Regulation DD -- ODP Resource Guide

1. Does your institution's system assess overdraft fees when debits besides checks are posted against insufficient balances?
2. Do your current new account disclosures reflect the categories of transactions that can trigger an overdraft fee, at least as specifically as suggested by the language in the official Comment?

Changes needed: If your disclosures already reflect the categories of transactions that can result in overdraft fees, you don't need to make any changes. If, however, you disclose that you assess fees for checks and your system actually charges for other withdrawals and perhaps ACH debits, you should arrange to have your disclosures updated.

This doesn't need to wait for the July 1, 2006, effective date of the regulation changes. If you're planning other revisions to your disclosure document/brochure/pamphlet, you should combine this correction with those changes. Be sure to complete the second task in this list at the same time. If your current disclosures comply with the current Commentary wording ("Naming and describing the fee ... will typically satisfy these requirements") you don't need to provide updated disclosures to existing customers.

Review current statement language and new account disclosures
While reviewing how overdraft fees are described in your new account disclosures, take a look at any charges you assess for bouncing overdrawn items, and how you disclose these fees. Changes to ? 230.6(a) and its Commentary make it clear that you must disclose separately fees for paying overdrafts and fees for returning checks or other items unpaid. That means you need to make sure that you have separate "names" or descriptions for these two types of fees. For example, you might call your fee for paying overdrawn items a "FEE FOR PAYING OVERDRAFTS" and your fee for bouncing overdrawn items a "FEE FOR RETURNING OVERDRAFTS." Just make sure you aren't combining these two types of fees into one.

Since Regulation DD requires consistency in how you label your fees, make sure any changes to your statement descriptions are included in changes to your disclosure documents.

This change, too, can be made at any time prior to July 1, 2006. It also may apply to your institution even if you don't offer an ODP (see our separate analysis of the requirement). If you require changes in your core processing or statement printing programs, you should get your implementation requests in early enough to allow for programming changes.

Review all advertisements
The prohibitions in ? 230.8(a) against advertising that is misleading, inaccurate, or misrepresentative of the deposit contract continue to be open to interpretation. In particular, there continues to be no definition of "clear and conspicuous" in the regulation. However, the Fed's staff provided some added definition in this area when they added Comment 10 to this section. The Comment provides five examples of advertisements that would ordinarily violate the ? 230.8(a) standard. Although the major purpose of the July 1, 2006, amendments is to affect disclosures of and ads for ODPs, the last of the five examples deals with other account-related services, and is discussed above in the review of ads for "free" accounts.

1. Describing an overdraft service as a "line of credit," unless the service is subject to Regulation Z.
2. Representing that the institution will honor all checks or transactions that overdraw an account, with or without a dollar limit, when the institution actually retains discretion all times not to honor checks or other transactions.
3. Representing that consumers are permitted to carry an overdraft balance when the terms of an account's ODP require a prompt return to a positive balance.
4. Describing an ODP solely as protection against bounced checks when it in fact also permits overdrafts for a fee by other methods, such as ATM withdrawals, debit card transactions or other EFTs.
5. Advertising an account-related service for which there is a fee in an ad that uses the terms "free," "no cost" or similar terms to describe the account, unless the ad clearly and conspicuously indicates there is a cost associated with the service.

The last example presents another change that could apply to your institution whether or not you offer ODP. You'll need to review all of your ads for deposit accounts, looking particularly for those that offer "free accounts."

Some account-related services to look for in your "free account" ads (this is just a starter list):

• bill payment
• On-line banking
• ATM services (including the use of network ATMs)
• Overdraft protection (this one will require extra-special attention, as you'll see below)

You should review all of your media ads, brochures and other materials that tout free accounts and identify any that list any account-related service for which you charge a fee. If an ad makes it clear that the related service involves a fee, that ad will probably be acceptable after July 1, 2006. But if no mention is made of a cost for the account-related service, the ad will need to be changed by July to either omit the reference to the service or add the required notice that there is an associated cost. Except for ODP services, the regulation doesn't require that you state the actual cost of the related service (although you may do so).

Determine whether your institution promotes the payment of overdrafts by offering a covered ODP
A "covered ODP" is a program for the payment of overdrafts that includes a non-contractual, discretionary amount up to which your institution agrees to let a customer overdraw a deposit account. The program may be established for internal use only, to assist in the pay/return process, or it may be promoted to customers as a service. The dollar amount of overdraft "coverage" may or may not be communicated to customers, and there may (or may not) be a fee involved for the program when it is promoted to customers. These programs are sometimes referred to as "Overdraft Protection," "Overdraft Privilege," or "Courtesy Overdraft."

Programs that sometimes carry the same marketing names cover customer overdrafts by automatically transferring funds from other customer accounts. These programs are not "covered ODPs" for the purpose of ? 230.11. Nor are programs that involve a written agreement to cover overdrafts up to a statement amount from an established line of credit that is subject to Regulation Z.

Finally, "covered ODPs" include only those programs that involve consumer deposit accounts.

If your institution offers a covered ODP, review all forms of advertising, as well as communications
This assignment is the linchpin for compliance with the more significant changes to Regulation DD. Start by understanding the new, broader definition of "advertisement" in ? 230.2(b). Beginning on July 1, virtually any communication that you provide a prospective or current customer about a new or an existing account will be considered an advertisement for two key purposes:

1. determining whether or not the communication is considered misleading or inaccurate, or misrepresents the deposit contract (discussed above); and,
2. deciding whether the communication will trigger the substantive disclosure requirements of new ? 230.11.

Communications that are considered advertisements for the payment of overdrafts
In general, the following are considered promotions of the payment of overdrafts, and will trigger a requirement for four additional dollar totals on consumers' periodic account statement, and expanded information disclosures in the communication. If a communication fits any of the following descriptions and is not in the list of excluded communications, the "trigger" will be pulled as of July 1, 2006:

• A promotion of the institution's payment of some overdrafts (except via true lines of credit under Regulation Z or transfers from others of the consumer's accounts), in an ad using any medium, brochures, telephone solicitations or e-mail, or on Internet sites, ATM receipts or screens, billboards, or indoor signs.
• Inclusion of a message on a periodic statement informing the consumer of an overdraft limit or the amount of funds available for covering overdrafts. For example, including a statement message that informs a consumer of a $500 overdraft limit or that the consumer has $300 remaining in an overdraft limit, will be considered promotion of an overdraft service.
• Disclosing an overdraft limit or including the dollar amount of an overdraft limit in a balance disclosed by any means, including on an ATM receipt or in an automated system, such as a telephone response machine, an ATM screen, or on the institution's Internet site.

Excluded communications
If the communication fits any of the following descriptions, it won't be considered a promotion of an overdraft service, and the statement disclosure requirements (described below) of ? 230.11(a) won't be triggered --

• Promoting a service for paying overdrafts that is agreed upon in writing and is subject to Regulation Z
• Communicating about the payment of overdrafts in response to a consumer's inquiry about deposit accounts or overdrafts (except on a telephone response machine, an ATM, or at an institution's Internet site)
• Engaging in an in-person discussion with a consumer
• Making disclosures mandated by federal or state law
• Providing a notice or information on a periodic statement about a specific overdrawn item or the amount an account is overdrawn
• Including a discussion of the institution's right to pay overdrafts in a deposit agreement
• Providing a notice (such as at an ATM) that completing a requested transaction may trigger an overdraft fee, or providing a general notice that items overdrawing an account may trigger such a fee
• Providing informational or educational materials concerning the payment of overdrafts, if the materials don't specifically describe the institution's own overdraft service.

If the communication fits any of the above exceptions, or any of the following descriptions, it will not trigger the additional advertising disclosure requirements (described below) of ? 230.11(b) --

• An ad made via broadcast or electronic media, such as television or radio. This exception does not include ads on an Internet site, on an ATM screen, provided on a telephone response machine, or sent via electronic mail.
• An ad on outdoor media, such as billboards
• An ATM receipt

Section 230.11(a) Statement Disclosure Requirements
If your institution promotes the payment of overdrafts in a covered ODP in any of the ways described above, you must add four items of information to your periodic statements for covered accounts, starting with statement periods beginning on or after July 1, 2006. The requirement applies only to accounts for which you have advertised the payment of ODs. But if your ads haven't stated the types of accounts covered, the statement requirement will apply to all consumer deposit accounts.

The added statement information?

1. The total dollar amount of all fees and charges imposed on the account during the statement period for the payment of items against insufficient funds and the account becomes overdrawn. The total dollar amount includes per-item fees as well as interest charges, daily or other periodic fees, or fees charged for maintaining an account in overdraft status, whether the overdraft is by check or by other means. It also includes fees charged when there are insufficient funds because previously deposited funds are subject to a hold or are uncollected. It does not include fees for transferring funds from another account to avoid an overdraft, or fees charged when the institution has previously agreed in writing to pay items that overdraw the account and the service is subject to the Board?s Regulation Z, 12 CFR part 226.
2. The total amount of the same fees imposed for the calendar year to date. For institutions using statement cycles that are not calendar months, this aggregate total can cover the period beginning with the first full statement period in the year, or the period beginning on January 1. Fo
   statement periods beginning after July 1 (the effective date of the requirement) in 2006, the year-to-date total need not include amounts imposed before the first statement period beginning on or after July 1.
3. The total dollar amount of all fees and charges imposed on the account during the statement period for dishonoring or returning checks or other items drawn on the account. This does not include fees imposed when charging back to the account deposited items that are returned.
4. The total amount of the same fees imposed for the calendar year to date. The dates covered are the same as discussed under item 2 above.

The fees that are required to be totaled on the statement may also be itemized individually on the statement. If a fee is imposed in one statement cycle and waived (or refunded) after the end of that statement cycle, you may (but aren't required to) reflect the adjustment in the total for the calendar year to date. You must not, however, net the adjustment out of the total fees disclosed for the statement period in which the credit is posted.

Section 230.11(b) Advertising Disclosure Requirements
If your institution promotes the payment of overdrafts in a covered ODP in any of the ways described above, you must include in the advertisement or other communication all of the following information:

1. The fee or fees for the payment of each overdraft. Include per item fees as well as interest charges, daily or other periodic fees, and fees charged for maintaining an account in overdraft status, whether the overdraft is by check or by other means. The fees also include fees charged when there are insufficient funds because previously deposited funds are subject to a hold or are uncollected.
2. The categories of transactions for which a fee for paying an overdraft may be imposed. An exhaustive list of transactions is not required. Disclosing that a fee may be imposed for covering overdrafts "created by check, in-person withdrawal, ATM withdrawal, or other electronic means" would satisfy this requirement (adapt that language to what you charge for).
3. The time period by which the consumer must repay or cover the overdraft. If you reserve the right to require a consumer to pay an overdraft immediately or on demand instead of affording consumers a specific time period to cure the overdraft, you may comply by disclosing that fact.
4. The circumstances under which you will not pay an overdraft. You must describe the circumstances under which you will not pay an overdraft. It is sufficient to state, as applicable: "Whether your overdrafts will be paid is discretionary and we reserve the right not to pay. For example, we typically do not pay overdrafts if your account is not in good standing, or you are not making regular deposits, or you have too many overdrafts."

Items 2 and 4 above are not required in a message on an ATM screen or a voice response machine. None of the four items applies to indoor signs, if there is a clear and conspicuous statement that fees may apply, and that consumers should contact an amployee for further information about applicable fees and terms. The indoor sign exemption does not apply to indoor ATM screens.

You should note that these detailed disclosures about ODPs are required in an ad for a "free account," if the ODP service is mentioned in the ad.

Arrange for periodic statement changes, if required
We have listed two changes that your institution might have to make to periodic statements.

The first is the definition of two different fee types for statement purposes: Fees for paying overdrafts and fees for returning items unpaid. Many institutions made that distinction long ago, and have no need to make a change. For those who have yet to make the change, the time is growing short to "get the ball rolling." Contact your statement provider, whether it is in-house or a third party, and determine whether a simple labeling change or a more involved programming change is involved. As noted above, you don't need to wait until July 1 to get this change completed, but procrastination could be disastrous.

If your institution will be promoting the payment of overdrafts on or after July 1, the addition of the four totals required by ? 230.11(b) is an item that demands programming attention, and you need to get the work started -- by your staff or that of your service provider -- as soon as possible. An early implementation would not violate the regulation.

A closing suggestion --
If your institution has decided to avoid the statement total requirements of ? 230.11(b) by discontinuing its promotion of its ODP service, shutting down that promotion before July 1, 2006, is a high priority. If you stop by June 30, 2006, you can ignore the statement total requirements altogether. But if you don't shut down all promotion by June 30, the ? 230.11(b) requirements will apply for two year after you finally discontinue promoting the service!

To make sure you've shut down your promotion, go back to the discussion above on reviewing ads and communications.

First published on BankersOnline.com 12/21/2005
Updated 6/28/06