Overdraft Fees: What's in a Name? John S. Burnett, BOL Guru
There have been many discussions on Bankers' Threads that have carefully explained that all financial institutions need to begin using separate names for their fees for paying overdrawn items and their fees for returning checks and other items unpaid. However, emails and conversations, and questions repeatedly posted in Bankers' Threads, make it clear that many bankers continue to misread the regulation, or have received misinformation from other sources.
In our Regulation DD -- ODP Resource Guide, we list as a second task for implementation teams working on the Regulation DD amendments, "Review current statement language and new account disclosures." That section of the guide goes on to suggest that banks and credit unions that impose the same fee -- with the same verbiage -- on overdrawn items on a consumer account whether they are paid or returned need to make changes. Two separate fees (they may be for the same amount) need to be used -- one for overdrawn items that are paid, the other for items that are returned.
The guide further says that the review is required even if your institution doesn't offer an overdraft protection plan. The suggestion that the change "may apply" to your institution (rather than "will apply") recognizes that some institutions already treat these two fees separately. There is no implication that the change is optional for those institutions that haven't already split up the fees.
Here is an analysis of the requirement that demonstrates that you sometimes need to look beyond the regulation and commentary or official interpretations to find the nuances of a regulation's effect on your institution:
Amendment to Official Staff Interpretations
Interpretation 2 to § 230.6(a)(3) was amended to add a fourth pairing of fees that cannot be combined for grouping on a periodic statement:
"iv. fees for paying overdrafts and fees for returning checks or other items unpaid."
This addition to the list in the Supplement I of the regulation suggests that "fees for paying overdrafts" and "fees for returning checks or other items unpaid" are not fees of the same type. They therefore need to be separately itemized or separately grouped (grouping is optional under § 230.6(a)(3)). Of course, if the grouping of fees is mandatory under § 230.11(a)(1), it is clear that two separate totals are required.
Consistent terminology requirement
Interpretation No. 2 to § 230.3 has long required that verbiage used on statements must be the same as that used in other disclosures when describing fees. Therefore, if two different fee descriptors will be required on statements, those same descriptors need to be included in account disclosures under § 230.4 and, when applicable, § 230.5.
Federal Register information
Perhaps the most cogent argument of all is found in the language of the Federal Register document in which the amendments were published on May 24, 2005 (70 Federal Register 29582). On page 29589 of that document, the Federal Reserve's staff states, "Institutions that do not promote the payment of overdrafts and have merely automated their traditional practice of paying overdrafts on an ad hoc basis are not covered by § 230.11(a)(1). These institutions may continue to itemize fees on periodic statements but whether they itemize fees or group them together by type, institutions must distinguish between fees for paying overdrafts and fees for returning unpaid items." [Emphasis added]
Institutions subject to the mandatory compliance deadline of July 1, 2007 that have not yet made the changes necessary to split their fees for overdraft items into separate "paid" and "unpaid" fees should redouble their efforts to do so as soon as possible. Although regulators have certainly observed the industry's confusion about this issue, we cannot know whether or for how long they will make allowances for that confusion as they begin the first round of compliance examinations after the deadline.
Credit Unions
Credit unions' date for mandatory compliance with the amended Truth in Savings Rules was pushed back to October 1, 2006. Credit unions should note that the NCUA has referred to the material in the Fed's publication of Regulation DD amendments for the analysis of the changes. That makes the Fed's statements on these changes applicable to credit unions, too.
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