During a recent seminar, one of our employees was informed that it could be a violation of UDAAP to charge a customer an overdraft fee if the customer has opted in but does not qualify for our automatic overdraft program (i.e., we look at their overdrafts on an ad hoc basis).

Would it be acceptible practice for the bank to opt a customer OUT (even if they have previously opted in) when they are disqualified from our automatic overdraft program? This would prevent us from inadvertantly charging a fee for the random debit card purchase that slips through (which does happen occassionally) thus making us EXTREMELY fair and safe and not-at-all abusive.

Is this something we need to be concerned about or is this being overly cautious?

Is this something we need to be concerned about or is this being overly cautious?

Be very concerned. A Reg E opt-in should only be possible if a customer is in an ODP product.

In answer to your first question, it would be wise to go ahead and turn off those opt-ins if you aren't actually providing any overdraft "pad" to those cardholders.

In the FDIC enforcement actions I've looked into and in some cases in which the FDIC pushed for corrective action without going as far as a formal enforcement order, banks have been asked/ordered to go back to 7/1/10 and refund any overdraft fees they have assessed for card transactions under questionable opt-ins. In some cases, the FDIC controlled/influenced the wording of the banks' mea culpa letters advising customers of the refunds.

At least if you're proactive in making similar adjustments, your bank can control the customer communication.

John,
BOL tracks HMDA CMPs and Flood CMPs. Would BOL consider having a page where any UDAAP related enforcement actions could be listed? It would be nice to have one place to go to research enforcement trends relating to UDAAP. Thanks.

I have another question on the padded balance if you do not tell the customer and have ad hoc approach. The customer consents to the REG E opt-in and we pad the balance to allow an overdraft.

Please explain how this affects us under CFPB examination process.

How can you pad balances and still have an ad-hoc program?

I agree with Randy. You cannot return ATM withdrawals and Debit Card purchases as NSF so there is no ad hoc to these. Having a padded balance would indicate a formal program.

The examiners will look at those A-9 opt in forms to see if you are accurately describing how you approve these transactions. They will also look to see that you make pay/return decisions on checks/ACH for customers who have not opted in as for those who have. Be prepared to answer for how you mitigate risk from the overdrafts and under what circumstances you will stop offering a padded balance.

That might be do-able. We'll discuss the idea and let you know. Thanks for the suggestion.

If it is acceptable to "turn off" the customer's opt-in when they are disqualified from our automatic program, would it then be acceptable to wait to turn it on until they qualify? Meaning we could sell this product at account opening but the customer may not qualify for it until a couple of months later.

If they opted-in and it was fully explained to them what it meant, probably. How do you handle the opt-out for the ODP program if you don't qualify the customer until several months later? Why not give them the opt-out and opt-in at the same time.

Our bank has decided to turn the few opt in's to opt out's. But now that we are going to make everyone opt out.. is it necessary to give the disclosure form (the standard one that was suggested and use at the "git-go")?

If you don't have an ODP program or do and just prefer not to assess charges on these types of transactions, there would be no disclosure necessary.

If you only pad the balance of the REG E opt-ins that have consented at ATM and one time debit card transactions, only charge those customers, is action completed. The issue we do not communicate that padded balance. What issue(s) would arise from that action?

If you are not padding the balance for those that opt-in, I guess I have to ask: What are they opting into?

We do pad the balance of those that opt-in.

There's no requirement that you communicate the pad amount to the customer or provide a padded balance (regulators would prefer you not provide a padded balance, BTW).

To follow up -If they opted in and had ODP and then we remove the ODP, should we notify the customer that we have removed their opt-in?

I don't think you need to notify them, I would just turn the flag to no to make sure you would no longer charge for anything that might slip through. You already notified them that they were no longer eligible for the ODP program - correct?

I am not sure if we notify them when we remove the ODP - I am new to the Reg E arena and haven't gotten a hold on our procedures yet. I feel that we need to notify them so that we are being deceptive or unfair.

So if we are not notifying them when we remove the ODP do we need to go back and notify them of the removal of the opt-in?

I believe that you should notify the consumer when you withdraw overdraft payment services (you put it as "remove the ODP") OR if you void the consumer's opt-in. Normally, those two actions would run hand-in-hand, in which case I'd only send one notice.

That is my thought too John. Thanks for the confirmation.

What if we currently offer the overdraft service on all types of transactions but now wish to no longer offer it on card transactions? Common sense tells me we should notify the 1100 affected accounts but are there any regulatory requirements for notifying the customer that we will no longer authorize debit card transactions that would put them into overdrafts?

But on the issue of notification to customer, we DO NOT have an overdraft program... (we have "ad hoc") ... on all overdrafts. We can't return ATM and one time transactions anyway, so all we are doing is turning off the opt in feature to ensure we don't accidentially charge someone. ???

We have an ODP program and have customers not in the ODP program that have "opt in". I was told that as long as we have a benefit available (ODP), even if they do not qualify at this time, we are still okay with them "opt in" because even if they do not qualify at this time, they may in the future. We were advised not to "opt out" those accounts.

One could make an argument that your decision will impose stricter limitations on the dollar amount of transfers the cardholder can make, thus requiring a notice under Regulation E §1005.8(a)(1)(iv). Or one could argue that the card overdraft program is an EFT service that you're terminating, also triggering a notice under §1005.8(a). Finally, one could consider that one of the best practices cited in the 2005 Joint Agency Overdraft Guidance is notifying consumers if the institutions terminates or suspends access to the service.

But even if you don't "buy" any of those reasons, there is one other: I think you'll catch less customer flak if you warn them of the end of the service in advance than if they find out about it in the checkout line at Walmart.

I almost forgot -- Don't forget to turn off any "opt-in" flag you have for these customers to ensure they won't be charged if you are forced to pay a card transaction that overdraws an account after you discontinue the overdraft service.