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#2178619 - 05/17/18 10:14 PM Overdraft LOC fees
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I have noticed that when a Bank charges a fee for accessing and Overdraft Line of Credit, often called a "Transfer Fee," the amount is generally charged to the deposit account. Is it permissible for a Bank to instead add the "transfer fee" to the amount of extended credit on the ODLOC and receive interest on this amount? I could not find any Regulatory guidance that spoke to the situation one way or the other. From an operational perspective, for those banks that do charge the transfer fee to the deposit account, then wouldn't this basically just result in another Overdraft because the account is already in a negative balance, or is it not really considered an Overdraft because it is an internal charge? In that case do you just leave a negative balance in the deposit account because of the fee?

I also see that Banks often draw on the line in certain increments, such that if the negative balance is $10, for instance, the minimum draw on the Line is set to $50, such as with this US Bank product - https://www.usbank.com/bank-accounts/che...rotection.html. I guess the extra $40 that you would be back in the positive would be enough to cover the Transfer Fee, but let's say the negative is $47 and the $50 increment would only leave the account with a $3 positive balance and then a $5 Transfer fee would create another Overdraft. I could see the potential for a lot of abusive practices to the consumer either way, i.e. charging interest on the Transfer Fee, or charging the Transfer Fee to the deposit account and then having a new negative balance result and doing another line draw, transfer fee, and on and on.

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#2178623 - 05/17/18 10:42 PM Re: Overdraft LOC fees Compliance NABW
rlcarey Online
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If you charge it directly to the line, you are going to turn the charges into finance charges. A charge to the deposit is not.

Paragraph 4(b)(2)

1. Checking account charges. A checking or transaction account charge imposed in connection with a credit feature is a finance charge under §1026.4(b)(2) to the extent the charge exceeds the charge for a similar account without a credit feature. If a charge for an account with a credit feature does not exceed the charge for an account without a credit feature, the charge is not a finance charge under §1026.4(b)(2). To illustrate:

i. A $5 service charge is imposed on an account with an overdraft line of credit (where the institution has agreed in writing to pay an overdraft), while a $3 service charge is imposed on an account without a credit feature; the $2 difference is a finance charge. (If the difference is not related to account activity, however, it may be excludable as a participation fee. See the commentary to §1026.4(c)(4).)

ii. A $5 service charge is imposed for each item that results in an overdraft on an account with an overdraft line of credit, while a $25 service charge is imposed for paying or returning each item on a similar account without a credit feature; the $5 charge is not a finance charge.
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#2178708 - 05/18/18 03:29 PM Re: Overdraft LOC fees Compliance NABW
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Is the impact of having finance charges just a matter of disclosure and calculations, or is there anything that prohibits having such finance charges?

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#2178887 - 05/21/18 01:42 PM Re: Overdraft LOC fees rlcarey
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Are you saying in all cases a charge to the line will be a finance charge?

This part of Reg. Z seems to indicate it is not a finance charge if the "Transfer Fee" for the overdraft LOC usage is less than the overdraft penalty charged to the account if it did not have the connected ODLOC. In the vast majority of cases, as that is one of the benefits of having the ODLOC, the "Transfer Fee" is much less than the Overdraft penalty on an account that is not tied to an ODLOC.

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#2178890 - 05/21/18 01:55 PM Re: Overdraft LOC fees Compliance NABW
rlcarey Online
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1026.4(b)(2) Service, transaction, activity, and carrying charges, including any charge imposed on a checking or other transaction account to the extent that the charge exceeds the charge for a similar account without a credit feature.
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#2178918 - 05/21/18 04:16 PM Re: Overdraft LOC fees Compliance NABW
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It still says "to the extent that the charge exceeds the charge for a similar account without a credit feature." Focus on the last part of the sentence, not just your underlined section.

In my understanding, the "Transfer Fee" on an ODLOC would almost never exceed an Overdraft penalty for a deposit account that was not linked to an ODLOC.

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#2178928 - 05/21/18 04:29 PM Re: Overdraft LOC fees Compliance NABW
rlcarey Online
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rlcarey
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Galveston, TX
If you are assessing the charge to the LOC, it is not "any charge imposed on a checking or other transaction account".
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#2179039 - 05/21/18 09:49 PM Re: Overdraft LOC fees Compliance NABW
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Okay, thank you. I was just confused as to why you kept referencing that part of the Regulation, as I already had accepted your answer initially, I just wanted to clarify that charges to the line were a finance charge. Now that I look back, I guess you were just trying to prove the point about the charges to the transaction account not being a finance charge.

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