commitments with an original maturity of more than 
one year are subject to a 50 percent credit conversion factor and the 
resulting credit equivalent amount should be risk-weighted according to 
the obligor.
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    \9\ Federally insured credit unions should calculate risk-based 
net worth in accordance with the rules contained in 12 CFR part 702.
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    Institutions entering into overdraft protection contracts with 
third-party vendors must conduct thorough due diligence reviews prior 
to signing a contract. The interagency guidance contained in the 
November 2000 Risk Management of Outsourced Technology Services 
outlines the Agencies' expectations for prudent practices in this area.

Legal Risks

    Overdraft protection programs must comply with all applicable 
Federal laws and regulations, some of which are outlined below. State 
laws that may be applicable include usury and criminal laws, and laws 
regarding unfair or deceptive acts or practices. It is important that 
institutions have their overdraft protection programs reviewed by 
counsel for compliance with all applicable laws prior to 
implementation.
Federal Trade Commission Act/Advertising Rules
    Section 5 of the Federal Trade Commission Act (FTC Act) prohibits 
unfair or deceptive acts or practices.\10\ The Federal banking agencies 
enforce this section pursuant to their authority in section 8 of the 
Federal Deposit Insurance Act, 12 U.S.C. 1818.\11\ An act or practice 
is unfair if it causes or is likely to cause substantial injury to 
consumers that is not reasonably

[[Page 31862]]

avoidable by consumers themselves and not outweighed by countervailing 
benefits to consumers or to competition. An act or practice is 
deceptive if, in general, it is a representation, omission, or practice 
that is likely to mislead a consumer acting reasonably under the 
circumstances, and it is material.
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    \10\ 15 U.S.C. 45.
    \11\ See OCC Advisory Letter 2002-3 (March 2002); and joint 
Board and FDIC guidance on Unfair or Deceptive Acts or Practices by 
State-Chartered Banks (March 11, 2004).
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    In addition, the OTS and the NCUA have promulgated similar rules 
that prohibit savings associations and federally insured credit unions, 
respectively, from using advertisements or other representations that 
are inaccurate or misrepresent the services or contracts offered.\12\ 
These regulations are broad enough to prohibit savings associations and 
federally insured credit unions from making any false representations 
to the public regarding their deposit accounts.\13\
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    \12\ 12 CFR 563.27 (OTS) and 12 CFR 740.2 (NCUA).
    \13\ See OTS Op. Chief Counsel (September 3, 1993), 93-CC-21.
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    Overdraft protection programs may raise issues under either the FTC 
Act or, in connection with savings associations or federally insured 
credit unions, the OTS's or NCUA's advertising rules, depending upon 
how the programs are marketed and implemented. To avoid engaging in 
deceptive, inaccurate, misrepresentative, or unfair practices, 
institutions should closely review all aspects of their overdraft 
protection programs, especially any materials that inform consumers 
about the programs.
Truth in Lending Act
    TILA and Regulation Z require creditors to give cost disclosures in 
connection with extensions of consumer credit.\14\ TILA and the 
regulation apply to creditors that regularly extend consumer credit 
that is subject to a finance charge or is payable by written agreement 
in more than four installments.\15\
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    \14\ 15 U.S.C. 1601 et seq. TILA is implemented by Regulation Z, 
12 CFR part 226.
    \15\ Institutions should be aware that whether a written 
agreement exists is a matter of State law. See, e.g., 12 CFR 226.5.
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    When overdrafts are paid, credit is extended. However, fees for 
paying overdraft items currently are not considered finance charges 
under Regulation Z if the institution has not agreed in writing to pay 
overdrafts.\16\ Since this regulatory exception was created for the 
occasional ad-hoc payment of overdrafts, its application to these 
automated and marketed overdraft protection programs could be 
reevaluated in the future. Even where the institution agrees in writing 
to pay overdrafts as part of the deposit account agreement, fees 
assessed against a transaction account for overdraft protection 
services are finance charges only to the extent the fees exceed the 
charges imposed for paying or returning overdrafts on a similar 
transaction account that does not have overdraft protection.
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    \16\ Traditional lines of credit, which generally are subject to 
a written agreement, do not fall under this exception.
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    Some financial institutions also offer overdraft repayment loans to 
consumers who are unable to repay their overdrafts and bring their 
accounts to a positive balance within a specified time period.\17\ 
These closed-end loans will trigger Regulation Z disclosures, for 
example, if the loan is payable by written agreement in more than four 
installments. Regulation Z will also be triggered where such closed-end 
loans are subject to a finance charge.
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    \17\ For Federal credit unions, this time period may not exceed 
45 calendar days. 12 CFR 701.21(c)(3).
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Equal Credit Opportunity Act
    Under the Equal Credit Opportunity Act (ECOA) and Regulation B, 
creditors are prohibited from discriminating against an applicant on a 
prohibited basis in any aspect of a credit transaction.\18\ This 
prohibition applies to overdraft protection programs. Thus, steering or 
targeting certain consumers on a prohibited basis for overdraft 
protection programs while offering other consumers overdraft lines of 
credit or other more favorable credit products or overdraft services, 
will raise concerns under the ECOA.
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    \18\ 15 U.S.C. 1691 et seq. The ECOA is implemented by 
Regulation B, 12 CFR part 202. The ECOA prohibits discrimination on 
the basis of race, color, religion, national origin, sex, marital 
status, age (provided the applicant has the capacity to contract), 
the fact that all or part of the applicant's income derives from a 
public assistance program, and the fact that the applicant has in 
good faith exercised any right under the Consumer Credit Protection 
Act.
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    In addition to the general prohibition against discrimination, the 
ECOA and Regulation B contain specific rules concerning procedures and 
notices for credit denials and other adverse action. Regulation B 
defines the term ``adverse action,'' \19\ and generally requires a 
creditor who takes adverse action to send a notice to the consumer 
providing, among other things, the reasons for the adverse action.\20\ 
Some actions taken by creditors under overdraft protection programs 
might constitute adverse action but would not require notice to the 
consumer if the credit is deemed to be ``incidental credit'' as defined 
in Regulation B. ``Incidental credit'' includes consumer credit that is 
not subject to a finance charge, is not payable by agreement in more 
than four installments, and is not made pursuant to the terms of a 
credit card account.\21\ Overdraft protection programs that are not 
covered by the TILA would generally qualify as incidental credit under 
Regulation B.
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    \19\ See 12 CFR 202.2(c).
    \20\ See 12 CFR 202.9.
    \21\ See 12 CFR 202.3(c).
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Truth in Savings Act
    Under the Truth in Savings Act (TISA), deposit account disclosures 
must include the amount of any fee that may be imposed in connection 
with the account and the conditions under which the fee may be 
imposed.\22\ In addition, institutions must give advance notice to 
affected consumers of any change in a term that was required to be 
disclosed if the change may reduce the annual percentage yield or 
adversely affect the consumer.
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    \22\ 12 U.S.C. 4301 et seq. TISA is implemented by Regulation DD 
at 12 CFR part 230 for banks and savings associations, and by NCUA's 
TISA regulation at 12 CFR part 707 for federally insured credit 
unions.
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    When overdraft protection services are added to an existing deposit 
account, advance notice to the accountholder may be required, for 
example, if the fee for the service exceeds the fee for accounts that 
do not have the service.\23\ Where the added overdraft protection fees 
do not exceed previously disclosed NSF fees, a new disclosure may be 
required if the previous disclosure did not adequately disclose that 
the fees would be assessed for both paid checks and returned checks. In 
addition, TISA prohibits institutions from making any advertisement, 
announcement, or solicitation relating to a deposit account that is 
inaccurate or misleading or that misrepresents their deposit contracts.
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    \23\ For example, an advance change in terms notice would not be 
required if the consumer's account disclosures stated that their 
overdraft check may or may not be paid and the same fee would apply.
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    Since these automated and marketed overdraft protection programs 
did not exist when most of the implementing regulations were issued, 
the regulations may be reevaluated.
Electronic Fund Transfer Act
    The Electronic Fund Transfer Act (EFTA) and Regulation E require an 
institution to provide consumers with account-opening disclosures and 
to send a periodic statement for each monthly cycle in which an 
electronic fund transfer (EFT) has occurred and at least quarterly if 
no transfer has occurred.\24\ If, under an overdraft protection 
program, a consumer could

[[Page 31863]]

overdraw an account by means of an ATM withdrawal or point-of-sale 
debit card transaction, both are electronic fund transfers subject to 
EFTA and Regulation E. As such, periodic statements must be readily 
understandable and accurate regarding debits made, current balances, 
and fees charged. Terminal receipts also must be readily understandable 
and accurate regarding the amount of the transfer. Moreover, readily 
understandable and accurate statements and receipts will help reduce 
the number of alleged errors that the institution must investigate 
under Regulation E, which can be time-consuming and costly to 
institutions.
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    \24\ 15 U.S.C. 1693 et seq. The EFTA is implemented by 
Regulation E, 12 CFR part 205.
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Best Practices

    Clear disclosures and explanations to consumers of the operation, 
costs, and limitations of an overdraft protection program and 
appropriate management oversight of the program are fundamental to 
enabling responsible use of overdraft protection. Such disclosures and 
oversight can also minimize potential consumer confusion and 
complaints, foster good customer relations, and reduce credit and other 
potential risks to the institution. Institutions that establish 
overdraft protection programs should take into consideration the 
following practices that have been implemented by institutions and that 
may otherwise be required by applicable law. These best practices 
currently observed in or recommended by the industry include:
Marketing and Communications With Consumers
     Avoid promoting poor account management. Do not market the 
program in a manner that encourages routine or intentional overdrafts; 
rather present the program as a customer service that may cover 
inadvertent consumer overdrafts.
     Fairly represent overdraft protection programs and 
alternatives. When informing consumers about an overdraft protection 
program, inform consumers generally of other available overdraft 
services or credit products, explain to consumers the costs and 
advantages of various alternatives to the overdraft protection program, 
and identify for consumers the risks and problems in relying on the 
program and the consequences of abuse.
     Train staff to explain program features and other choices. 
Train customer service or consumer complaint processing staff to 
explain their overdraft protection program's features, costs, and 
terms, including how to opt out of the service. Staff also should be 
able to explain other available overdraft products offered by the 
institution and how consumers may qualify for them.
     Clearly explain discretionary nature of program. If the 
overdraft payment is discretionary, describe the circumstances in which 
the institution would refuse to pay an overdraft or otherwise suspend 
the overdraft protection program. Furthermore, if payment of overdrafts 
is discretionary, information provided to consumers should not contain 
any representations that would lead a consumer to expect that the 
payment of overdrafts is guaranteed or assured.
     Distinguish overdraft protection services from ``free'' 
account features. Avoid promoting ``free'' accounts and overdraft 
protection services in the same advertisement in a manner that suggests 
the overdraft protection service is free of charges.
     Clearly disclose program fee amounts. Marketing materials 
and information provided to consumers that mention overdraft protection 
programs should clearly disclose the dollar amount of the overdraft 
protection fees for each overdraft and any interest rate or other fees 
that may apply. For example, rather than merely stating that the 
institution's standard NSF fee will apply, institutions should restate 
the dollar amount of any applicable fees in the overdraft protection 
program literature or other communication that discloses the program's 
availability.
     Clarify that fees count against overdraft protection 
program limit. Consumers should be alerted that the fees charged for 
covering overdrafts, as well as the amount of the overdraft item, will 
be subtracted from any overdraft protection limit disclosed, if 
applicable.
     Demonstrate when multiple fees will be charged. Clearly 
disclose, where applicable, that more than one overdraft protection 
program fee may be charged against the account per day, depending on 
the number of checks presented on and other withdrawals made from the 
consumer's account.
     Explain check clearing policies. Clearly disclose to 
consumers the order in which the institution pays checks or processes 
other transactions (e.g., transactions at the ATM or point-of-sale 
terminal).
     Illustrate the type of transactions covered. Clearly 
disclose that overdraft protection fees may be imposed in connection 
with transactions such as ATM withdrawals, debit card transactions, 
preauthorized automatic debits, telephone-initiated transfers or other 
electronic transfers, if applicable. If institutions' overdraft 
protection programs cover transactions other than check transactions, 
institutions should avoid language in marketing and other materials 
provided to consumers implying that check transactions are the only 
transactions covered.
Program Features and Operation
     Provide election or opt-out of service. Obtain affirmative 
consent of consumers to receive overdraft protection. Alternatively, 
where overdraft protection is automatically provided, permit consumers 
to ``opt out'' of the overdraft program and provide a clear consumer 
disclosure of this option.
     Alert consumers before a non-check transaction triggers 
any fees. When consumers attempt to use means other than checks to 
withdraw or transfer funds made available through an overdraft 
protection program, provide a specific consumer notice, where feasible, 
that completing the withdrawal will trigger the overdraft protection 
fees. This notice should be presented in a manner that permits 
consumers to cancel the attempted withdrawal or transfer after 
receiving the notice. If this is not possible, then post notices on 
proprietary ATMs explaining that withdrawals in excess of the actual 
balance will access the overdraft protection program and trigger fees 
for consumers who have overdraft protection services. Institutions may 
make access to the overdraft protection program unavailable through 
means other than check transactions.
     Prominently distinguish actual balances from overdraft 
protection funds availability. When disclosing an account balance by 
any means, the disclosure should represent the consumer's own funds 
available without the overdraft protection funds included. If more than 
one balance is provided, separately (and prominently) identify the 
balance without the inclusion of overdraft protection.
     Promptly notify consumers of overdraft protection program 
usage each time used. Promptly notify consumers when overdraft 
protection has been accessed, for example, by sending a notice to 
consumers the day the overdraft protection program has been accessed. 
The notification should identify the transaction, and disclose the 
overdraft amount, any fees associated with the overdraft, the amount of 
time consumers have to return their accounts to a positive balance, and 
the consequences of not returning the account to a positive balance 
within the given timeframe. Institutions should also consider 
reiterating the terms of the overdraft protection service when the 
consumer accesses the service for the first time.

[[Page 31864]]

Where feasible, notify consumers in advance if the institution plans to 
terminate or suspend the consumer's access to the service.
     Consider daily limits. Consider limiting the number of 
overdrafts or the dollar amount of fees that will be charged against 
any one account each day while continuing to provide coverage for all 
overdrafts up to the overdraft limit.
     Monitor overdraft protection program usage. Monitor 
excessive consumer usage, which may indicate a need for alternative 
credit arrangements or other services, and should inform consumers of 
these available options.
     Fairly report program usage. Institutions should not 
report negative information to consumer reporting agencies when the 
overdrafts are paid under the terms of overdraft protections programs 
that have been promoted by the institutions.
    This concludes the text of the proposed Interagency Guidance on 
Overdraft Protection Programs.

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