The Federal Reserve Board has announced a final rule that requires affirmative consumer consent (that is, an opt-in) for charging overdraft fees on automated teller machine and one-time (non-recurring) debit card transactions. Issued on November 12, 2009, as an amendment to Regulation E, which implements the Electronic Fund Transfer Act, the final rule has a July 1, 2010, mandatory compliance date. The new rule’s prohibitions and requirements include the following:
- An issuer must provide its customer with a prescribed form of opt-in notice containing specified information, including a description of the issuer's overdraft policies and the fees imposed. The issuer must also provide the customer with written or electronic confirmation of the customer's opt-in, informing the customer of his or her continuing right to revoke the opt-in.
- Checks, ACH payments, and recurring debit card transactions that create overdrafts, such as regular bill payments on a VISA®-branded debit card, are not subject to the new rule. As a result, an issuer may charge overdraft fees for these transactions without an opt-in. The Fed staff has indicated that current systems allow merchants to code debit card transactions differently for recurring and non-recurring transactions. The new rule permits issuers to rely on such merchant coding.
- An issuer is prohibited from providing different account terms, conditions, and features to customers who do not opt in. Also, an issuer is prohibited from conditioning the payment of overdrafts falling outside the rule on a customer's consent to payment of fees on ATM and one-time debit card overdrafts. This means that to comply with the new rule, an issuer cannot simply decline payment of all debit card overdrafts of a customer who does not opt in and instead must install a system that can read the codes used by merchants to distinguish between recurring and non-recurring transactions. The Fed established the delayed July 1, 2010, mandatory implementation date in large part due to the practical difficulties of installing such a system.
- In contrast to the proposed rule, overdrafts created by debit holds in excess of the actual transaction amount are not addressed in the final rule. The Fed concluded that the proposed rule was insufficiently comprehensive and that an approach involving financial institutions, card networks, and merchants may be required to effectively address problems associated with debit holds.
On accounts opened before July 1, 2010, issuers may continue to charge overdraft fees for paying ATM or one-time debit transactions without a customer’s opt-in until August 15, 2010. Issuers are permitted to obtain opt-ins at any time before July 1, 2010 (including before the new rule's effective date of January 19, 2010), so long as the opt-in satisfies all requirements of the new rule.
As manifested by an onslaught of class action litigation in recent months, potential non-compliance with the new rule is hardly the only risk facing issuers who charge overdraft fees. Earlier this year, Ballard Spahr lawyers won the dismissal of a federal-court class action premised on the argument that a bank's "high-to-low" processing of transactions in descending dollar amount order resulted in excessive overdraft fees. (Click here to read Ballard Spahr's June 18, 2009, alert on the decision.) Ballard Spahr lawyers are also involved in ongoing overdraft fee class action litigation recently consolidated by the federal multidistrict panel before Judge Lawrence King in the U.S. District Court for the Southern District of Florida.
Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or email@example.com; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or firstname.lastname@example.org; Martin C. Bryce, Jr., 215.864.8238 or email@example.com; John L. Culhane, Jr., 215.864.8535 or firstname.lastname@example.org; Barbara S. Mishkin, 215.864.8528 or email@example.com; or Mark J. Furletti, 215.864.8138 or firstname.lastname@example.org.
Copyright © 2009 by Ballard Spahr LLP.
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