[Federal Register Volume 70, Number 33 (Friday, February 18, 2005)]
[Notices]
[Pages 8428-8431]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-3195]


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DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[No. 2005-05]


Guidance on Overdraft Protection Programs

AGENCY: Office of Thrift Supervision, Treasury (OTS).

ACTION: Final guidance.

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SUMMARY: OTS is issuing this final Guidance on Overdraft Protection 
Programs (Guidance). This Guidance is intended to assist savings 
associations in the responsible disclosure and administration of 
overdraft protection services.

DATES: This Guidance is effective February 18, 2005.

FOR FURTHER INFORMATION CONTACT: Maurice McClung, Program Manager, 
Market Conduct, Thrift Policy, (202) 906-6182; Richard Bennett, 
Counsel, Regulations and Legislation Division, (202) 906-7409, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

    OTS has developed this final Guidance after careful consideration 
of comments received on the proposed Interagency Guidance on Overdraft 
Protection Programs, 69 FR 31858 (June 7, 2004) (proposed guidance) 
issued by the Federal Financial Institution Examination Council (FFIEC) 
agencies, i.e., the Office of the Comptroller of the Currency (OCC), 
Board of Governors of the Federal Reserve System (Board), Federal 
Deposit Insurance Corporation (FDIC), and National Credit Union 
Administration (NCUA). It addresses a service offered by insured 
depository institutions commonly referred to as ``bounced-check 
protection'' or ``overdraft protection.'' This 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 for OTS.
    The proposed guidance identified the historical and traditional 
approaches to providing consumers with protection against account 
overdrafts and contrasted these approaches with the more recent 
overdraft protection programs that are marketed to consumers. The 
Agencies also identified some of the existing and potential concerns 
surrounding the offering and administration of such overdraft 
protection programs that have been identified by Federal and State bank 
regulatory agencies, consumer groups, financial institutions, and their 
trade representatives.
    In response to these concerns, the Agencies provided proposed 
guidance in three primary sections: Safety and Soundness 
Considerations, Legal Risks, and Best Practices. In the section on 
Safety and Soundness Considerations, the Agencies wanted to ensure that 
financial institutions offering overdraft protection services adopt 
adequate policies and procedures to address the risks associated with 
these services. The Legal Risks section of the proposed guidance 
outlined several federal consumer compliance laws, generally alerted 
institutions offering overdraft protection services of the need to 
comply with all applicable Federal and State laws, and advised 
institutions to have their overdraft protection programs reviewed by 
legal counsel to ensure overall compliance prior to implementation. 
Finally, the proposed guidance set forth Best Practices that serve as 
positive 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.
    The Agencies received a total of over 320 comment letters in 
response to the proposed guidance. Comment letters were received from 
depository institutions, trade associations, vendors offering overdraft 
protection products, and other industry representatives, as well as 
government officials, consumer and community groups, and individual 
consumers.

II. Overview of Public Comments

    The Agencies received comments that addressed broad aspects of the 
proposed guidance, as well as its specific provisions. Many industry 
commenters, for instance, were concerned about the overall scope of the 
proposed guidance and whether it would apply to financial institutions 
that do not offer bounce protection programs but do cover the 
occasional overdraft on a case-by-case basis. Commenters also addressed 
the three specific sections of the proposed guidance.
    In regard to the Safety and Soundness section, for example, many 
industry commenters suggested extending the charge-off period from 30 
days to either 45 or 60 days because they believed a longer charge-off 
period would provide consumers with more time to repay overdrafts and 
avoid being reported to credit bureaus as delinquent on their accounts. 
Comments were also received addressing technical reporting and 
accounting issues.
    The Agencies received numerous comments regarding the Legal Risks 
section, particularly the Truth in Lending Act (TILA) and Equal Credit 
Opportunity Act (ECOA) discussions. For instance, many consumers and 
consumer group comments stated that overdraft protection should be 
considered credit covered by TILA's disclosures and other required 
protections. They likened the product to payday lending, which is 
covered by TILA. Many industry commenters argued against the coverage 
of overdraft programs by TILA and the Board's Regulation Z, and urged 
that the payment of overdrafts does not involve credit and finance 
charges requiring the disclosures and protections afforded by this body 
of law.
    Lastly, many commenters offered specific criticisms or recommended 
edits with respect to particular Best Practices identified in the 
proposal. Several industry commenters sought general clarification of 
whether examiners would treat the Best Practices as law or rules when 
examining institutions offering overdraft protection services.

III. Final Guidance

    This final Guidance incorporates changes made by OTS to provide 
clarity and address many commenter concerns. Language has been added to 
clarify the scope of the Guidance. The Safety and Soundness section 
expressly states that it applies to all methods of covering overdrafts. 
The introduction to the Best Practices section clarifies that while OTS 
is concerned about promoted overdraft protection programs, the Best 
Practices may also be useful for other methods of covering overdrafts.
    In response to the comments regarding the Safety and Soundness 
section, OTS now indicates that overdraft balances, including 
uncollected fees, should generally be written off when considered 
uncollectible, but no later than 60 days from the date first overdrawn. 
This OTS

[[Page 8429]]

Guidance does not address whether overdrafts are credit because OTS 
believes that some ``bounce protection'' programs are provided to 
customers as a fee for service rather than an extension of credit. 
Other overdraft plans, particularly those where the savings association 
performs a credit check on the borrower, provide a period of time to 
repay the overdraft, and charge interest based on the amount and time 
the overdraft is outstanding, are loans. It is not within the scope of 
this Guidance to make a determination of whether any particular 
overdraft program is credit. Other technical edits have been made to 
further clarify reporting and accounting aspects of this section of the 
Guidance.
    This OTS Guidance has eliminated the discussion of Legal Risks. 
This section engendered substantial comment and controversy, 
particularly over whether overdrafts are credit for purposes of TILA 
and Regulation Z.
    OTS reminds savings associations, however, that overdraft 
protection programs must comply with all applicable Federal laws and 
regulations. It is important that savings associations have their 
overdraft protection programs reviewed by counsel for compliance with 
all applicable laws prior to implementation. As these laws and 
regulations are subject to amendment, savings associations are reminded 
to monitor applicable laws and regulations for revisions and to ensure 
that their overdraft protection programs are fully compliant with them.
    Lastly, OTS reaffirms that the Best Practices are practices that 
have been recommended or implemented by financial institutions and 
others, as well as practices that may otherwise be required by 
applicable law. The Best Practices, or principles within them, are 
enforceable to the extent they are required by other federal statutes 
and regulations. The final Guidance explicitly states that while OTS is 
particularly concerned about promoted overdraft protection programs, 
the Best Practices may also be useful for other methods of covering 
overdrafts. OTS also revised or shortened numerous Best Practices for 
clarity, in response to particular commenter suggestions.
    OTS's Best Practices depart from those in the proposed guidance 
issued by the FFIEC agencies in a few respects. OTS's Best Practices 
include not manipulating transaction-clearing (including, but not 
limited to, check-clearing rules and batch debit processing) to inflate 
fees and not allowing consumers to access overdraft amounts unless the 
consumer is informed that the transaction will trigger an overdraft fee 
and is given an opportunity to cancel the transaction. If this is not 
feasible for a particular type of transaction, the savings association 
should allow consumers the choice to make access to the overdraft 
protection program unavailable by transaction type.
    For savings associations interested in further reading on the 
subject of best practices, OTS recommends an American Bankers 
Association publication entitled, ``Overdraft Protection: A Guide for 
Bankers.''
    The text of the OTS Guidance on Overdraft Protection Programs 
follows:

OTS Guidance on Overdraft Protection Programs

    The Office of Thrift Supervision (OTS) is issuing this guidance 
concerning a service offered by savings associations that is commonly 
referred to as ``bounced-check protection'' or ``overdraft 
protection.'' This service is sometimes offered on both consumer and 
small business transaction accounts as an alternative to traditional 
ways of covering overdrafts. This guidance is intended to assist 
savings associations in the responsible disclosure and administration 
of overdraft protection services, particularly those that are marketed 
to consumers.

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 typically returns the 
check as unpaid and charges the consumer a nonsufficient funds or 
``NSF'' fee. Some institutions may accommodate the consumer and pay 
overdrafts on a discretionary, ad-hoc basis. Regardless of whether the 
overdraft is paid, institutions typically charge the NSF fee when an 
overdraft occurs. Over the years, this accommodation has become 
automated by many institutions. Historically, institutions have not 
promoted this accommodation. This approach has not raised significant 
supervisory concerns.
    More recently, some depository institutions have offered 
``overdraft protection'' programs that, unlike the discretionary 
accommodation traditionally provided to those lacking a line of credit 
or other type of overdraft service (e.g., linked accounts), are 
marketed to consumers essentially as a convenience or fee for service 
program.
    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 advertise the use of the service.
     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.
     Institutions with an express aggregate ``dollar limit'' 
inform consumers of their limit under the program.
     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.

Concerns

    Aspects of the marketing, disclosure, and implementation of some 
overdraft protection programs are of concern to OTS. For example, some 
institutions have promoted this service in a manner that leads 
consumers to believe that it is a line of credit by informing them 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 reduce 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

[[Page 8430]]

their accounts, such as by informing consumers that the service may be 
used to routinely overdraw their accounts, 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. Some institutions may 
advertise accounts with overdraft protection coverage as ``free'' 
accounts and thereby lead consumers to believe that there are no fees 
associated with the account or the overdraft protection program.
    Furthermore, institutions may not clearly disclose that the program 
may cover instances when consumers overdraw their accounts by means 
other than check, such as at ATMs and point-of-sale (POS) terminals. 
Some institutions may include overdraft protection amounts in the 
figure that they disclose as the consumer's account ``balance'' (for 
example at an ATM) without clearly distinguishing the funds that are 
available for withdrawal without overdrawing the account. Where the 
institution knows that the transaction will trigger an overdraft fee, 
such as at a proprietary ATM, institutions also may not alert the 
consumer prior to the completion of the transaction to allow the 
consumer to cancel the transaction before the fee is triggered.
    Savings associations should carefully weigh the risks presented by 
the programs. Further, savings associations should carefully review 
their programs to ensure that marketing and other communications 
concerning the programs do not mislead consumers to believe that the 
program is a traditional line of credit or that payment of overdrafts 
is guaranteed, do not mislead consumers about their account balance or 
the costs and scope of the overdraft protection offered, and do not 
encourage irresponsible consumer financial behavior or other behavior 
that potentially may unacceptably increase risk to the savings 
association.

Safety & Soundness Considerations

    Overdraft protection programs may expose an institution to a higher 
level of nonpayment than traditional line of credit programs where the 
institution has performed appropriate credit underwriting. All 
overdrafts, whether or not subject to an overdraft protection program, 
are subject to the safety and soundness considerations contained in 
this section.
    Savings associations providing overdraft protection programs should 
adopt written policies and procedures adequate to address the 
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 decisions and other criteria. Savings associations also 
should monitor these accounts on an ongoing basis and be able to 
identify consumers who do not manage their accounts in a satisfactory 
manner. Overdraft protection programs should be administered and 
adjusted, as needed, to ensure that the performance of such programs is 
satisfactory and in line with expectations. This may include, where 
appropriate, disqualification of a consumer from future overdraft 
protection. Reports sufficient to enable management to identify, 
measure, and manage overdraft volume, profitability, and performance 
should be provided to management on a regular basis.
    Savings associations 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, savings associations should have 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 a loan at the 
savings association) as well as for when there is a lack of timely 
repayment of an overdraft. In addition, overdraft balances, including 
uncollected fees, should generally be written off when considered 
uncollectible, but no later than 60 days from the date first overdrawn.
    Some overdrafts are rewritten as loan obligations in accordance 
with an institution's loan policy and supported by a documented 
assessment of that consumer's ability to repay. In those instances, the 
overdraft is considered a loan and the delinquency and charge-off 
timeframes described in the FFIEC Uniform Retail Credit Classification 
and Account Management Policy apply. See also OTS CEO Memorandum 
128 (July 27, 2000) (``Revised Uniform Retail Credit and 
Account Management Policy''), available at http://www.ots.treas.gov/docs/2/25128.pdf.
    With respect to the reporting of income and loss recognition on 
overdraft protection programs, savings associations should follow 
generally accepted accounting principles (GAAP). OTS expects all 
savings associations to adopt rigorous loss estimation processes to 
ensure that overdraft fee income is accurately measured. Such methods 
may include providing loss allowances for uncollectible amounts or fees 
or, alternatively, only recognizing that portion of earned fees 
estimated to be collectible.
    Savings associations 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 
Outsourcing Technology Services Booklet part of the FFIEC's IT 
Examination Handbook, outlines OTS's expectations for prudent practices 
in this area. See also OTS CEO Memorandum 201 (July 15, 2004), 
available at http://www.ots.treas.gov/docs/2/25201.pdf.

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, legal, 
and other potential risks to the savings association. Savings 
associations that establish overdraft protection programs should, as 
applicable, take into consideration the following Best Practices, many 
of which have been recommended or implemented by financial institutions 
and others, as well as practices that may otherwise be required by 
applicable law. While OTS is concerned about promoted overdraft 
protection programs, the Best Practices may also be useful for other 
methods of covering overdrafts. These Best Practices currently observed 
in or recommended by the industry include:
Marketing and Communications With Consumers
     Avoid promoting poor account management. Savings 
associations should 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 overdraft services or 
credit products, if any, that are available at the savings association 
and how the terms, including fees, for

[[Page 8431]]

these services or products differ. Identify for consumers the 
consequences of extensively using the overdraft protection program.
     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 
savings association and how consumers may qualify for them.
     Clearly explain the discretionary nature of program. If 
payment of an overdraft is discretionary, make this clear. Savings 
associations should not represent that the payment of overdrafts is 
guaranteed or assured if the savings association retains discretion not 
to pay an overdraft.
     Distinguish overdraft protection services from ``free'' 
account features. Savings associations should not promote ``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 fees. In communications about 
overdraft protection programs, clearly disclose the dollar amount of 
the fee for each overdraft and any interest rate or other fees that may 
apply. For example, rather than merely stating that the savings 
association's standard NSF fee will apply, savings associations should 
restate the dollar amount of any applicable fees or interest charges.
     Clarify that fees count against the disclosed overdraft 
protection dollar 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.
     Demonstrate when multiple fees will be charged. If 
promoting an overdraft protection program, clearly disclose that more 
than one overdraft fee may be charged against the account per day, 
depending on the number of checks presented and other withdrawals made 
from the consumer's account.
     Do not manipulate transaction-clearing rules. Transaction-
clearing rules (including check-clearing and batch debit processing) 
should not be administered unfairly or manipulated to inflate fees.
     Explain the impact of transaction-clearing policies. 
Clearly explain to consumers that transactions may not be processed in 
the order in which they occurred and that the order in which they are 
received by the savings association and processed can affect the total 
amount of overdraft fees incurred by the consumer. Savings associations 
should also clearly disclose rules for processing and clearing 
transactions.
     Illustrate the type of transactions covered. Clearly 
disclose that overdraft protection fees may be imposed on transactions 
such as ATM withdrawals, debit card transactions, preauthorized 
automatic debits, telephone-initiated transfers, or other electronic 
transfers, if applicable, to avoid 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 transaction triggers any fees. 
When consumers attempt to withdraw, transfer, or otherwise access funds 
made available through an overdraft protection program (other than by 
check), savings associations should alert consumers that completing the 
transaction will trigger an overdraft protection fee. Savings 
associations should also give consumers an opportunity to cancel the 
attempted transaction. If this is not feasible for a particular type of 
transaction, then savings associations should allow consumers the 
choice to make access to the overdraft protection program unavailable 
by transaction type, even if it results in limiting access to the 
overdraft protection amount only to check transactions.
     Prominently distinguish balances from overdraft protection 
funds availability. When disclosing a single balance for an account by 
any means, savings associations should not include overdraft protection 
funds in that account balance. The disclosure should instead 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. In addition to any alert at the time of 
transaction, 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 date of the transaction, the type of transaction, 
the overdraft amount, the fee associated with the overdraft, the amount 
necessary to return the account to a positive balance, 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. Notify consumers if the savings association 
terminates or suspends the consumer's access to the service, for 
example, if the consumer is no longer in good standing.
     Consider daily limits on fees imposed. Consider providing 
a daily cap on overdraft fees charged against any one account, while 
continuing to provide coverage for overdrafts up to the overdraft 
limit.
     Monitor overdraft protection program usage. Monitor 
excessive consumer usage, which may indicate a need for alternative 
arrangements or other services and inform consumers of these available 
options.
     Fairly report program usage. Savings associations should 
not report negative information to consumer reporting agencies when the 
overdrafts are paid under the terms of overdraft protection programs 
that have been promoted by the savings association.
    This concludes the text of the OTS Guidance on Overdraft Protection 
Programs.

    Dated: February 15, 2005.

    By the Office of Thrift Supervision
James E. Gilleran,
Director.
[FR Doc. 05-3195 Filed 2-17-05; 8:45 am]
BILLING CODE 6720-01-P