Can we provide different overdraft limits based on the type of checking account they have?
Free checking - overdraw up to $500
Other checking accounts - overdraw up to %700

I do not recommend it based on possible fair lending issues that could arise but it is not prohibited. For example:

Senior Account (55 or older) has $1,000 limit
All others have $500 limit.

This is discrimination based off of age as customers less than 55 do not have the same access to credit as those 55 and older.

Good point.

If we currently have a $500 overdraft limit and want to increase to $700, is this a change in terms requiring 21 day notice since it increases the consumer's liability?

21 day notice is the timeframe required by Reg E. I see this as more of a Reg DD issue since the customer could be adversely impacted in the form of increased fees and would consequently require a 30 day advance notice.

I routinely see institutions offer different overdraft limits for different customer segments, similar to how card limits are different between regular and platinum cards.

However, to James's point the qualifications cannot be age related, and must be applied fairly across all customers. So perhaps the qualification for the higher 700 limit is x amount in average balance, and no more than x days a month in a negative balance. Most FIs rely on a service now to help calculate and apply those available balances so that they hold up to regulatory scrutiny.

As noted, it's pretty common that different classes of accounts would have different overdraft limits. If none of your accounts have age as a criteria, then it's not an issue.

Regulation DD does not require you to disclose overdraft limits so, if you want to change them up or down, it does not require you to give advance notice. Regardless, if you have promoted one thing and you're changing to another, you really need to let the consumer know. Remember, this communication may trigger a complete disclosure of the features of your overdraft service...

If none of your accounts have age as a criteria, then it's not an issue.

Well maybe? Since the extension of overdrafts is credit under Regulation B, any of the recognized three methods of proof of lending discrimination under the ECOA might apply. So, depending on who holds your different account classes, there might be some risk involved.

Although a disparate impact claim might be a little bit of a stretch, I have seen some pretty outrageous things coming from the regulators recently.

When giving advance notice of the change of the overdraft limit, would you only notify customers who opted in?