[Federal Register Volume 74, Number 18 (Thursday, January 29, 2009)]
[Proposed Rules]
[Pages 5212-5243]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-31184]



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Part II





Federal Reserve System





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12 CFR Parts 205, 226, 227, and 230





Department of the Treasury





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Office of Thrift Supervision



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12 CFR Part 535





National Credit Union Administration





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12 CFR Part 706



Electronic Fund Transfers; Proposed Rule; Truth in Lending; Unfair or 
Deceptive Acts or Practices; Truth in Savings; Final Rules and Proposed 
Rule

Federal Register / Vol. 74, No. 18 / Thursday, January 29, 2009 / 
Proposed Rules

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FEDERAL RESERVE SYSTEM

12 CFR Part 205

[Regulation E; Docket No. R-1343]


Electronic Fund Transfers

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; request for public comment.

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SUMMARY: The Board is proposing to amend Regulation E, which implements 
the Electronic Fund Transfer Act, and the official staff commentary to 
the regulation, which interprets the requirements of Regulation E. The 
proposal would limit the ability of a financial institution to assess 
an overdraft fee for paying automated teller machine (ATM) withdrawals 
and one-time debit card transactions that overdraw a consumer's 
account, unless the consumer is given notice of the right to opt out of 
the payment of such overdrafts, and the consumer does not opt out. As 
an alternative approach, the proposal would limit the ability of a 
financial institution to assess an overdraft fee for paying ATM 
withdrawals and one-time debit card transactions that overdraw a 
consumer's account, unless the consumer affirmatively consents, or opts 
in, to the institution's payment of overdrafts for these transactions. 
In addition, the proposal would prohibit financial institutions from 
assessing an overdraft fee if the overdraft would not have occurred but 
for a debit hold placed on funds in the consumer's account that exceeds 
the actual amount of the transaction.

DATES: Comments must be received on or before March 30, 2009.

ADDRESSES: You may submit comments, identified by Docket No. R-1343, by 
any of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: regs.comments@federalreserve.gov. Include the 
docket number in the subject line of the message.
     FAX: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room MP-500 of the Board's Martin Building (20th and C 
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Ky Tran-Trong, Counsel, Dana Miller, 
Attorney, or Vivian Wong, Senior Attorney, Division of Consumer and 
Community Affairs, Board of Governors of the Federal Reserve System, 
Washington, DC 20551, at (202) 452-2412 or (202) 452-3667. For users of 
Telecommunications Device for the Deaf (TDD) only, contact (202) 263-
4869.

SUPPLEMENTARY INFORMATION:

I. Statutory Background

    The Electronic Fund Transfer Act (15 U.S.C. 1693 et seq.) (EFTA or 
Act), enacted in 1978, provides a basic framework establishing the 
rights, liabilities, and responsibilities of participants in electronic 
fund transfer (EFT) systems. The EFTA is implemented by the Board's 
Regulation E (12 CFR part 205). Examples of the types of transactions 
covered by the Act and regulation include transfers initiated through 
an ATM, point-of-sale (POS) terminal, automated clearinghouse (ACH), 
telephone bill-payment plan, or remote banking service. The Act and 
regulation provide for the disclosure of terms and conditions of an EFT 
service; documentation of EFTs by means of terminal receipts and 
periodic account activity statements; limitations on consumer liability 
for unauthorized transfers; procedures for error resolution; and 
certain rights related to preauthorized EFTs. Further, the Act and 
regulation restrict the unsolicited issuance of ATM cards and other 
access devices.
    The official staff commentary (12 CFR part 205 (Supp. I)) 
interprets the requirements of Regulation E to facilitate compliance 
and provides protection from liability under Sections 915 and 916 of 
the EFTA for financial institutions and other persons subject to the 
Act. 15 U.S.C. 1693m(d)(1). The commentary is updated periodically to 
address significant questions that arise.

II. Background

Overview of Overdraft Services

    Historically, if a consumer sought to engage in a transaction that 
would overdraw his or her deposit account, the consumer's financial 
institution used its discretion on an ad hoc basis to determine whether 
to pay the overdraft. If an overdraft was paid, the institution usually 
imposed a fee on the consumer's account. In recent years, many 
institutions have largely automated the overdraft payment process. 
Automation is used to apply specific criteria for determining whether 
to honor overdrafts and to set limits on the amount of coverage 
provided.
    Overdraft services vary among institutions but often share certain 
common characteristics. In most cases, consumers that meet a depository 
institution's criteria are automatically enrolled in overdraft 
services. While institutions generally do not underwrite on an 
individual account basis when enrolling the consumer in an overdraft 
service, most institutions will review individual accounts periodically 
to determine whether the consumer continues to qualify for the service 
and the amount of overdraft coverage provided. Most institutions 
disclose that the payment of overdrafts is discretionary, and that the 
institution has no legal obligation to pay any overdraft.\1\
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    \1\ These transactions are generally not covered under 
Regulation Z (Truth in Lending) if there is no written agreement 
between the consumer and institution to pay an overdraft and impose 
a fee. See 12 CFR 226.4(c)(3).
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    In the past, institutions generally provided overdraft coverage 
only for check transactions. In recent years, however, the service has 
been extended to cover overdrafts resulting from non-check 
transactions, including ATM withdrawals, debit card transactions at 
POS, online transactions, preauthorized transfers, and ACH 
transactions.\2\
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    \2\ According to the FDIC's Study of Bank Overdraft Programs, 
nearly 70 percent of banks surveyed implemented their automated 
overdraft program after 2001. In addition, 81 percent of banks 
surveyed that operate automated programs allow overdrafts to be paid 
at ATMs and POS debit card terminals. See FDIC Study of Bank 
Overdraft Programs 8, 10 (November 2008) (hereinafter, FDIC Study) 
(available at: http://www.fdic.gov/bank/analytical/overdraft/
FDIC138_Report_FinalTOC.pdf). See also Overdraft Protection: Fair 
Practices for Consumers: Hearing before the House Subcomm. on 
Financial Institutions and Consumer Credit, House Comm. on Financial 
Services, 110th Cong., at 72 (2007) (hereinafter, Overdraft 
Protection Hearing) (available at http://www.house.gov/apps/list/
hearing/financialsvcs_dem/hr0705072.shtml) (stating that as 
recently as 2004, 80 percent of banks still declined ATM and debit 
card transactions without charging a fee when account holders did 
not have sufficient funds in their account).

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    A flat fee is charged each time an overdraft is paid, regardless of 
the amount of the overdraft. Institutions commonly charge the same 
amount for paying the overdraft as they would if they returned the item 
unpaid. Some institutions may also impose a fee for each day the 
account remains overdrawn.
    According to a recent report from the Government Accountability 
Office (GAO), the average cost of overdraft and insufficient funds fees 
was just over $26 per item in 2007.\3\ The GAO also reported that large 
institutions on average charged between $4 and $5 more for overdraft 
and insufficient fund fees compared to smaller institutions.\4\ In 
addition, the GAO noted that a small number of institutions (primarily 
large banks) apply tiered fees to overdrafts, charging higher fees as 
the number of overdrafts in the account increases.\5\
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    \3\ See Bank Fees: Federal Banking Regulators Could Better 
Ensure That Consumers Have Required Disclosure Documents Prior to 
Opening Checking or Savings Accounts, GAO Report 08-281, at 14 
(January 2008) (hereinafter, GAO Bank Fees Report). See also 
Bankrate 2008 Checking Account Study, posted October 27, 2008 
(available at: http://www.bankrate.com/brm/news/chk/chkstudy/
20081027-bounced-check-fees-a1.asp?caret=2) (reporting an average 
overdraft fee of approximately $29 per item).
    \4\ See GAO Bank Fees Report at 16. A recent survey suggests 
that the cost difference in overdraft fees between small and large 
institutions may be larger than reported by the GAO, however. See 
also ``Disparities in Checking Overdraft Fees by Geography and 
Size,'' Press release, Moeb$ Services (October 25, 2008) (Moeb$ 2008 
Pricing Survey Press Release) (available at: http://moebs.com/
AboutUs/Pressreleases/tabid/58/ctl/Details/mid/380/ItemID/29/
Default.aspx) (reporting that banks with more than $20 billion in 
assets charged on average $33.43 per overdrawn check compared to 
$24.28 per overdrawn check for banks and credit unions with less 
than $100 million in assets).
    \5\ According to the GAO, of the financial institutions that 
applied up to three tiers of fees in 2006, the average overdraft 
fees were $26.74, $32.53 and $34.74, respectively. See GAO Bank Fees 
Report at 14.
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Industry and Consumer Group Perspectives

    From the industry's perspective, automated overdraft services 
enable institutions to reduce the cost of manually reviewing individual 
items, and also ensure that all consumers are treated consistently with 
respect to overdraft payment decisions. Industry representatives 
observe that whether an overdrawn check is paid or returned, the 
consumer will be charged the same amount by the consumer's financial 
institution. Industry representatives also assert, however, that when 
an overdrawn check is paid, consumers receive significant benefits 
because they can avoid additional fees that would be charged by the 
merchant if the item was returned unpaid, and other adverse 
consequences, such as the furnishing of negative information to a 
consumer reporting agency.\6\
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    \6\ See, e.g., Overdraft Protection Hearing at 44.
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    In contrast, consumer groups assert that overdraft transactions are 
a high-cost form of lending that trap low- and moderate-income 
consumers into paying high fees. Consumer groups also state that 
consumers are often enrolled in overdraft services automatically 
without their request or consent. In addition, consumer groups believe 
that by honoring overdrafts, institutions encourage consumer reliance 
on the service and therefore, consumers incur greater costs in the long 
run than they would if the transactions were not honored. Consumer 
groups note, for example, that historically, institutions declined a 
consumer's request for an ATM withdrawal or debit card transaction if 
the consumer did not have sufficient funds in his or her account.\7\ 
Today, however, institutions are more likely to cover those overdrafts 
and assess a fee on the consumer's account for doing so.\8\ According 
to consumer groups, this practice can be particularly costly in 
connection with debit card overdrafts because the dollar amount of the 
fee is likely to considerably exceed the dollar amount of the 
overdraft.\9\ In addition, multiple fees may be assessed in a single 
day for a series of small-dollar transactions. Because of these costs, 
consumer groups assert that most consumers would prefer that their bank 
decline debit card transactions if the transactions would overdraw 
their account.\10\
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    \7\ See, e.g., Overdraft Protection Hearing at 72 (stating that 
as recently as 2004, 80 percent of banks still declined ATM and 
debit card transactions without charging a fee when account holders 
did not have sufficient funds in their account).
    \8\ See, e.g., FDIC Study at 10 (reporting that 81 percent of 
banks surveyed that operate automated programs allow overdrafts to 
be paid at ATMs and POS debit card terminals).
    \9\ See, e.g., Overdraft Protection Hearing at 72.
    \10\ See Leslie Parrish, Consumers Want Informed Choice on 
Overdraft Fees and Banking Options, Ctr. for Responsible Lending 
(April 16, 2008) (reporting the results of a survey indicating that 
80 percent of consumers would prefer that a debit card transaction 
be declined if a $5 purchase would result in an overdraft and an 
accompanying $34 fee) (available at: http://
www.responsiblelending.org/pdfs/final-caravan-survey-4-16-08.pdf). 
But see 80 Percent of Consumers Have Not Paid Overdraft Fees in Past 
Year, Says ABA Survey, Press Release, American Bankers Association 
(August 30, 2007) (reporting survey results indicating that of those 
consumers who had paid an overdraft fee in the past 12 months, 88 
percent had wanted the payment covered) (available at: http://
www.aba.com/Press+Room/083007ABASurvey.htm).
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Previous Agency Actions

    In February 2005, the Board, Federal Deposit Insurance Commission 
(FDIC), Office of the Comptroller of the Currency (OCC), and National 
Credit Union Administration (NCUA) (collectively, the federal banking 
agencies) issued guidance on overdraft protection programs in response 
to the increased availability and customer use of overdraft protection 
services (Joint Guidance).\11\ The Joint Guidance addresses three 
primary areas--safety and soundness considerations, legal risks, and 
best practices. The Office of Thrift Supervision (OTS) issued separate 
guidance (OTS Guidance) that focuses on safety and soundness 
considerations and best practices.\12\ The best practices described in 
the Joint Guidance and the OTS Guidance address the marketing and 
communications that accompany the offering of overdraft services, as 
well as the disclosure and operation of program features, including the 
provision of consumer choice to opt out of the overdraft service.\13\
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    \11\ See Interagency Guidance on Overdraft Protection Programs, 
70 FR 9127, Feb. 24, 2005.
    \12\ See OTS Guidance on Overdraft Protection Programs, 70 FR 
8428, Feb. 18, 2005.
    \13\ The federal banking agencies have also published a consumer 
brochure on overdraft services. The brochure, entitled ``Protecting 
Yourself from Overdraft and Bounced-Check Fees,'' can be found at: 
http://www.federalreserve.gov/pubs/bounce/default.htm.
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    In May 2005, the Board revised Regulation DD and the staff 
commentary pursuant to its authority under the Truth in Savings Act 
(TISA) to address concerns about institutions' disclosure of overdraft 
fees generally, and the advertisement of overdraft services.\14\ The 
goal of the Regulation DD revisions was to improve the uniformity and 
adequacy of disclosures provided to consumers about overdraft and 
returned-item fees to assist consumers in better understanding the 
costs associated with the payment of overdrafts. In addition, the final 
rule addressed some of the Board's concerns about institutions' 
marketing practices with respect to overdraft services.
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    \14\ 70 FR 29582, May 24, 2005. A substantively similar rule 
applying to credit unions was issued separately by the NCUA. 71 FR 
24568, Apr. 26, 2006.
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May 2008 FTC Act and Regulation DD Proposals

    In May 2008, the Board, along with the OTS and the NCUA 
(collectively, the Agencies), proposed to exercise their authority 
under the Federal Trade Commission Act (FTC Act) to prohibit 
institutions from assessing any fees on a consumer's account in 
connection

[[Page 5214]]

with an overdraft service, unless the consumer is given notice and the 
right to opt out of the institution's overdraft service, and the 
consumer does not opt out. 73 FR 28904, May 19, 2008. The proposed opt-
out right would have applied to overdrafts resulting from all methods 
of payment, including checks, ACH transactions, ATM withdrawals, 
recurring payments, and POS debit card transactions. The proposal also 
would have required institutions to provide consumers with the option 
of opting out only of the payment of overdrafts for ATM withdrawals and 
debit card transactions at POS. In addition, the proposal would have 
prohibited institutions from assessing overdraft fees where the 
overdraft would not have occurred but for a debit hold placed on funds 
in the consumer's account in excess of the actual transaction amount.
    Concurrent with the issuance of the May 2008 FTC Act Proposal, the 
Board separately issued a proposal under Regulation DD (Truth in 
Savings), which set forth proposed form, content, and timing 
requirements for providing the opt-out notice. 73 FR 28730, May 19, 
2008. To facilitate compliance, the Regulation DD proposal contained a 
model form that institutions could use to satisfy the opt-out notice 
requirement. Collectively, the two proposals on overdraft services were 
intended to ensure that consumers understand how overdraft services 
operate generally and have the opportunity to avoid the associated 
costs where such services do not meet their needs.
    In addition to the proposed requirements regarding the form and 
content of the opt-out notice, the Regulation DD proposal set forth 
proposed revisions that would require all institutions to provide 
aggregate totals for overdraft fees and for returned item fees for the 
statement period and the year-to-date. Currently, only institutions 
that promote the payment of overdrafts are subject to this requirement. 
The Regulation DD proposal also addressed balance disclosures provided 
to consumers through automated systems, such as ATMs and online banking 
services. These provisions are adopted in final form under Regulation 
DD elsewhere in today's Federal Register.

Overview of Comments Received

    The Agencies received approximately 1,500 comment letters on the 
proposed opt-out right for overdraft services under the May 2008 FTC 
Act Proposal. Consumer groups, members of Congress, the FDIC, and 
individual consumers supported the Agencies' proposal, but urged the 
Agencies to require institutions to obtain a consumer's affirmative 
consent (that is, an opt-in) before any fees could be charged for 
paying an overdraft. Some of these commenters also argued that 
overdraft services provide extensions of credit that should be subject 
to the Truth in Lending Act (TILA) so that consumers would be better 
able to compare the cost of overdraft services to the cost of other 
credit alternatives.
    In contrast, the majority of industry commenters opposed the 
proposed rule. Industry commenters asserted that consumers derive 
substantial benefit from overdraft services, particularly in connection 
with check transactions. While institutions generally assess the same 
fee whether a check is paid or returned, industry commenters observed 
that the payment of overdrafts for checks enables consumers to avoid 
other adverse consequences, such as merchant fees, the furnishing of 
negative information for credit reports, and violations of bad check 
laws. Some industry commenters urged the Board to instead use other 
regulatory authority, such as Regulations DD or E, to address concerns 
about overdraft services.
    Industry commenters also asserted that consumers may not fully 
understand the implications of opting out, and that those who elect to 
do so might unintentionally incur significant costs. In this regard, 
industry commenters and the OCC stated that if the opt-out right 
applied to check transactions, more checks would be returned unpaid. 
Industry commenters and the OCC also noted a potential unintended 
consequence of the proposal could be that institutions would lengthen 
their availability schedules to the extent permitted by the Board's 
Regulation CC, 12 CFR part 229, to ensure that there are sufficient 
funds in the payor's account to cover a deposited check. As a result, 
they argued, consumers may experience a longer waiting period before 
gaining access to deposited funds than currently is the case today.
    With respect to implementing the proposed opt-out requirement, 
industry commenters raised a number of operational issues. These 
commenters were most concerned about the feasibility of limiting the 
opt-out right only to overdrafts paid in connection with ATM 
withdrawals and POS debit card transactions. Some industry commenters, 
however, argued that if the Agencies deemed it necessary to create a 
consumer opt-out right, it should be limited to ATM withdrawals and POS 
debit card transactions. These commenters noted that the majority of 
complaints about overdraft services arise in connection with debit card 
transactions in which the amount of the overdraft fee is substantially 
higher than the amount of the overdraft. Industry commenters also 
questioned the merits of requiring institutions to provide an opt-out 
notice following the assessment of an overdraft fee in light of the 
costs of printing and mailing additional opt-out notices.
    With respect to the debit hold provision, individual consumers and 
consumer groups generally supported the Agencies' proposal. Industry 
commenters, in contrast, expressed concern about the operational 
burdens associated with the proposal because it could require 
institutions to retroactively monitor, and adjust, overdraft fees that 
have been assessed to a consumer's account. Industry commenters also 
urged the Agencies to instead adopt a disclosure-based rule applying to 
merchants that are responsible for placing the hold.
    The Board also received over 600 comments in response to the 
Regulation DD proposal regarding the timing, format and content of the 
opt-out notice. Most of the comments came from individual consumers, 
who supported the proposed rule. The remaining comments came from 
financial institutions, industry trade associations, consumer groups, 
members of Congress, other federal banking agencies, state and local 
governments, and others.
    Consumer groups supported the proposed content and model form for 
notifying consumers of their right to opt out of an overdraft service, 
but urged the Board to enhance the model form in various ways, 
including making the opt-out notice more prominent. Several industry 
commenters argued that the proposed model form was unduly biased 
towards encouraging consumers to opt out, and did not sufficiently 
explain that the payment of overdrafts was discretionary. Some industry 
commenters also urged the Board to eliminate the requirement to provide 
notice of the opt-out right following the assessment of an overdraft 
fee, stating that an initial notice was sufficient to apprise consumers 
of that right.

Consumer Testing

    In addition to reviewing the comments received on the two 
proposals, the Board worked with a testing consultant, Macro 
International, Inc. (Macro), to revise the proposed model opt-out 
notice and conduct consumer testing of the revised notice. Two rounds 
of one-on-one interviews with a diverse group of consumers were 
completed in the fall of 2008. In general,

[[Page 5215]]

after reviewing the model disclosures, test participants generally 
understood the concept of overdraft coverage, and that they would be 
charged fees if their institution paid their overdrafts. Participants 
also appeared to understand that if they opted out of overdraft 
coverage, this meant their checks would not be paid and they could be 
charged fees by both their institution and by the merchant.
    During the first round of testing, Macro tested an opt-out form 
that allowed consumers to opt out of the payment of overdrafts for all 
transaction types, including checks and recurring debits. In the second 
round of testing, Macro tested an opt-out form that limited the opt-out 
right to ATM withdrawals and one-time debit card transactions made at 
POS and online. The majority of participants during both rounds 
indicated that they likely would not opt out if the opt-out also 
applied to checks. However, when asked if they would opt out if the 
choice was limited to opting out of overdrafts in connection with ATM 
withdrawals and one-time debit card purchases, half of the participants 
indicated that they would consider doing so.\15\
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    \15\ See Review and Testing of Overdraft Notices. Macro 
International, December 8, 2008.
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III. Summary of Proposal

Overdrafts

    The Board is proposing amendments to Regulation E and the staff 
commentary to assist consumers in understanding how overdraft services 
provided by their institutions operate and to ensure that consumers 
have the opportunity to limit the overdraft costs associated with ATM 
withdrawals and one-time debit card transactions where such services do 
not meet their needs. The Board is proposing two alternative approaches 
in proposed Sec.  205.17 of Regulation E. In addition, as stated 
elsewhere in today's Federal Register, the Board is not taking action 
on the May 2008 FTC Act (Regulation AA) and Regulation DD Proposals 
regarding consumers' right to opt out of overdraft services.
    Under the first approach, institutions would be required to provide 
consumers with notice of the right to opt out of the institution's 
overdraft service for ATM withdrawals and one-time debit card 
transactions. The notice must be provided to the consumer before the 
institution may assess any fees or charges to a consumer's account for 
paying such overdrafts. Under this approach, the opt-out notice would 
generally be given at account opening (or any time before any overdraft 
fees are assessed) and subsequently for each periodic statement cycle 
in which the institution assesses a fee or charge to the consumer's 
account for paying an overdraft.
    Under the second approach, institutions would be required to 
provide consumers with notice of the right to opt in, or affirmatively 
consent, to the institution's overdraft service for ATM withdrawals and 
one-time debit card transactions. The notice must be provided, and the 
consumer's affirmative consent obtained, before the institution could 
assess a fee or charge on the consumer's account for paying such 
overdrafts. Under this approach, additional notices following the 
assessment of a fee or charge for paying an ATM or one-time debit card 
overdraft would not be required once the consumer has opted in to the 
overdraft service.
    Both approaches would permit institutions to implement the 
consumer's choice by providing an account that would not permit the 
payment of overdrafts for ATM withdrawals and one-time debit card 
transactions. The proposal provides two alternatives for implementing 
the consumer's choice for both of the opt-out and opt-in approaches. 
Under one alternative, the proposal would require an institution to 
provide an account that has the same terms, conditions, or features 
that are provided for consumers who do not opt out, except for features 
that limit the institution's payment of such overdrafts. Under another 
alternative, the proposal would allow institutions to vary the terms, 
conditions, or features for the account that does not permit the 
payment of ATM and one-time debit card overdrafts, provided that the 
differences are not so substantial that they discourage a reasonable 
consumer from exercising his or her right to opt out of the payment of 
such overdrafts (or compel a reasonable consumer to opt in).
    To facilitate compliance, the proposal provides model forms that 
institutions may use to satisfy their disclosure obligations. The Board 
intends to conduct additional consumer testing of the proposed model 
forms following issuance of this proposal.

Debit Holds

    The Board is also proposing to prohibit institutions from assessing 
an overdraft fee where the overdraft would not have occurred but for a 
debit hold placed on funds in an amount that exceeds the actual 
transaction amount and where the merchant can determine the actual 
transaction amount within a short period of time after authorization of 
the transaction (for example, fuel purchases at a gas station). The 
prohibition, set forth in proposed Sec.  205.19, would not apply if the 
institution adopts procedures designed to release the hold within a 
reasonable period of time.
    In light of this proposal, and as discussed elsewhere in today's 
Federal Register, the Board is not taking action on the proposed FTC 
Act (Regulation AA) amendments regarding debit holds.

IV. Legal Authority

    The Board is issuing the proposed opt-out (and opt-in) and debit 
hold provisions of this proposal pursuant to its authority under 
Sections 904(a) and 904(c) of the EFTA (15 U.S.C. 1693b). Section 
904(a) of the EFTA authorizes the Board to prescribe regulations 
necessary to carry out the purposes of the title. The express purposes 
of the EFTA are to establish ``the rights, liabilities, and 
responsibilities of participants in electronic fund transfer systems'' 
and to provide ``individual consumer rights.'' See EFTA Section 902(b); 
15 U.S.C. 1693. In addition, Section 904(c) of the EFTA provides that 
regulations prescribed by the Board may contain any classifications, 
differentiations, or other provisions, and may provide for such 
adjustments or exceptions for any class of electronic fund transfers, 
that the Board deems necessary or proper to effectuate the purposes of 
the title, to prevent circumvention or evasion, or to facilitate 
compliance.
    The legislative history of the EFTA makes clear that the Board has 
broad regulatory authority. The Senate Report states that section 904 
of the EFTA ``authorizes the Federal Reserve Board to promulgate 
regulations to carry out the act's purposes'' and notes that the Senate 
Committee on Banking, Housing, and Urban Affairs ``regards regulations 
as essential to the act's effectiveness.'' \16\ According to the Senate 
Report, such regulations ``will add flexibility to the act by 
permitting the Board to modify the act's requirements to suit the 
characteristics of individual EFT services. Moreover, since no one can 
foresee EFT developments in the future, regulations would keep pace 
with new services and assure that the act's basic protections continue 
to apply.'' \17\ The Senate Report states that the intent was to give 
the Board ``flexibility in determining whether new or developing 
electronic services should be covered by

[[Page 5216]]

the act and, if so, to what extent.'' \18\ ``This delegation of 
authority to the Board is an important aspect of this legislation as it 
would enable the Board to examine new services on a case-by-case basis 
and would contribute substantially to the act's overall 
effectiveness.'' \19\
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    \16\ S. Rep. No. 95-1273, 95th Cong., 2d Sess., at 26 (Oct. 4, 
1978).
    \17\ S. Rep. No. 95-1273, at 26.
    \18\ S. Rep. No. 95-1273, at 25.
    \19\ S. Rep. No. 95-1273, at 26.
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    The proposed opt-out (and opt-in) rules are intended to carry out 
the express purposes of the EFTA by: (a) Establishing notice 
requirements to help consumers better understand the cost of overdraft 
services for certain EFTs; and (b) providing consumers with a choice as 
to whether they want overdraft services for ATM withdrawals and one-
time debit card transactions in light of the costs associated with 
those services. The proposed opt-out (and opt-in) rules include 
provisions designed to prevent circumvention or evasion of the 
requirement to provide the consumer with choice regarding these 
overdraft services. These rules also include provisions, including 
exceptions, designed to facilitate compliance by financial institutions 
in light of certain operational constraints.
    The proposed debit hold rule is intended to carry out the express 
purposes of the EFTA by ensuring that consumers generally are not 
assessed fees for overdrafts that would not have occurred but for the 
placement of the hold. The proposed debit hold rule contains 
classifications, differentiations, and other provisions, including 
adjustments and exceptions, designed to facilitate compliance by 
financial institutions in light of certain operational constraints.
    The proposed disclosures that would implement the proposed opt-out 
(and opt-in) requirements are issued pursuant to the Board's authority 
under Sections 904, 905 and 906(b) of the EFTA. 15 U.S.C. 1693b, 1693c 
and 1693d(c).

V. Section-by-Section Analysis

Section 205.12 Relation to Other Laws

    Section 205.12(a) explains the relationship between Regulation E 
and Regulation Z when an access device permits a consumer to obtain an 
extension of credit incident to an EFT. In general, Regulation E 
governs the issuance of access devices and the addition of an EFT 
service to an accepted credit card, and Regulation Z governs the 
issuance of a combined credit card and access device and the addition 
of a credit feature to an accepted credit card. See Sec.  205.12(a). 
The proposal would amend Regulation E to clarify that both the issuance 
of an access device with an overdraft service and the addition of an 
overdraft service to an accepted access device are governed by 
Regulation E.
    Currently, Sec.  205.12(a)(1)(ii) states that the EFTA and 
Regulation E govern the ``issuance of an access device that permits 
credit extensions (under a preexisting agreement between a consumer and 
a financial institution) only when the consumer's account is overdrawn 
or to maintain a specified minimum balance in the consumer's account.'' 
As the Board stated in the original March 1979 final rule, this 
provision was intended to clarify that Regulation E, rather than 
Regulation Z, applies to the issuance of ``access devices that are also 
credit cards solely by virtue of their capacity to access an existing 
overdraft credit line attached to the consumer's account.'' 61 FR 
18468, 18472, March 28, 1979 (adopting Sec.  205.4(c) where this 
provision originally appeared).
    When the rule was originally adopted, the primary means of covering 
overdrafts incurred in connection with EFTs was through an overdraft 
line of credit linked to a debit card or other access device. Today, 
however, consumers are more likely to have these overdrafts covered by 
their institution's overdraft service, rather than by a separate 
overdraft line of credit. In both cases, the Board believes that 
Regulation E should apply to ensure consistent treatment.
    Accordingly, the Board is proposing to amend Sec.  205.12(a)(1)(ii) 
to provide that Regulation E governs the issuance of an access device 
that permits extensions of funds under an overdraft service (as defined 
below under proposed Sec.  205.17) when the consumer's account is 
overdrawn. Proposed Sec.  205.12(a)(1)(iii) provides that Regulation E 
also covers the addition of an overdraft service to a previously 
accepted access device. See also comment 12(a)-2, as proposed to be 
revised. Proposed comment 12(a)-3 clarifies that the addition of an 
overdraft service to an accepted access device does not constitute the 
addition of a credit feature under Regulation Z.
    In addition, the Board is also proposing to amend Sec.  
205.12(a)(1)(i) to conform the regulation to reflect the redesignation 
of the definition of the term ``accepted credit card'' under Regulation 
Z, adopted elsewhere in today's Federal Register. See 12 CFR 226.12, 
comment 2. Current Sec.  205.12(a)(1)(iii), which provides that 
Regulation E's liability limits and error resolution rules also apply 
to extensions of credit under an overdraft line of credit, would be 
redesignated as Sec.  205.12(a)(1)(iv) and revised to include a 
reference to overdraft services.

Section 205.17 Requirements for Overdraft Services

Background
    In the February 2005 Joint Guidance on overdraft protection 
services, the federal banking agencies recommended as a best practice 
that institutions obtain a consumer's affirmative consent to receive 
overdraft protection. Alternatively, the Joint Guidance stated that 
where overdraft protection is automatically provided, institutions 
should provide consumers the opportunity to ``opt out'' of the 
overdraft program and provide consumers with a clear disclosure of this 
option. 70 FR at 9132.\20\
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    \20\ The OTS made similar recommendations in its separate 
guidance. See 70 FR at 8431.
---------------------------------------------------------------------------

    Although it appears that most institutions provide consumers the 
right to opt out of overdraft services, this practice is not uniform 
across all institutions.\21\ Moreover, even where an opt-out right is 
provided, this right may not be clearly disclosed to consumers. For 
example, some institutions may disclose the opt-out right in a clause 
in their deposit agreement, which many consumers may not notice or may 
not consider relevant because they do not expect to overdraw their 
accounts. In other cases, the clause may not be written in clearly 
understandable language. Accordingly, to ensure that all consumers are 
given a meaningful choice regarding overdraft services, the May 2008 
FTC Act Proposal would have established notice and opt-out requirements 
for institutions providing such services. The content and format of the 
opt-out notice were set forth in the Board's Regulation DD Proposal.
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    \21\ According to the FDIC's Study of Bank Overdraft Programs, 
75.1% of institutions surveyed permit consumers to opt out of their 
automated overdraft program, while 11.1% of institutions require 
consumers to opt in. According to the FDIC, banks that do not 
promote automated programs were less likely to give consumers either 
the option to opt in or to opt out of the automated overdraft 
program. See FDIC Study at 27. See also Moeb$ 2008 Pricing Survey 
Press Release (reporting that 89.9% of institutions offer some form 
of a consumer opt-out).
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Discussion
    Based on the comments received in response to the May 2008 FTC Act 
and Regulation DD Proposals, the results of limited consumer testing, 
and its own analysis, the Board believes that concerns about overdraft 
services can be appropriately addressed under its rulemaking authority 
under the EFTA

[[Page 5217]]

and Regulation E. The Board has a number of reasons for reaching this 
conclusion.
    First, the Board has considered the benefits to consumers of 
covering check transactions under an overdraft service. In particular, 
while a consumer will generally be charged the same fee by the 
financial institution whether or not a check is paid, if the 
institution covers an overdrawn check, the consumer may avoid other 
adverse consequences, such as the imposition of additional merchant 
returned item fees.\22\ Such benefits are not evident, however, with 
regard to the payment of overdrafts for certain types of EFTs, 
specifically ATM withdrawals and one-time debit card transactions. For 
those types of transactions, if the transaction is declined because of 
insufficient funds in the consumer's account, the consumer would not 
incur any merchant returned item fees and typically would avoid any 
fees assessed by the financial institution. Accordingly, the Board 
believes it is unnecessary to apply an opt-out (or opt-in) rule to 
check transactions in the proposed rule and that a more targeted rule 
covering overdraft services is appropriate.
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    \22\ According to one survey, the average merchant fee for a 
returned check is $27.78. See Moeb$ 2008 Pricing Survey Press 
Release. See also FDIC Study at 16 n.18 (stating that the fee 
amounts for paying an overdraft and for returning an item unpaid 
were the same for 98.1 of the surveyed institutions operating 
automated overdraft programs that reported the two fees).
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    Second, the Board has considered the cost impact to consumers from 
overdraft fees assessed in connection with ATM and debit card 
overdrafts.\23\ For one-time debit card transactions in particular, the 
amount of the fee assessed may substantially exceed the amount 
overdrawn.\24\ Given the costs associated with overdraft services in 
these circumstances, consumers may prefer not to have these overdrafts 
paid. In the Board's limited consumer testing, some participants stated 
that they would prefer to have ATM withdrawals and debit card 
transactions declined if they had insufficient funds, rather than incur 
an overdraft fee.
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    \23\ According to the FDIC's Study of Bank Overdraft Programs, 
the median dollar amount for debit card transactions resulting in an 
overdraft is $20. The FDIC's study also reported that POS/debit 
overdraft transactions accounted for the largest share of all 
insufficient funds transactions (41.0%). See FDIC Study at 78-79. 
This compares to the average cost of overdraft and insufficient 
funds fees of over $26 per item in 2007, as reported by the GAO. See 
Bank Fees: Federal Banking Regulators Could Better Ensure That 
Consumers Have Required Disclosure Documents Prior to Opening 
Checking or Savings Accounts, GAO Report 08-281, at 14 (January 
2008). See also FDIC Study at 15, 18 (reporting a median per item 
overdraft fee of $27 for banks surveyed); Eric Halperin, Lisa James 
and Peter Smith, Debit Card Danger: Banks Offer Little Warning and 
Few Choices as Customers Pay a High Price for Debit Card Overdrafts, 
Ctr. for Responsible Lending at 8 (January 25, 2007) (estimating 
that the median amount by which a consumer overdraws his or her 
account for a debit card purchase is $17).
    \24\ See Overdraft Protection Hearing at 72 (stating that 
consumers pay $1.94 in fees for every one dollar borrowed to cover a 
debit card POS overdraft).
---------------------------------------------------------------------------

    Third, the Board notes that addressing overdrafts under its 
authority under the EFTA and Regulation E would ensure that if 
finalized, the rule would apply to all depository institutions, 
including state-chartered credit unions which would not have been 
covered by the NCUA's FTC Act authority.
    Thus, for the reasons discussed above, the Board is proposing to 
prohibit account-holding financial institutions from assessing 
overdraft fees or charges on a consumer's account for paying an 
overdraft on an ATM withdrawal or one-time debit card transaction 
(whether at POS, online or by telephone), unless the consumer is given 
notice and a reasonable opportunity to opt out of the institution's 
overdraft service in connection with those transactions, and the 
consumer does not opt out. As discussed below, the Board is also 
proposing an alternative approach that would prohibit an account-
holding financial institution from assessing any fees on a consumer's 
account for paying an ATM withdrawal or one-time debit card transaction 
that overdraws the account, unless the consumer opts in, or 
affirmatively consents, to the service.
1. First Alternative Approach--Opt-Out Requirement
A. Definition--Sec.  205.17(a)
    Proposed Sec.  205.17(a) defines ``overdraft service'' to mean a 
service under which a financial institution assesses a fee or charge on 
a consumer's account held by the institution for paying a transaction 
(including a check or other item) when the consumer has insufficient or 
unavailable funds in the account. The term is intended to cover 
circumstances when an institution assesses a fee for paying an 
overdraft pursuant to any automated program or service, whether 
promoted or not, or as a non-automated, ad hoc accommodation. The term 
does not include an institution's payment of overdrafts pursuant to a 
line of credit subject to the Board's Regulation Z, including transfers 
from a credit card account, a home equity line of credit, or an 
overdraft line of credit. The term also does not include any overdrafts 
paid pursuant to a service that transfers funds from another account of 
the consumer (including any account that may be jointly held by the 
consumer and another person) held at the institution. The Board is not 
proposing to include these methods of covering overdrafts under this 
proposal because they require the express agreement of the consumer.
B. Opt-Out Requirement--Sec.  205.17(b)
    General rule and scope of opt-out. Proposed Sec.  205.17(b)(1) sets 
forth the general rule prohibiting an account-holding institution from 
assessing a fee or charge on a consumer's account for paying an 
overdraft on an ATM withdrawal or a one-time debit card transaction 
pursuant to the institution's overdraft service, unless the consumer is 
given notice and a reasonable opportunity to opt out of the service, 
and the consumer does not opt out.\25\ The proposed opt-out would apply 
to any ATM withdrawal, including withdrawals made at proprietary or 
foreign ATMs. The proposed opt-out would also apply to any one-time 
debit card transaction, regardless of whether the consumer uses a debit 
card at a point-of-sale (for example, at a merchant or a store), in an 
online transaction, or in a telephone transaction.
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    \25\ As further discussed below under proposed Sec.  205.17(c), 
notice must be provided both before the institution's assessment of 
any fees or charges for paying an overdraft, and subsequently after 
the consumer has incurred any such fees or charges.
---------------------------------------------------------------------------

    Proposed comment 17(b)-1 clarifies that a consumer's election to 
opt out of a financial institution's overdraft service does not 
prohibit the institution from paying any overdrafts for ATM withdrawals 
or one-time debit card transactions. If the institution pays an 
overdraft for these transactions, however, it would generally be 
prohibited from assessing an overdraft fee or charge, except as 
permitted under the exceptions set forth in proposed Sec.  
205.17(b)(5), discussed below. The rule would not, however, limit the 
institution's ability to debit the consumer's account for the amount of 
the overdraft, if the institution is permitted to do so under 
applicable law.
    The proposed opt-out would not apply to other types of 
transactions, including check transactions and preauthorized EFTs.\26\ 
As discussed above with respect to checks, the payment of overdrafts 
for these transactions may enable consumers to avoid other possible 
adverse consequences that might result if such items are returned 
unpaid, such as merchant returned item fees. Consumers may also be more 
likely to use checks

[[Page 5218]]

and preauthorized EFTs to pay for significant household expenses, such 
as utilities and rent. In the Board's limited consumer testing, 
participants indicated that they were more likely to pay important 
bills using checks and preauthorized EFTs, and to use debit cards for 
their discretionary purchases.
---------------------------------------------------------------------------

    \26\ The EFTA and Regulation E generally do not apply to check 
transactions. See Sec.  205.3(c).
---------------------------------------------------------------------------

    The opt-out also generally would not apply to ACH transactions. For 
example, if the consumer provides his or her checking account number to 
authorize an ACH transfer online or by telephone, the institution would 
be permitted to pay the item if it overdraws the consumer's account and 
assess a fee for doing so. The Board notes that in many cases, ACH 
transactions serve as a replacement for check transactions, such as 
where a check is converted to a one-time ACH debit to the consumer's 
account.\27\ In addition, the payment of an overdraft for an ACH 
transaction could enable consumers to avoid merchant returned item 
fees.
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    \27\ See Geoffrey Gerdes, ``Recent Payment Trends in the United 
States,'' Federal Reserve Bulletin at A79 (October 2008) (noting 
that the number of checks converted to electronic payments in 2006 
was 2.6 billion up from 0.3 billion in 2003).
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    Operational considerations. As discussed above, the May 2008 FTC 
Act Proposal would have required institutions to offer consumers the 
option of opting out of the payment of overdrafts only for ATM 
withdrawals and POS debit card transactions in addition to the option 
to opt out of the payment of overdrafts for all transaction types. In 
response, industry commenters stated that many processors do not 
currently have systems set up to distinguish paying overdrafts for 
some, but not all, payment channels, and that the reprogramming costs 
would be significant. Specifically, industry commenters stated that 
most systems today could either pay overdrafts for all transaction 
types or pay overdrafts for none; however, these systems were not set 
up to pay overdrafts for certain transaction types (e.g., checks and 
ACH), but not others (e.g., ATM and POS debit card transactions). Some 
industry commenters also asserted that most systems today are unable to 
readily differentiate between POS debit card transactions and other 
types of debit card transactions, such as a preauthorized transfer. A 
few industry commenters, however, argued that any opt-out right should 
be limited to ATM withdrawals and POS debit card transactions because 
the majority of complaints about overdraft services arise in connection 
with these transactions.
    Notwithstanding the programming changes that would be required by 
the proposed rule, the benefits of enabling consumers to have a choice 
regarding the payment of overdrafts for ATM withdrawals and one-time 
debit card transactions may outweigh the associated reprogramming 
costs. From a consumer's perspective, any benefits from overdrawing the 
consumer's account for ATM withdrawals and one-time debit card 
transactions may be substantially outweighed by the costs associated 
with the overdraft. Unlike for check and ACH transactions where the 
consumer could be assessed fees by both the institution and the 
merchant or other payee, the consequence of not having overdraft 
services for ATM and one-time debit card transactions is to have a 
transaction denied with no fees assessed. If a one-time debit card 
transaction is denied, the consumer can provide another form of 
payment, such as cash or a credit card. For ATM transactions, consumers 
may reasonably expect that their withdrawal request will be denied if 
they do not have sufficient funds in their accounts.
    For these reasons, the Board is proposing to limit the scope of the 
opt-out to ATM withdrawals and one-time debit card transactions. To 
minimize the cost impact on institutions, however, the Board 
anticipates allowing substantial lead time for institutions to 
implement the necessary programming changes. Comment is requested on 
whether the proposed opt-out should also apply to recurring debit card 
transactions and ACH transactions. Comment is also solicited on an 
appropriate implementation period for the proposed rule.
    Reasonable opportunity for opt-out. Proposed Sec.  205.17(b)(1)(ii) 
provides that once a consumer has received an opt-out notice, the 
consumer must be given a reasonable opportunity to opt out of an 
institution's overdraft service for ATM withdrawals and one-time debit 
card transactions. Proposed comment 17(b)-2 provides examples to 
illustrate what would constitute a reasonable opportunity to opt out, 
including reasonable methods for opting out.
    The first three examples provide a generally applicable safe harbor 
for opt-out periods of 30 days after the consumer is provided an 
initial notice informing the consumer of the opt-out right. During this 
period, an institution generally would be prohibited from assessing any 
fees or charges for paying an overdraft for an ATM withdrawal or a one-
time debit card transaction. Although 30 days would be a safe harbor, 
an institution may decide that a shorter waiting period could be 
adequate depending on the circumstances. Comment is requested regarding 
whether a shorter time frame, such as 15 or 20 days, may be more 
appropriate.
    Proposed comment 17(b)-2.i contains an example of a reasonable 
method of opting out when the institution provides a written form that 
the consumer can fill out and mail to opt out. See proposed Model Form 
A-9(A) in Appendix A, discussed below. Proposed comment 17(b)-2.ii 
provides that an institution could also provide a toll-free telephone 
number that the consumer may call to exercise the opt-out. Proposed 
comment 17(b)-2.iii provides that an institution may provide an 
electronic means to opt out, such as a form that can be accessed and 
processed at an Internet Web site, provided that the institution 
directs the consumer to the specific Web site address where the form 
may be located, rather than solely referring to the institution's home 
page.
    The fourth example provides that an institution may provide an opt-
out notice prior to or at account-opening and require the consumer to 
decide whether to opt out as a necessary step to opening the account. 
See proposed comment 17(b)-2.iv. For operational reasons, an 
institution may not want to set up an account for the consumer with 
overdraft services, only to have to implement a consumer's opt-out a 
short time later when the consumer opts out within 30 days after 
receiving an initial opt-out notice.
    Comment is requested whether the Board should require institutions 
to provide a toll-free telephone number to ensure that consumers can 
easily opt out. Participants in the Board's consumer testing indicated 
that even if the institution provided a form with a check-off box for 
the consumer's convenience, participants would still prefer to call 
their institution to opt out. Comment is also requested regarding 
whether the Board should add examples of methods of opting out that 
would not satisfy the requirement to provide a reasonable opportunity 
to opt out, such as requiring the consumer to write a letter to opt 
out.
    Conditioning the opt-out. Proposed Sec.  205.17(b)(2) provides that 
a financial institution shall not condition a consumer's right to opt 
out of the institution's payment of ATM withdrawals and one-time debit 
card transactions pursuant to the institution's overdraft service on 
the consumer also opting out of the institution's overdraft service 
with respect to checks, ACH transactions or other types of transactions 
(such as preauthorized EFTs). The Board is concerned that consumers may 
be discouraged from exercising their opt-out rights with

[[Page 5219]]

respect to the institution's payment of ATM and debit card overdrafts 
if the consumer's opt-out choice would also preclude the consumer from 
having overdrafts paid for checks, ACH transactions, and other types of 
transactions.\28\
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    \28\ In the Board's limited consumer testing, participants 
indicated that they would likely not opt out if checks and 
preauthorized EFTs would be returned because they used these methods 
of payment to pay important household bills, such as rent and 
utilities. In contrast, several participants stated that they would 
prefer that their institution decline their ATM withdrawals and one-
time debit card transactions if they did not have sufficient funds 
in their accounts in order to avoid overdraft fees.
---------------------------------------------------------------------------

    To prevent circumvention of the opt-out right, the proposed rule 
also would prohibit an institution from declining to pay checks, ACH 
transactions, or other types of transactions that overdraw the 
consumer's account because the consumer has opted out of the 
institution's overdraft service for ATM and one-time debit card 
transactions. Although the payment of overdrafts is generally at the 
discretion of the institution, the Board is concerned that some 
institutions may exercise that discretion in a manner that effectively 
prevents consumers from exercising a meaningful choice regarding 
overdraft services. Thus, the proposed rule generally would require an 
institution to apply the same criteria for deciding whether to pay 
overdrafts on checks, ACH transactions, or other types of transactions 
regardless of the consumer's opt-out choice with respect to ATM and 
one-time debit card overdrafts. For example, if an institution's 
internal criteria would lead the institution to pay a check overdraft 
if the consumer had not opted out of the institution's overdraft 
service, it must also apply that same criteria in a consistent manner 
in determining to pay the check overdraft if the consumer has opted 
out.
    This provision is not intended to create a contractual requirement 
for the institution to pay overdrafts on checks, ACH transactions, or 
other types of transactions. Comment is requested on whether there are 
other, more effective means of ensuring that consumers are not 
discouraged from opting out of an institution's overdraft service for 
ATM withdrawals and one-time debit card transactions.
    Notwithstanding the Board's concerns about potential chilling 
effects, the Board is also proposing a modified version of proposed 
Sec.  205.17(b)(2) that would expressly permit institutions to 
condition the consumer's ability to opt out of an institution's 
overdraft service for ATM withdrawals and one-time debit card 
transactions on the consumer also opting out of the institution's 
overdraft service for checks and other transaction types. Under this 
alternative approach, an institution could also decline checks, ACH 
transactions, and other types of transactions because the consumer has 
opted out of the service for ATM withdrawals and one-time debit card 
transactions. This alternative would address the potential operational 
issues associated with implementing a partial opt-out rule.
    The Board solicits comment on the merits of both alternatives. The 
Board also seeks comment on other approaches that may sufficiently 
balance concerns about the potential chilling effects from institutions 
declining to pay overdrafts for checks and other transactions if a 
consumer opts out of the payment of overdrafts for ATM withdrawals and 
one-time debit card transactions against the operational difficulties 
of implementing a partial opt-out rule.
    Implementation of opt-out. Some institutions may choose to 
implement a consumer's decision to opt out at the account level and 
decline to pay overdrafts for ATM withdrawals and one-time debit card 
transactions for those consumers that have opted out. Other 
institutions for operational reasons may prefer to implement the 
consumer's choice at the product level and offer two different 
accounts, one account that allows the institution to pay overdrafts for 
ATM withdrawals and one-time debit card transactions, and another that 
is specifically designed for consumers who opt out (``opt-out'' 
account). Proposed Sec.  205.17(b)(3) is intended to provide 
operational flexibility to financial institutions to implement an opt-
out using either approach.
    This provision would not, however, permit an institution to 
discourage, or chill, a reasonable consumer's exercise of the right to 
opt out. The Board is concerned that institutions may circumvent the 
proposed opt-out requirement and discourage consumers from opting out 
by, for example, imposing higher fees, paying lower interest rates, or 
limiting the features of the opt-out account. Thus, the proposal sets 
forth two alternative approaches to address this concern.
    Under the first alternative, if the institution is providing an 
opt-out account that does not permit the payment of ATM and one-time 
debit card overdrafts, the account must have the same terms, 
conditions, and features, including interest rates paid and fees 
assessed, as an account that permits the payment of such overdrafts, 
except for features that limit the institution's payment of such 
overdrafts.\29\
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    \29\ As discussed in proposed comment 17(b)-1, a consumer's 
election to opt out of an institution's overdraft service for ATM 
and one-time debit card transactions does not prohibit the 
institution from paying overdrafts in such cases. However, the 
institution generally would not be permitted to assess a fee or 
charge for paying the overdraft.
---------------------------------------------------------------------------

    Under the second alternative, an institution may alter some of the 
terms, conditions, or features of an account that does not permit the 
payment of overdrafts on ATM withdrawals and one-time debit card 
transactions. For example, the institution may wish to price some 
account services differently for the opt-out account. In light of the 
Board's concern about possible chilling effects, however, the second 
alternative permits an institution to vary the terms, conditions, or 
features of the opt-out account, provided that the differences in the 
terms, conditions, or features are not so substantial that they would 
discourage a reasonable consumer from exercising his or her right to 
opt out of the payment of overdrafts on ATM withdrawals and one-time 
debit card transactions.\30\ For example, an institution may not 
decline to provide ATM and debit card services altogether because the 
consumer has opted out of the institution's overdraft service for ATM 
withdrawals and one-time debit card transactions. See proposed comment 
17(b)(3)-1 to this second alternative.
---------------------------------------------------------------------------

    \30\ An institution that varies a term, condition, or feature of 
an account if a consumer opts out of the institution's overdraft 
service would have to comply with the change-in-terms notice 
requirements in Sec.  205.8 and 12 CFR 230.5, as applicable.
---------------------------------------------------------------------------

    The Board requests comment on both approaches. Specifically, the 
Board requests comment on whether institutions that currently offer an 
opt-out implement an opt-out at the account level (i.e., within the 
same type of account) or at the product level (i.e., by placing the 
consumer in a separate opt-out account). The Board also requests 
comment on whether institutions that currently offer an opt-out vary 
any other terms, conditions, or features of a separate opt-out account, 
and if so, which terms, conditions, or features are varied and why.
    Exceptions to the notice and opt-out requirements. In response to 
the May 2008 FTC Act Proposal, several commenters urged the Agencies to 
exclude institutions that require consumers to opt into the 
institution's overdraft service from the requirement to provide opt-out 
notices to consumers. These commenters stated that the Agencies' 
proposed rule would impose

[[Page 5220]]

unnecessary costs on such institutions. Moreover, these commenters 
stated that consumers would likely be confused by notices informing 
them of their right to opt out of a service that they have 
affirmatively requested.
    In addition, some institutions may have a policy and practice of 
declining any ATM withdrawals or debit card transactions when the 
institution has a reasonable belief that the consumer does not have 
sufficient funds available in his or her account to cover the requested 
transaction at the time of authorization. An opt-out requirement would 
serve little purpose in these circumstances, and could lead to 
potential consumer confusion.
    The Board is proposing to create exceptions to the notice and opt-
out requirements in the circumstances described above. Proposed Sec.  
205.17(b)(4) contains the two proposed exceptions. First, institutions 
that have a policy and practice of declining to pay ATM withdrawals or 
one-time debit card transactions for which authorization is requested 
if the institution has a reasonable belief that the consumer does not 
have sufficient funds available to cover the transaction at the time of 
the authorization request would not have to provide consumers with 
notice and the right to opt out of overdraft services. Second, 
institutions that require the consumer's affirmative consent, or opt-
in, before assessing any fees or charges for paying an ATM or one-time 
debit card overdraft also would not be subject to Sec.  205.17.\31\
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    \31\ This exception assumes that the Board adopts a rule 
requiring consumer opt-out, rather than opt-in, as is proposed under 
the second alternative approach discussed below.
---------------------------------------------------------------------------

    Proposed comment 17(b)(4)-1 states that institutions that qualify 
for either of the exceptions in Sec.  205.17(b)(4) would not be 
required to provide consumers notice and a reasonable opportunity to 
opt out of the institution's payment of overdrafts for ATM withdrawals 
and one-time debit card transactions. Proposed comment 17(b)(4)-2 
clarifies that an institution is not required to obtain the consumer's 
affirmative consent prior to each transaction that may overdraw the 
consumer's account to qualify for the opt-in exception in Sec.  
205.17(b)(4)(ii).
    Exceptions allowing assessment of overdraft fees when a consumer 
opts out. In limited circumstances, an institution may be unable to 
avoid paying a transaction that would overdraw a consumer's account. 
The proposal sets forth two exceptions that would permit an institution 
to assess a fee or charge to a consumer's account for paying an 
overdraft for an ATM withdrawal or one-time debit card transaction, 
even if the consumer has opted out of the institution's overdraft 
service.
    FTC Act Proposal. The May 2008 FTC Act Proposal would have 
permitted fees to be charged for an overdraft in two circumstances, 
notwithstanding the consumer's decision to opt out. The first 
circumstance was where the purchase amount presented at settlement by a 
merchant for a debit card transaction exceeded the amount originally 
requested for pre-authorization. The second circumstance was where a 
merchant or other payee presented a debit card transaction for payment 
by paper-based means, rather than electronically using a card terminal, 
and where the payee did not obtain authorization from the card-issuing 
financial institution at the time of the transaction.
    In the supplementary information accompanying the May 2008 FTC Act 
Proposal, the Agencies stated that they had considered, but did not 
propose, an exception that would allow an institution to impose an 
overdraft fee despite a consumer's opt-out election as long as the 
institution did not ``knowingly'' authorize a transaction that resulted 
in an overdraft. The Agencies expressed concern that given the 
difficulty in determining a consumer's real-time account balance, such 
an exception could undercut the protections provided by a consumer's 
election to opt out. Nonetheless, the Agencies sought comment on other 
circumstances in which an exception may be appropriate to allow an 
institution to impose a fee or charge for paying an overdraft even if 
the consumer has opted out of the institution's overdraft service.
    Industry commenters urged the Board to consider additional 
exceptions. Some industry commenters urged the Board to adopt a broad 
principles-based exception allowing fees to be charged when overdrafts 
are paid despite a consumer's decision to opt out. These commenters 
suggested the following principles-based exceptions: if an institution 
does not ``knowingly'' authorize the transaction that would overdraw 
the consumer's account; or if the institution authorizes a transaction 
on the ``good faith belief'' that there are sufficient funds in the 
consumer's account.
    Other industry commenters listed specific exceptions that the 
Agencies should consider. Several commenters urged the Agencies to 
allow fees to be assessed if an overdraft was paid when the institution 
used a stand-in processor to authorize the transaction because the card 
network was temporarily off-line. Industry commenters also stated that 
the rule should permit fees to be assessed for ``force-post'' or ``must 
pay'' debit card transactions where an institution authorizes payment 
at the time of the transaction based on a determination that the 
consumer had sufficient funds. Under these circumstances, card network 
rules require institutions to honor or pay the transaction even if 
intervening transactions (for example, checks that are presented for 
payment or ATM withdrawals) causes the consumer to have insufficient 
funds when the transaction is presented for settlement. In addition, 
industry commenters supported exceptions permitting fees to be charged 
where a consumer subsequently has a deposited item returned, and where 
the transaction is not submitted for authorization by the merchant.
    Reasonable belief exception. Proposed Sec.  205.17(b)(5)(i) would 
permit a financial institution to assess an overdraft fee or charge for 
paying an ATM withdrawal or one-time debit card transaction, 
notwithstanding the consumer's opt-out, if the institution has a 
reasonable belief that there are sufficient funds available in the 
consumer's account at the time the institution authorizes the 
transaction. Thus, an institution could assess an overdraft fee if the 
institution has authorized a transaction on the reasonable belief that 
there were sufficient funds available to cover the transaction, but 
sufficient funds were not, in fact, available at settlement.
    This could occur, for instance, where an authorization balance is 
not updated in real-time. For example, some institutions use a daily 
batch balance method for authorizing transactions and authorization 
decisions may be based upon a balance which is not updated during the 
day to reflect other account activity that occurred before the 
authorization request. In such cases, the institution may authorize a 
debit card transaction even though prior transactions that have posted 
or otherwise taken place during the day may cause the consumer's 
account to have insufficient funds for the debit card transaction. The 
proposed exception would permit the institution to pay the debit card 
transaction and assess an overdraft fee on the consumer's account 
because the institution authorized the transaction on the reasonable 
belief that there were sufficient available funds in the account to 
cover the transaction.
    An institution could also assess an overdraft fee if it authorizes 
a

[[Page 5221]]

transaction on the reasonable belief that a previously deposited check 
or other item was deposited on good funds, and the item is subsequently 
returned, causing the transaction to overdraw the consumer's account. 
For example, an institution may provide immediate availability for a 
$100 check that a consumer has deposited, and subsequently authorize a 
$75 debit card transaction on the belief that the check was written on 
sufficient funds. However, if the check is later returned due to 
insufficient funds in the check writer's account, the institution could 
permissibly charge the account of the consumer that had deposited that 
check if the debit card transaction overdraws the account because of 
the returned deposit.
    The proposed exception would also apply where the settlement amount 
exceeds the amount submitted for pre-authorization. For example, a 
consumer may use his or her debit card at a pay-at-the-pump fuel 
dispenser to purchase $50 of fuel. At the time of authorization, the 
gas station may request a pre-authorization hold of $1 to verify the 
validity of the card. Assuming the card-issuing financial institution 
does not increase the amount of the hold, if the consumer has less than 
$50 in his or her account when the transaction is presented for 
settlement, the institution would be permitted to pay the transaction 
and assess a fee, even if the consumer has opted out of the 
institution's overdraft service.
    Finally, an institution could assess an overdraft fee or charge in 
connection with force-post, or must-pay, debit card transactions that 
the institution is required to honor even if, at settlement, 
intervening transactions by the consumer have reduced the consumer's 
available balance below the authorized amount of the transaction. For 
example, a consumer may use his debit card to make a $50 purchase, 
which the institution authorizes based on the consumer's available 
balance at the time of authorization. However, because settlement may 
not occur for some period of time after completion of the transaction, 
intervening transactions may post to the consumer's account before the 
$50 transaction is presented for settlement. If there are insufficient 
funds in the consumer's account at the time of settlement, this 
exception would allow the institution to assess a fee to the consumer's 
account for paying the overdraft even if the consumer has opted out of 
the institution's overdraft service. Proposed comment 17(b)(5)-1 sets 
forth examples illustrating this exception.
    The proposed exception in Sec.  205.17(b)(5)(i) is not intended to 
permit an institution to assess an overdraft fee where a merchant has 
not submitted the transaction to the institution for authorization. A 
transaction may not be submitted for authorization, for example, 
because it is below the floor limits established by card network rules 
requiring authorization. Similarly, a merchant may decide not to submit 
the transaction for authorization because the small dollar amount of 
the transaction does not pose significant payment risk to the merchant. 
In either case, the consumer's financial institution would be unable to 
decline the transaction if the consumer did not have sufficient funds 
in the consumer's account. Nevertheless, the Board believes that 
institutions should not be permitted to assess a fee on the consumer's 
account in these cases when the consumer has opted out. From the 
perspective of a consumer who has opted out, it is reasonable to expect 
that the transaction would be declined if he or she did not have 
sufficient funds in the account. The merchant's decision not to seek 
authorization for small dollar transactions generally is not 
transparent to the consumer. In addition, because small-dollar 
transactions are those most frequently not submitted for authorization, 
prohibiting institutions from assessing overdraft fees in these 
circumstances would reduce the possibility that the consumer will incur 
overdraft fees that exceed the amount of the overdraft. An institution 
may, however, debit the consumer's account for the amount of the 
overdraft if permitted to do so under applicable law.
    Similarly, the proposal would not permit the institution to assess 
a fee if the institution uses a stand-in processor to authorize the 
transaction and an overdraft was paid as a result. A stand-in processor 
may be used by an institution when the debit card network is 
temporarily unavailable. In such cases, the authorization decision may 
be made by the processor based on the institution's pre-determined 
amount, rather than the consumer's account balance. The Board is 
concerned about the appropriateness of permitting an institution to 
assess an overdraft fee on the consumer's account in these rare 
circumstances because a consumer who has opted out would reasonably 
expect the transaction to be declined if he or she did not have 
sufficient funds in the account. The institution may, however, debit 
the consumer's account for the amount of the overdraft if permitted to 
do so under applicable law. Proposed comment 17(b)(5)-2 provides 
examples of circumstances where an institution would not be permitted 
to assess a fee for paying an overdraft if the consumer has opted out 
because a transaction was never submitted to the institution for 
authorization.
    Paper-based debit card transaction exception. Proposed Sec.  
205.17(b)(5)(ii) would permit an institution to assess an overdraft fee 
or charge, notwithstanding the consumer's opt-out election, where a 
merchant or other payee presents a debit card transaction for payment 
by paper-based means, rather than electronically using a card terminal, 
and the institution has not previously authorized the transaction. For 
example, the merchant may use a card imprinter to take an imprint of 
the consumer's card and later submit the sales slip to its acquirer for 
payment.
    The Board believes this circumstance is analogous to a check 
transaction that is later returned for insufficient funds. In this 
case, the institution cannot authorize the transaction because of the 
way in which the transaction is processed. The consumer should be aware 
that the merchant is not obtaining authorization from the financial 
institution when the merchant takes an imprint of the consumer's card. 
Thus, the consumer could reasonably expect that he or she would be 
charged a fee if there are not sufficient available funds to pay for 
the transaction. In contrast, where a merchant swipes a consumer's card 
to capture the card information, but chooses not to submit the 
transaction for authorization, the merchant's decision not to seek 
authorization is not transparent to the consumer. Therefore, in the 
latter circumstance, the consumer may reasonably expect that if he or 
she did not have sufficient funds in his or her account that the 
transaction would be declined. Proposed comment 17(b)(5)-3 illustrates 
this exception.
C. Timing--Sec.  205.17(c)
    The May 2008 FTC Act and Regulation DD Proposals would have 
required institutions to provide notice of the opt-out both before the 
institution's assessment of any fees or charges for paying an 
overdraft, and subsequently after the consumer has incurred any such 
fees or charges. The subsequent notice could be given on each periodic 
statement reflecting any fees or charges imposed in connection with an 
overdraft service, or at least once per statement cycle on any notice 
sent promptly after the institution's payment of an overdraft under an 
overdraft service. Proposed Sec.  205.17(c)

[[Page 5222]]

sets forth essentially the same requirements under Regulation E.
    In response to the May 2008 FTC Act and Regulation DD Proposals, 
the majority of industry commenters stated that the rule should only 
require notices to be provided at account opening. These commenters 
argued that the subsequent notice requirement would impose unnecessary 
costs on institutions based on the expense of producing and mailing the 
additional notices. In the alternative, industry commenters recommended 
that the Board permit institutions to provide a shorter opt-out notice 
on periodic statements to limit statement costs.
    Consumer groups urged the Board to require institutions to provide 
initial opt-out notices at account opening, segregated from other 
account documents, to ensure that the notice would be noticeable. In 
addition, consumer groups urged the Board to require institutions to 
provide subsequent notice of the opt-out right both on the periodic 
statement as well as on any notices the institution may send 
immediately after an overdraft so that if the consumer failed to read 
the opt-out language on the notice sent after an overdraft, it would 
also appear on the periodic statement.
    Proposed Sec.  205.17(c)(1) would require an institution to provide 
an opt-out notice before the institution assesses a fee or charge for 
paying an ATM withdrawal or one-time debit card transaction pursuant to 
the institution's overdraft service for accounts opened after the 
effective date of the final rule. For example, notice may be given at 
account opening, either within the deposit account agreement or in a 
stand-alone document. Institutions may also choose to provide the opt-
out notice closer to the time the overdraft service is available, so 
long as the notice is provided before the institution assesses any fees 
or charges for paying an ATM withdrawal or one-time debit card 
transaction that overdraws the consumer's account. Proposed Sec.  
205.17(c)(1) also provides that the consumer must be given a reasonable 
opportunity to exercise the opt-out right after receiving the notice 
before such fees or charges may be assessed to the consumer's account. 
See proposed comment 17(b)-2 (providing that a consumer has a 
reasonable opportunity to opt out if the consumer is given 30 days 
after receiving an opt-out notice before an overdraft fee is assessed). 
Comment is requested whether institutions should be required to 
segregate the opt-out notice from other account disclosures to help 
ensure that the notice can be seen by the consumer.
    Under the proposal, initial opt-out notices would not have to be 
provided to accounts that are opened prior to the effective date of the 
final rule. In response to the May 2008 Regulation DD proposal, 
consumer groups urged the Board to require institutions to provide 
initial opt-out notices to existing accountholders. The Board is 
concerned, however, that the costs of mailing initial opt-out notices 
to the millions of existing accountholders may exceed any consumer 
benefit. As further discussed below, existing consumers will still be 
alerted to their right to opt out of the overdraft service because they 
will receive an opt-out notice if and when they are assessed a fee or 
charge by their financial institution for paying an ATM or debit card 
overdraft.
    If a consumer has not opted out (in the case of a joint account, 
where no joint account holder has opted out) or the consumer has 
revoked a prior opt-out election, proposed Sec.  205.17(c)(2) would 
require institutions to provide an opt-out notice following the 
assessment of any overdraft fees or charges for paying an ATM 
withdrawal or one-time debit card transaction. The subsequent notice 
requirement would apply to all accounts, including existing accounts as 
of the effective date of the final rule.
    The requirement to provide an opt-out notice following the 
assessment of an overdraft fee or charge is designed to ensure that 
consumers are given notice of their right to opt out at a time that may 
be most relevant to them, that is, after they have been assessed fees 
or other charges for the service. Consumers receiving an opt-out notice 
only at account opening may not focus on the significance of the 
information at that time because they may assume that they will not 
overdraw the account. Or, consumers may not notice the opt-out 
information provided with other account-opening documents.
    Under the proposal, institutions would have the option of placing 
an opt-out notice on the periodic statement reflecting an overdraft fee 
or charge assessed to the consumer's account or on any notice sent 
promptly after the ATM or debit card overdraft. If the subsequent 
notice is included on the periodic statement, proposed Sec.  
205.17(c)(2)(i) would require the notice to be placed in close 
proximity to any aggregate totals for overdraft and returned item fees 
required to be disclosed by 12 CFR 230.11(a), as adopted under the 
Board's final rules under Regulation DD, published elsewhere in today's 
Federal Register. During consumer testing, a version of the opt-out 
form was placed directly below the cost totals associated with 
overdrawing the account. This placement enabled consumers to easily 
notice the information about their opt-out right.
    The requirement to provide subsequent notice of the opt-out 
terminates once the consumer has opted out. That is, once the consumer 
has opted out, an institution need not provide notice of the opt-out 
right following the assessment of any overdraft fees or charges to the 
consumer's account (for example, under one of the exceptions in Sec.  
205.17(b)(5)). Of course, if the consumer opts out after having 
incurred an overdraft fee, the opt-out applies only to subsequent 
transactions and the institution could permissibly assess an overdraft 
fee without violating the general rule in Sec.  205.17(b). Similarly, 
if the consumer has opted out but incurs an overdraft before the opt-
out has been implemented, the institution would be permitted to assess 
a fee for paying the overdraft. See also proposed comment 17(g)-1 
(stating that a consumer's subsequent opt-out does not require the 
institution to waive or reverse any overdraft fees assessed to the 
consumer's account prior to the institution's implementation of the 
opt-out).
    Comment is requested as to whether the rule should permit 
institutions to include the opt-out notice on periodic statements in 
any cycle in which the consumer has been assessed an overdraft fee or 
charge, even if that fee or charge was not incurred in connection with 
an ATM withdrawal or a one-time debit card transaction. For example, 
the rule could permit institutions to provide an opt-out notice on a 
periodic statement if the consumer incurred an overdraft fee in 
connection with a check transaction. Comment is also requested as to 
whether institutions should be permitted to include the opt-out notice 
on the periodic statement if the consumer did not incur any overdraft 
fees or charges during the statement cycle. Prohibiting institutions 
from including the opt-out notice on each periodic statement where no 
fee has been assessed could impose additional costs on institutions 
because it would require a dynamic statement process that only permits 
the opt-out notice to appear on statements that reflect an overdraft 
fee. The Board is concerned, however, that consumers may dismiss the 
opt-out notice as boilerplate language if the opt-out notice were 
included on every periodic statement.
    Proposed comment 17(c)(1)-1 contains guidance regarding the 
applicability of the notice requirements

[[Page 5223]]

in Sec.  205.17(c) to existing consumers. As discussed above, the 
requirement to provide notice before overdraft fees are assessed would 
apply only to accounts opened on or after the effective date of the 
final rule, that is, on or after the mandatory compliance date. 
However, the requirement to provide subsequent notice of the opt-out 
right after the consumer has overdrawn the account and assessed a fee 
or charge on the account would apply to all accounts on or after the 
effective date of the final rule, including existing accounts.
D. Content and Format--Sec.  205.17(d)
    Proposed Sec.  205.17(d) specifies the information that an 
institution would be required to include in its opt-out notices. In 
general, the proposal includes information similar to what would have 
been required under the May 2008 Regulation DD proposal, with certain 
revisions to reflect industry and consumer group comments, as well as 
the Board's consumer testing.
    Two different notices are set forth in the proposal. First, the 
proposal contains a detailed notice about the institution's overdraft 
service and the consumer's opt-out right that would be provided before 
an institution can assess any fees or charges for paying an ATM or one-
time debit card transaction that overdraws the consumer's account. 
Second, the proposal includes a shorter notice which could be provided 
to the consumer after an overdraft fee has been assessed (for example, 
on a periodic statement) that generally informs the consumer of his or 
her opt-out right and instructs the consumer to contact the institution 
for more information.\32\ Model forms that institutions may use to 
comply with the rule are also included in this proposal. See proposed 
Model Forms A-9(A) and A-9(B) in Appendix A.
---------------------------------------------------------------------------

    \32\ Alternatively, after assessing an overdraft fee or charge 
to the consumer's account, the institution could provide a notice 
containing the same content as the initial notice.
---------------------------------------------------------------------------

    Initial notice content. Proposed Sec.  205.17(d)(1) sets forth the 
information that must be included in the initial opt-out notice 
provided to consumers before an institution may assess any fees or 
charges for paying an overdraft. Proposed Sec.  205.17(d)(1) would also 
require that the initial opt-out notice be in a form substantially 
similar to Model Form A-9(A) in Appendix A.
    Proposed Sec.  205.17(d)(1)(i) would require the institution to 
provide a general description of the financial institution's overdraft 
services and the types of EFTs for which an overdraft fee may be 
imposed, including ATM withdrawals and one-time debit card 
transactions.
    Proposed Sec.  205.17(d)(1)(ii) would require the initial notice to 
include information about the dollar amount of any fees or charges 
assessed on the consumer's account for paying an ATM withdrawal or a 
one-time debit card transaction pursuant to the institution's overdraft 
service. Some institutions may vary the fee amount that may be imposed 
based upon the number of times the consumer has overdrawn his or her 
account, the amount of the overdraft, or other factors. Under these 
circumstances, the institution must disclose the maximum fee that may 
be imposed or a range of fees. Proposed comment 17(d)(1)-1 provides 
that the institution may indicate that the consumer may be assessed a 
fee ``up to'' the maximum fee or provide the range of fees. Comment is 
requested whether additional guidance is necessary if an overdraft fee 
is determined by other means, such as a percentage of the overdraft or 
the transaction that caused the overdraft.
    Proposed Sec.  205.17(d)(1)(iii) would require institutions to 
disclose any daily dollar limits on the amount of overdraft fees or 
charges that may be assessed. If the institution does not limit the 
amount of fees that can be imposed, it must disclose this fact. The May 
2008 Regulation DD Proposal contained a similar disclosure, but also 
would have required institutions to state any dollar limits on the 
amount of fees that may be imposed in a statement period. Upon further 
analysis, however, a requirement to state any limits on the amount of 
fees that may be imposed in a statement cycle is not included in this 
proposal because the Board believes that this information is unlikely 
to be relevant or helpful to consumers.
    Proposed Sec.  205.17(d)(1)(iv) would require institutions to 
inform consumers of the right to opt out of the institution's payment 
of overdrafts for ATM and one-time debit card transactions, including 
the method(s) that the consumer may use to exercise the opt-out right 
and how to contact the institution for more information. See also 
proposed Sec.  205.17(b)(1)(ii); comment 17(b)-2. An institution may 
also include an explanation regarding the type of transactions that 
would not be covered by the opt-out. See proposed comment 17(d)(1)-2, 
discussed below.
    Several industry commenters in response to the Regulation DD 
proposed model forms urged the Board to add language to the forms 
stating that the payment of overdrafts is discretionary even if the 
consumer does not opt out. In addition, industry commenters urged the 
Board to include language stating that the consumer's decision to opt 
out would not ensure that overdrafts would not be paid. The proposed 
model form does not include specific language regarding the 
discretionary nature of overdraft services. However, institutions would 
be permitted to include in their opt-out notices language indicating 
that the payment of overdrafts is at their discretion. See proposed 
comment 17(d)(1)-2.
    Proposed Sec.  205.17(d)(1)(v) provides that institutions must 
state whether they offer any alternatives for the payment of 
overdrafts. Specifically, if an institution offers an overdraft line of 
credit or a service that transfers funds from another account of the 
consumer held at the institution to cover the overdraft (including an 
account held jointly with another consumer), the institution must state 
that fact and how to obtain more information about these alternatives. 
Institutions may also, but are not required to, list any additional 
alternatives they may offer to overdraft services. This provision 
incorporates a recommendation from the February 2005 Joint Guidance 
that institutions should inform consumers generally of other overdraft 
services and credit products, if any, that are available when 
describing an overdraft protection program.\33\
---------------------------------------------------------------------------

    \33\ See 70 FR at 9131.
---------------------------------------------------------------------------

    In some cases, these alternatives for paying overdrafts may be less 
costly than the overdraft service offered by the institution.\34\ 
Consequently, requiring disclosures regarding these alternatives may 
enable consumers to make an informed decision about the merits of the 
overdraft service or whether other alternatives would be more 
appropriate to their needs. Consumer testing indicated that 
participants found information about alternatives helpful. Participants 
also generally understood that they would have to qualify for an 
overdraft line of credit, without a reference in the notice to any 
qualification requirements.
---------------------------------------------------------------------------

    \34\ The FDIC Study on Bank Overdraft Programs indicated that 
the median per usage fee charged by banks for automated overdraft 
programs was $27. In contrast, the median per usage fee for linked-
account programs and overdraft lines of credit was $5. FDIC Study at 
15, 20 and 23.
---------------------------------------------------------------------------

    Some institutions may wish to explain to consumers the consequences 
of opting out of overdraft services. Proposed comment 17(d)(1)-2 
provides that institutions may briefly describe these consequences. For 
example, the institution may state that if a consumer opts out of the 
institution's overdraft service for ATM withdrawals and one-time debit 
card transactions, the

[[Page 5224]]

institution may decline such transactions if the consumer's account 
does not have sufficient funds. Institutions that include an 
explanation of the consequences of opting out, the type of transactions 
that would not covered by the opt-out, or that the payment of 
overdrafts is at the institution's discretion, would not violate the 
requirement that opt-out notices be substantially similar to Model 
Forms A-9(A) or A-9(B), as applicable. But see proposed Sec.  
205.17(b)(3) (prohibiting institutions from declining to pay checks, 
ACH transactions, or other types of transactions that overdraw a 
consumer's account because the consumer opted out of the institution's 
overdraft service for ATM withdrawals and one-time debit card 
transactions). Comment is requested regarding whether the rule should 
permit or require any other information to be included in the overdraft 
notice.
    Notice following assessment of overdraft fee. Proposed Sec.  
205.17(d)(2) sets forth the content requirements for the short form 
notice that institutions may provide to consumers following an 
institution's assessment of a fee or charge to the consumer's account 
for paying an ATM withdrawal or one-time debit card transaction 
pursuant to the institution's overdraft service (assuming that the 
consumer has not opted out).
    The May 2008 Regulation DD Proposal would have required both the 
initial notice and subsequent notice of the opt-out right to contain 
the same content. Industry commenters urged that the Board to eliminate 
the subsequent notice requirement to reduce compliance burdens and 
costs. Alternatively, industry commenters urged the Board to permit 
institutions to provide an abbreviated notice on periodic statements 
that would generally remind consumers of their opt-out right and 
instruct them to contact the institution for additional information. 
Consumer group commenters supported the Board's proposal to require the 
same content on all notices informing consumers of their opt-out right 
to ensure that consumers can make an informed decision at the time they 
review the opt-out notice.
    Upon further analysis, the Board believes that permitting 
institutions to provide a short-form opt-out notice may strike an 
appropriate balance between including sufficient information to inform 
consumers of their options regarding overdraft services and keeping 
such notices short, simple, and cost-effective. The Board recognizes 
that requiring institutions to provide the same amount of detail in the 
subsequent notice as provided in the initial notice could impose 
significant statement production and mailing costs. In addition, 
participants during consumer testing indicated that it was sufficient 
for them to receive all of the required information about the 
institution's overdraft service at account opening. Nevertheless, test 
participants indicated that it would be helpful to receive a concise 
reminder of their right to opt out after they were assessed an 
overdraft fee or charge.
    Thus, proposed Sec.  205.17(d)(2) provides institutions with the 
flexibility to provide either a notice containing the same content as 
the initial opt-out notice or an abbreviated notice that is 
substantially similar to Model Form A-9(B) in Appendix A. The proposed 
abbreviated model notice generally states the consumer's right to opt 
out, the availability of alternatives to the institution's overdraft 
service, and how to contact the institution for more information.
    Model forms. As noted above, proposed Sec.  205.17(d)(1) would 
require the initial opt-out notice to be substantially similar to Model 
Form A-9(A) in Appendix A. The model form has been revised from the 
model form in the May 2008 Regulation DD proposal to reflect the more 
limited opt-out right and to highlight near the top of the notice key 
information about the consumer's opt-out right, including the 
information about alternatives to the institution's overdraft service. 
To comply with the subsequent notice requirement, proposed Sec.  
205.17(d)(2) permits institutions to use a notice substantially similar 
to proposed Model Form A-9(A) or an abbreviated notice substantially 
similar to proposed Model Form A-9(B). The Board expects to conduct 
additional consumer testing of both proposed model forms following 
issuance of this proposal.
E. Additional provisions addressing consumer opt-out right--Sec.  
205.17(e)-(h)
    Joint accounts. Proposed Sec.  205.17(e) would require a financial 
institution to treat an opt-out direction by any joint holder of an 
account as an opt-out for the account from all of the joint consumers. 
This provision takes into account recognizes the operational 
difficulties that would otherwise arise if an institution had to 
determine which account holder was responsible for a particular 
transaction and then decide whether to authorize that transaction based 
on that account holder's opt-out choice. Thus, if one joint consumer 
notifies the institution that he or she wishes to opt out of the 
institution's overdraft service, the institution must treat the choice 
as applying to all overdrafts triggered by an ATM withdrawal or debit 
card transaction for that account.
    Continuing right to opt-out and time to implement opt-out. Proposed 
Sec.  205.17(f) provides that a consumer may opt out of an 
institution's overdraft service at any time in the manner described in 
the institution's opt-out notice. Proposed Sec.  205.17(g) provides 
that institutions must comply with a consumer's opt-out request as soon 
as reasonably practicable after the institution receives it. Comment is 
requested regarding the need for additional guidance on the ``as soon 
as reasonably practicable'' standard. Proposed comment 17(g)-1 would 
clarify that an institution is not required to waive or reverse any 
overdraft fees or charges assessed to the consumer's account prior to 
the institution's implementation of the consumer's opt-out request.
    Duration of opt-out. Proposed Sec.  205.17(h) provides that once a 
consumer opts out, the opt-out remains in effect until revoked by the 
consumer in writing or electronically. Comment is requested on whether 
consumers should also be permitted to revoke prior opt-out elections 
orally, whether by telephone or in-person.
F. Request for Comment
    The Board requests comment on all aspects of the opt-out proposal, 
including the various alternatives set forth in the proposal. Comment 
is also requested on the costs and benefits of the proposed opt-out 
rule to consumers and financial institutions.
2. Second Alternative Approach--Opt-In Requirement
    The Board is also soliciting comment on an alternative--an opt-in 
approach. An opt-in requirement may be appropriate where the rule is 
limited to the payment of overdrafts for ATM withdrawals and one-time 
debit card transactions, and would not apply to the payment of 
overdrafts for other types of transactions, including checks and ACH 
transactions. While a check or ACH transaction that is returned for 
insufficient funds may cause the consumer to incur possible merchant 
fee(s) for the returned item or late payment penalties, as well as an 
insufficient funds fee assessed by the consumer's financial 
institution, a declined ATM or debit card transaction does not result 
in the same adverse consequences.
    Under an opt-out approach, consumers who may prefer to have ATM and 
debit card transactions declined if they would result in an

[[Page 5225]]

overdraft may nonetheless incur overdraft fees simply because they fail 
to act on the notice.\35\ For such consumers, establishing an opt-in 
rule that generally does not allow institutions to impose fees for 
paying these overdrafts unless a consumer affirmatively consents to the 
overdraft service would enable consumers to avoid fees for a service 
that they did not request or were unaware they had. An opt-in rule 
would also provide an incentive for institutions to persuade consumers 
of the benefits of the overdraft service and enable the consumer to 
make an informed choice about the merits of the service before he or 
she incurs any overdraft fees.
---------------------------------------------------------------------------

    \35\ Various studies suggest that consumers are likely to adhere 
to the established default rule, that is, theoutcome that would 
apply if the consumer takes no action, even if the default rule may 
not always be in their best interest. For example, studies of 
automatic enrollment in 401(k) savings plans indicate a significant 
increase in employee participation if the default rule provides that 
a consumer is automatically enrolled in the plan unless they opt 
out, instead of requiring employees to affirmatively agree to 
participate in the plan. See, e.g., Brigette Madrian and Dennis 
Shea, The Power of Suggestion: Inertia in 401(k) Participation and 
Savings Behavior, 116 Quarterly Journal of Economics 1149 (2001).
---------------------------------------------------------------------------

    However, for consumers who rarely, if ever, overdraw their 
accounts, the occasional coverage of overdrafts by their institutions 
may be a positive benefit.\36\ For such consumers, an opt-in regime may 
result in more declined transactions even though the consumer may have 
preferred to have the overdraft paid, despite the overdraft fee that 
may be charged by the consumer's financial institution. Such a consumer 
could be precluded from completing an important transaction when there 
are insufficient funds in the consumer's account and the consumer does 
not have another means of payment. For example, a consumer may need 
emergency funds and attempt to withdraw such funds from an ATM using a 
debit card. Or, the consumer may use a debit card to purchase essential 
groceries or medicine and have no other means of payment. In such 
cases, if the consumer has not opted in, the consumer would not be able 
to complete the transaction if the consumer does not have another form 
of payment.
---------------------------------------------------------------------------

    \36\ Available data indicates that the majority of account 
holders do not overdraw their accounts in a given year. In its Study 
of bank Overdraft Programs, the FDIC reported that almost 75 percent 
of consumer accounts for banks that had an automated doverdraft 
program had no overdrafts during the 12-month period examined. See 
FDIC Study at 76. See also 80 Percent of Consumers Have Not Paid 
Overdraft Fees in Past year, Says ABA Survey, Press release, 
american Bankers Association (August 30, 2007) (available at http://
www.aba.com/Press+Room/083007ABASurvey.htm).
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    Thus, while an opt-in approach may benefit some consumers, it may 
not be the optimal outcome for others. In addition, an opt-in rule 
could result in greater inefficiency for processing systems due to the 
potential increase in transactions that are declined. Accordingly, 
because there are both benefits and costs associated with the opt-in 
and opt-out approaches, the Board is soliciting comment on both 
approaches.
A. Definition--Sec.  205.17(a)
    The proposed definition of ``overdraft service'' is the same under 
both the opt-out and the opt-in approaches, and means a service under 
which a financial institution assesses a fee or charge on a consumer's 
account held by the institution for paying a transaction (including a 
check or other item) when the consumer has insufficient or unavailable 
funds in the account. See Sec.  205.17(a). The term would cover 
circumstances when an institution assesses a fee for paying an 
overdraft pursuant to any automated program or service, whether 
promoted or not, or as a non-automated, ad hoc accommodation. The term 
does not include an institution's payment of overdrafts pursuant to a 
line of credit subject to the Board's Regulation Z, including transfers 
from a credit card account, a home equity line of credit, or an 
overdraft line of credit. The term also does not include any overdrafts 
paid pursuant to a service that transfers funds from another account of 
the consumer (including any account that may be jointly held by the 
consumer and another person) held at the institution. The Board is not 
proposing to include these methods of covering overdrafts in this 
proposal because they require the express agreement of the consumer.
B. Opt-In Requirement--Sec.  205.17(b)
    General rule and scope of opt-in. Proposed Sec.  205.17(b)(1) sets 
forth the general rule prohibiting an account-holding institution from 
assessing a fee or charge on a consumer's account held at the 
institution for paying an ATM withdrawal or a one-time debit card 
transaction pursuant to the institution's overdraft service, unless the 
consumer is provided with notice explaining the institution's overdraft 
service for such transactions and a reasonable opportunity to 
affirmatively consent, or opt in, to the service, and the consumer 
affirmatively consents, or opts in, to the service. If the consumer 
opts in, the institution must provide written confirmation of the 
consumer's consent.
    The proposed opt-in would apply to any ATM withdrawal, including 
withdrawals made at proprietary or foreign ATMs. The proposed opt-in 
would also apply to any one-time debit card transaction, regardless of 
whether the consumer uses a debit card at a point-of-sale (for example, 
at a merchant or a store), in an online transaction, or in a telephone 
transaction.
    Proposed comment 17(b)-1 clarifies that a financial institution may 
pay overdrafts for ATM withdrawals and one-time debit card transactions 
even if a consumer has not affirmatively consented or opted in to the 
institution's overdraft service. If an institution pays an overdraft 
for these transactions and the consumer has not opted in to the 
service, however, the financial institution would generally be 
prohibited from assessing a fee or charge for doing so, except as 
permitted under the exceptions set forth in proposed Sec.  
205.17(b)(5). The rule would not, however, limit the institution's 
ability to debit the consumer's account for the amount of the 
overdraft, provided that the institution is permitted to do so by 
applicable law.
    Proposed comment 17(b)-2 clarifies that Sec.  205.17 does not 
require an institution to pay or honor any overdrafts on an ATM 
withdrawal or a one-time debit card transaction even if a consumer 
affirmatively consents to the institution's overdraft service for such 
transactions.
    Similar to the opt-out approach, the proposed rule requiring 
consumer opt-in would not apply to other types of transactions, such as 
checks, ACH transactions or preauthorized EFTs. In many of these cases, 
the institution would assess the same fee amount whether the item is 
paid or returned, but payment pursuant to the overdraft service would 
enable the consumer to avoid other adverse consequences, such as 
merchant returned item fees. In contrast, if a consumer does not opt in 
to the payment of overdrafts for ATM withdrawals or one-time debit card 
transactions, the transaction would generally be declined and the 
consumer would not be assessed any fees either by the financial 
institution or the merchant.
    To enable consumers to make an informed choice about an 
institution's overdraft service, proposed Sec.  205.17(b)(1)(i) would 
require the institution to provide a consumer a notice explaining the 
institution's overdraft service for ATM withdrawals and one-time debit 
card transactions that is segregated from everything else,

[[Page 5226]]

including other account disclosures. In addition, the proposal would 
provide that the notice may not contain any information that is not 
specified or otherwise permitted by this section (see proposed Sec.  
205.17(d) and comment 17(d)-2, discussed below). The separate notice 
requirement is designed to ensure that this information is not buried 
within other account documents and overlooked by the consumer. 
Otherwise, institutions could include information about the overdraft 
service in preprinted language in an account-opening disclosure, and a 
consumer might inadvertently consent to the institution's overdraft 
service merely by signing a signature card or other account-opening 
document acknowledging acceptance of the account terms.
    Reasonable opportunity to opt in. Proposed Sec.  205.17(b)(1)(ii) 
requires an institution to provide a reasonable opportunity for the 
consumer to affirmatively consent to the institution's overdraft 
service for ATM withdrawals and one-time debit card transactions. 
Proposed comment 17(b)-3 contains examples to illustrate what would 
constitute a reasonable opportunity to affirmatively consent, including 
the provision of reasonable method(s) to provide affirmative consent.
    Proposed comment 17(b)-3.i contains an example of a reasonable 
method of opting in when the institution provides a written form that 
the consumer can fill out and mail to opt in. See proposed Sec.  
205.17(b)(1)(i) and proposed Model Form A-9 in Appendix A, discussed 
below. The institution may not, however, obtain a consumer's 
affirmative consent in writing by including preprinted language about 
the overdraft service in an account disclosure provided with a 
signature card or contract that the consumer must sign to open the 
account and that acknowledges the consumer's acceptance of the account 
terms. Nor may an institution obtain a consumer's affirmative consent 
by providing a signature card that contains a pre-selected check box 
indicating that the consumer is requesting the service.
    Proposed comment 17(b)-3.ii illustrates that an institution could 
also provide a toll-free telephone number that the consumer may call to 
provide affirmative consent. Proposed 17(b)-3.iii illustrates that an 
institution may provide an electronic means for the consumer to 
affirmatively consent, such as a form that can be accessed and 
processed at an Internet Web site, provided that the institution 
directs the consumer to the specific Web site address where the form is 
located, rather than solely referring to the institution's home page.
    Proposed comment 205.17(b)-4 states that an institution may provide 
an opt-in notice prior to or at account opening and require the 
consumer to decide whether to opt in to the payment of ATM withdrawals 
or one-time debit card transactions pursuant to the institution's 
overdraft service as a necessary step to opening an account. For 
example, the institution could require the consumer prior to or at 
account opening to choose between an account that does not permit the 
payment of ATM withdrawals or one-time debit card transactions pursuant 
to the institution's overdraft service or an account that permits the 
payment of such overdrafts.
    Written confirmation. Proposed Sec.  205.17(b)(1)(iii) requires 
that upon obtaining the consumer's affirmative consent to the 
institution's overdraft service, the institution must provide the 
consumer with written confirmation documenting the consumer's choice, 
to help ensure that the consumer intended to opt in to the service. An 
institution could comply with the proposed written confirmation 
requirement, for example, by providing a copy of a consumer's completed 
opt-in form or sending a letter to the consumer acknowledging that the 
consumer has elected to opt in to the institution's service if the 
consumer has opted out by telephone or in person.
    Conditioning payment of overdrafts on consumer's affirmative 
consent. Proposed Sec.  205.17(b)(2) of the opt-in approach provides 
that an institution shall not condition the payment of any overdrafts 
for checks, ACH transactions, or other types of transactions on the 
consumer also affirmatively consenting to the institution's payment of 
overdrafts for ATM withdrawals and one-time debit card transactions. 
The Board is concerned that some institutions may seek to tie the 
ability of a consumer to have overdrafts paid for checks, ACH 
transactions, and other types of transactions to the consumer 
affirmatively consenting to the institution's payment of ATM and debit 
card overdrafts. As discussed above, many consumers may prefer that 
their account-holding financial institution cover overdrafts by check. 
These consumers may elect to opt in to an institution's overdraft 
service if not doing so would mean that checks would be returned 
unpaid.
    To prevent circumvention of the opt-out right, the proposed rule 
also would prohibit an institution from declining to pay checks, ACH 
transactions, or other types of transactions because the consumer has 
not also affirmatively consented to the institution's overdraft service 
for ATM and one-time debit card transactions. The proposed provision is 
designed to ensure that institutions do not exercise their discretion 
regarding the payment of overdrafts in such a manner as to prevent 
consumers from exercising a meaningful choice regarding overdraft 
services. Thus, the proposed rule generally would require an 
institution to apply the same criteria for deciding when to pay 
overdrafts for checks, ACH transactions, and other types of 
transactions, whether or not the consumer has affirmatively consented 
to the institution's overdraft service with respect to ATM and one-time 
debit card overdrafts. For example, if an institution's internal 
criteria would lead the institution to pay a check overdraft if the 
consumer had affirmatively consented to the institution's overdraft 
service, it must also apply that same criteria in a consistent manner 
in determining to pay the check overdraft if the consumer has not opted 
in. This provision is not intended to create a contractual requirement 
for the institution to pay overdrafts on checks, ACH transactions, or 
other types of transactions in any circumstances. See also proposed 
comment 17(b)-2. Comment is requested on whether there are other, more 
effective means of ensuring that consumers are not effectively 
compelled to opt in to an institution's overdraft service for ATM 
withdrawals and one-time debit card transactions.
    Notwithstanding the Board's concerns about potential consumer 
compulsion to opt in, the Board is proposing a modified version of 
proposed Sec.  205.17(b)(2) that would expressly permit institutions to 
condition the payment of any overdrafts for checks, ACH transactions, 
and other types of transactions on the consumer also affirmatively 
consenting to the institution's payment of ATM withdrawals and one-time 
debit card transactions pursuant to the institution's overdraft 
service. Under the alternative approach, an institution could also 
decline checks, ACH transactions, and other types of transactions 
because the consumer has not affirmatively consented to the 
institution's overdraft service for ATM withdrawals and one-time debit 
card transactions. See proposed Sec.  205.17(b)(2). This alternative 
would address the potential operational issues associated with 
implementing an opt-in that would apply to ATM withdrawals and one-time 
debit card transactions, but not to other types of transactions.

[[Page 5227]]

    The Board solicits comment on the merits of both alternatives. The 
Board also seeks comment on other approaches that may sufficiently 
balance concerns about consumers being effectively compelled to opt in 
to an institution's overdraft service for ATM withdrawals and one-time 
debit card transactions in order to have overdrafts paid for checks and 
other transactions against the operational difficulties of implementing 
a rule that enables consumers to decide whether to have overdrafts paid 
for some but not all types of transactions.
    Implementation of opt-in. Some institutions may choose to implement 
a consumer's affirmative consent at the account level and pay 
overdrafts for ATM withdrawals and one-time debit card transactions for 
those consumers that have opted in. Other institutions for operational 
reasons may prefer to implement the consumer's choice at the product 
level and open different accounts for consumers depending on whether 
the consumer has provided affirmative consent to the institution's 
overdraft service for ATM withdrawals and one-time debit card 
transactions (``opt-in'' account) or not (``no opt-in'' account). 
Proposed Sec.  205.17(b)(3) is intended to provide operational 
flexibility to institutions to implement a consumer's affirmative 
consent using either approach.
    The Board is concerned, however, that institutions could circumvent 
the proposed opt-in right and effectively compel the consumer to 
affirmatively consent to the institution's payment of overdrafts for 
ATM withdrawals and one-time debit card transactions by providing a 
``no opt-in'' account with significantly less favorable terms, 
conditions, or features compared to the opt-in account. Thus, the 
proposal sets forth two alternative approaches to address this concern.
    Under the first alternative, an institution must provide to 
consumers who do not affirmatively consent to the institution's 
overdraft service for ATM withdrawals and one-time debit card 
transactions an account with the same terms, conditions, and features, 
including interest rates paid and fees assessed, as it provides to 
consumers who do affirmatively consent, except for the features that 
limit the institution's payment of such overdrafts.
    Under the second alternative, an institution may wish to alter some 
of the terms, conditions, or features of the account that does not 
permit the payment of overdrafts on ATM withdrawals and one-time debit 
card transactions. For example, the institution may wish to price some 
account services differently for the ``no opt-in'' account. In light of 
the Board's concern about possible chilling effects, however, the 
second alternative permits an institution to vary the terms, 
conditions, or features of the ``no opt-in'' account only if the 
differences in the terms, conditions, or features are not so 
substantial as to effectively compel a reasonable consumer to 
affirmatively consent to the institution's payment of overdrafts on ATM 
withdrawals and one-time debit card transactions. For example, an 
institution may not decline to provide ATM and debit card services 
altogether if the consumer has not affirmatively consented to the 
institution's overdraft service for ATM withdrawals and one-time debit 
card transactions. See proposed comment 17(b)(3)-1 of this second 
alternative.
    The Board requests comment on both approaches. For institutions 
that require consumers to opt in to the institution's overdraft 
service, the Board requests comment on whether the consumer's choice is 
implemented at the account level (i.e., within the same type of 
account) or at the product level (i.e., by placing the consumer in a 
different type of account). The Board also requests comment on whether 
institutions that currently require an opt-in for overdraft services, 
or that offer accounts to certain subsets of consumers (such as high-
risk consumers) that limit the consumer's ability to overdraw the 
account, vary any other terms, conditions, or features of the account 
depending upon whether the consumer opts in or not. If so, comment is 
solicited on which terms, conditions or features are varied and why.
    Exception to the notice and opt-in requirements. Proposed Sec.  
205.17(b)(4) creates an exception to the proposed notice and opt-in 
requirement. Specifically, no notice would be required (nor affirmative 
consent obtained) when the institution has a policy and practice of 
declining to pay any ATM withdrawals or one-time debit card 
transactions for which authorization is requested if the institution 
has a reasonable belief that if the consumer's account does not have 
sufficient funds available to cover the transaction at the time of the 
authorization request.
    Exceptions to the fee prohibition. Proposed Sec.  205.17(b)(5) 
contains two exceptions to the fee prohibition that are identical to 
the exceptions proposed under the opt-out approach. These exceptions 
would allow institutions to assess a fee or charge for paying an ATM or 
debit card overdraft in certain circumstances even if the consumer has 
not affirmatively consented to the overdraft service.
    Under the first exception, an institution would be permitted to 
assess an overdraft fee or charge for paying an ATM withdrawal or one-
time debit card transaction, notwithstanding the absence of the 
consumer's affirmative consent, if the institution has a reasonable 
belief that there are sufficient funds available in the consumer's 
account at the time it authorizes a transaction. See proposed Sec.  
205.17(b)(5)(i). Under the second exception, an institution would be 
permitted to assess an overdraft fee or charge, notwithstanding the 
absence of the consumer's affirmative consent, where a merchant or 
payee presents a debit card transaction for payment by paper-based 
means, rather than electronically using a card terminal, and the 
institution has not previously authorized the transaction. See proposed 
Sec.  205.17(b)(5)(ii). These exceptions, and the reasons for proposing 
them, are discussed in greater detail in the section regarding the 
proposed opt-out approach. Proposed comments 17(b)(5)-1 through -3 
contain examples illustrating the proposed exceptions for the opt-in 
approach.
C. Timing--Sec.  205.17(c)
    Proposed Sec.  205.17(c) would generally require that a financial 
institution provide an opt-in notice to the consumer about the 
institution's overdraft service before the institution assesses any fee 
or charge on the consumer's account for paying an ATM withdrawal or 
one-time debit card transaction pursuant to the institution's overdraft 
service. However, once a consumer has opted in, financial institutions 
would not be required to provide a notice regarding the institution's 
overdraft service following the assessment of any overdraft fees or 
charges to the consumer's account. The Board believes such a 
requirement is not necessary when the consumer has affirmatively 
elected to enroll in the overdraft service.
    The proposed provision would apply differently depending on when 
the account is opened. For new accounts opened on or after the 
effective date of the final rule, the opt-in notice must be provided 
prior to the assessment of any fee or charge on the consumer's account 
for paying an ATM withdrawal or one-time debit card transaction 
pursuant to the institution's overdraft service.
    In contrast to the opt-out approach, the opt-in rule would not 
require institutions to provide a notice after a consumer has been 
assessed an overdraft fee or charge. Thus, existing

[[Page 5228]]

consumers may be unaware of their right to determine whether to enroll 
in their institution's overdraft service for ATM withdrawals and one-
time debit card transactions, absent being given an ``initial'' opt-in 
notice. Accordingly, the proposed opt-in approach would require 
institutions to provide notices regarding their opt-in right to 
existing customers.
    For existing accounts, that is, accounts opened prior to the 
effective date of the final rule, an institution may elect to provide 
an opt-in notice to all of its account holders on or with the first 
periodic statement sent after the effective date of the final rule. 
Alternatively, the institution may provide an opt-out notice to 
existing consumers following the first assessment of an overdraft fee 
or charge to the consumer's account on or after the effective date of 
the final rule.
    The notice requirements for existing accounts would apply only for 
accounts for which overdraft services are provided as of the effective 
date of the final rule. Thus, institutions would not be required to 
provide notices to consumers that have previously opted out of, or, for 
those institutions that require an opt-in, to consumers that have not 
affirmatively consented to, the service. Institutions that elect to 
provide notices to consumers prior to the effective date of the final 
rule also would not be required to provide new notices once the rule 
becomes effective for consumers that have not affirmatively consented 
to the service (provided that the consumer was given a reasonable 
amount of time to opt in).
    As discussed below under proposed Sec.  205.17(g), if an existing 
consumer has not opted in within 60 days of receiving the opt-in 
notice, the institution must cease assessing any fees or charges to 
existing consumer accounts for paying an ATM withdrawal or one-time 
debit card transaction pursuant to the institution's overdraft service, 
except for fees that are permitted by the exceptions in Sec.  
205.17(b)(5).
    The Board solicits comment on whether another approach may be more 
appropriate for existing customers. Specifically, the Board requests 
comment on whether it should adopt a hybrid approach consisting of an 
opt-out rule for existing accounts and an opt-in rule for new accounts. 
Under this approach, an institution could continue to pay overdrafts 
(and assess fees) for ATM withdrawals and one-time debit card 
transactions for existing consumers who have not opted out, but would 
be prohibited from paying such overdrafts and assessing an overdraft 
fee or charge on new consumers who have not affirmatively consented to 
the institution's overdraft service.
D. Content and Format--Sec.  205.17(d)
    Proposed Sec.  205.17(d) sets forth content requirements for the 
notice that must be provided to the consumer before the consumer may 
affirmatively consent to the institution's overdraft service. In 
addition, proposed Sec.  205.17(d) requires that the opt-in notice be 
in a form substantially similar to Model Form A-9 in Appendix A. The 
content requirements are discussed in greater detail in the section 
regarding the proposed opt-out approach. However, the Board has 
modified these content requirements (and the accompanying proposed 
commentary) from the proposed opt-out approach to reflect the 
requirement to obtain the consumer's affirmative consent. See proposed 
Sec.  205.17(d) and proposed comments 17(d)-1 and -2.
    The Board expects to conduct consumer testing of this proposed 
model form (and the proposed model forms for the opt-out) following 
issuance of this proposal.
E. Additional Provisions Addressing Consumer Opt-in Right--Sec.  
205.17(e)-(g)
    Joint accounts. Proposed Sec.  205.17(e) requires a financial 
institution to treat affirmative consent provided by any joint consumer 
of an account as affirmative consent for the account from all of the 
joint consumers. As also discussed above with regard to the opt-out 
approach, this provision takes into account the operational 
difficulties that would otherwise arise if an institution had to 
determine which account holder was responsible for a particular 
transaction and then make an authorization decision based on whether 
the consumer had affirmatively consented to the institution's overdraft 
service. Thus, if one joint consumer opts in to the institution's 
overdraft service, the institution must treat the consent as applying 
to all overdrafts triggered by an ATM withdrawal or debit card 
transaction for that account.
    Continuing right to opt-in. Proposed Sec.  205.17(f) provides that 
a consumer may affirmatively consent to a financial institution's 
overdraft service at any time in the manner described in the opt-in 
notice. This provision allows consumers to decide later in the account 
relationship that they wish to have overdrafts paid for ATM withdrawals 
and one-time debit card transactions.
    Time to comply for existing customers. As discussed above under 
Sec.  205.17(c), institutions would have the option of implementing the 
opt-in requirement for existing accounts either by providing a notice 
to all existing accounts on or with the first periodic statement sent 
on or after the effective date of the final rule. Alternatively, an 
institution could provide an opt-in notice to existing accounts after 
the first assessment of an overdraft fee or charge for an ATM or one-
time debit card overdraft on or after the effective date of the final 
rule. In either case, under proposed Sec.  205.17(g), if a consumer has 
not affirmatively consented to the service within 60 days after the 
institution sends the opt-in notice, the institution shall cease 
assessing any fees or charges on the consumer's account for paying such 
overdrafts, except if permitted by the exceptions in Sec.  
205.17(b)(5).
    The 60-day period is intended to provide sufficient time for the 
consumer to respond to the opt-in notice, and for the institution to 
implement the consumer's decision. During this time, an institution may 
continue to assess overdraft fees for paying ATM withdrawals and one-
time debit card transactions. Comment is requested on the 60-day 
period, and whether the period should be longer or shorter.
    Duration of opt-in. Proposed Sec.  205.17(h) provides that a 
consumer's affirmative consent to the institution's overdraft service 
is generally effective until revoked by the consumer. An institution 
may also terminate the consumer's access to the overdraft service at 
its discretion, for example, if the institution determines that there 
is excessive usage of the service by the consumer.
F. Request for Comment
    The Board requests comment on all aspects of the opt-in proposal, 
including the various alternatives set forth in the proposal. Comment 
is requested on the costs and benefits of the proposed opt-in rule to 
consumers and financial institutions. Comment is also solicited on 
which approach (opt-out or opt-in) may be optimal for both consumers, 
and whether one approach may present unique operational or cost issues 
that would not be associated with the other approach.

Section 205.19 Debit Holds

Background
    When a consumer uses a debit card to make a purchase, a block, or 
hold, may be placed on funds in the consumer's account to ensure that 
the consumer has sufficient funds in his or her account when the 
transaction is presented for settlement. This type of block or hold is 
commonly referred to as a ``debit hold.'' During the time the debit 
hold remains

[[Page 5229]]

in place, which may be up to three days after authorization, those 
funds may be unavailable for the consumer's use in other transactions.
    In some cases, the actual purchase amount is not known at the time 
the transaction is authorized, such as when a consumer uses a debit 
card to pay for gas at the pump, check into a hotel room, or pay for a 
meal at a restaurant. Consequently, the debit hold may be placed for an 
estimated amount that exceeds the actual transaction amount. The 
consumer may engage in subsequent transactions reasonably assuming that 
his or her account has only been debited for the actual transaction 
amount. Or, prior transactions may be presented for settlement after 
the hold is placed. Because of the excess hold, however, the consumer 
may incur overdraft fees for those transactions.
    For example, a consumer with $100 in a deposit account may swipe 
his or her debit card at a pay-at-the-pump dispenser to purchase $20 
worth of fuel. When this transaction is authorized, the consumer's 
financial institution may increase the merchant's $1 pre-authorization 
hold \37\ to $75 to cover the maximum amount the institution guarantees 
to pay the gas station under card network rules.\38\ Because the final 
$20 transaction amount is not settled immediately, the $75 debit hold 
amount may remain in place for some period of time, up to three days 
for signature-based debit card transactions.\39\ However, the consumer 
would be unaware that $55 more than the purchase amount has been 
temporarily made unavailable for use until the merchant presents the 
transaction for settlement. Thus, prior to settlement of the 
transaction, the consumer may make subsequent purchases assuming that 
his or her account has been debited by only $20, and inadvertently 
spend more than the available amount in his or her account. As a 
result, the consumer could be charged an overdraft fee even though the 
account contained sufficient funds to pay for all of the consumer's 
purchases.
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    \37\ Pre-authorization describes the dollar amount of funds that 
are held on a consumer's account when a card is swiped to initiate a 
transaction.
    \38\ In a signature-based debit card transaction at a pay-at-
the-pump dispenser, the merchant typically obtains a $1 pre-
authorization to activate the pump. The card issuer may increase 
this amount to the maximum amount guaranteed to the merchant 
(currently $75 in most cases under card network rules) to protect 
itself against risk of loss. In contrast, in a PIN-based debit card 
transaction where the cardholder enters his or her personal 
identification number (PIN) to complete the transaction, the 
merchant obtains pre-authorization for an estimated transaction 
amount, which under current card network rules generally may not 
exceed $75.
    \39\ Unlike signature-based debit card transactions, PIN-based 
debit card transactions that take place before the processing cut-
off time for that day will typically settle soon after completion of 
the transaction.
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    May 2008 FTC Act Proposal. The Agencies proposed in the May 2008 
FTC Act Proposal to prohibit institutions from assessing an overdraft 
fee where the overdraft would not have occurred but for the placement 
of an excess debit hold. While consumer groups endorsed the Agencies' 
proposal, industry commenters expressed strong opposition, stating that 
it would present significant operational difficulties.
    Several industry commenters asserted the rule would require banks 
to monitor retroactively, and manually adjust, transactions and fees 
that have posted to the account. A few of these commenters believed 
that the proposal would have a disproportionate cost impact on smaller 
institutions that do not have the systems or staff to handle the 
research and manual adjustments necessary to correct the consumer's 
account. Alternatively, institutions would have to stop placing debit 
holds altogether which, industry commenters argued, would raise 
potential safety and soundness concerns. Nonetheless, a few financial 
institution commenters stated that they either do not currently place 
holds on authorizations from gas stations, hotels, or rental car 
companies, or do not increase the $1 merchant pre-authorization amount 
in connection with fuel purchases.
    Rather than adopting a substantive FTC Act rule, industry 
commenters urged the Agencies to use other existing regulatory 
authority. For example, industry commenters recommended that the Board 
exercise its authority under Regulation E to require merchants to 
disclose at the point-of-sale when holds may be placed on debit card 
transactions. Many industry commenters also stated that the Agencies' 
concerns were already largely addressed by recent card network 
initiatives intended to reduce the length of the hold time for debit 
holds. For example, one payment card network has recently implemented 
changes intended to reduce the hold times for pay-at-the-pump fuel 
dispensers. Under these new rules, fuel merchants would be encouraged 
to transmit a transaction for settlement within two hours of 
authorization. If the merchant does so, the card-issuing institution 
will be required to drop the hold within the two-hour time frame, thus 
reducing the hold times to a matter of hours, instead of days.
Discussion
A. General Rule--Sec.  205.19(a)
    After reviewing the comments received on the May 2008 FTC Act 
Proposal and based on its own analysis, the Board is proposing to 
address debit holds under the EFTA and Regulation E. Proposed Sec.  
205.19(a) generally would prohibit financial institutions from 
assessing a fee or charge for paying an overdraft pursuant to the 
institution's overdraft service if the overdraft would not have 
occurred but for a debit hold placed in a consumer's account if the 
amount of the hold exceeds the actual transaction amount. The proposed 
rule would not apply to transactions in which the amount of the hold 
equals or is less than the actual amount of the transaction. Similarly, 
the proposed rule would not apply if the actual amount of the 
transaction would also have caused the overdraft to occur.
    Under the proposal, the scope of the debit hold provision would be 
limited to debit card transactions in which the actual transaction 
amount generally can be determined by the merchant or other payee 
within a short period of time after the institution authorizes the 
transaction. For example, in pay-at-the-pump fuel purchases, the actual 
transaction amount can be calculated once the consumer has finished 
pumping fuel. Similarly, when a consumer uses a debit card to pay a 
restaurant bill, the actual transaction amount can be determined once 
the consumer has signed the receipt and added a service tip. According 
to data submitted by one card network on the Board's May 2008 FTC Act 
Proposal, restaurant and fuel purchases comprise over 95 percent of all 
transactions in which the settlement amount typically does not match 
the authorization amount.\40\
---------------------------------------------------------------------------

    \40\ See Visa comment letter at 8.
---------------------------------------------------------------------------

    The proposed rule would not apply, however, to debit holds in other 
retail environments where the actual transaction amount generally 
cannot be determined for a considerable period of time after the 
merchant has submitted a transaction for authorization. For example, 
when a consumer provides his or her debit card at check-in for a multi-
night hotel stay, the transaction will not be submitted for settlement 
until the end of the consumer's stay. In this case, a hold may be 
placed on funds in the consumer's account at check-in, but will not be 
released until the consumer completes his or her stay (or when the hold 
is required to be released under card network rules, whichever comes 
first). Similarly, if a consumer uses his

[[Page 5230]]

or her debit card to reserve or pick up a rental car, the actual amount 
of the transaction will not be known until the car is returned. In 
these circumstances, the general rule would not apply because the 
actual amount of the transaction generally cannot be determined within 
a short period of time after. It seems impracticable to craft a rule in 
such cases because it would be impossible to determine a reasonable 
hold period in all such circumstances.
    Moreover, the Board believes that overdraft fees are less likely to 
occur for hotel and car rental transactions because consumers tend to 
use credit cards for these transactions. In addition, data provided by 
one commenter indicates that even where debit cards are used in hotel 
and car rental transactions, they comprise a very small proportion of 
transactions overall involving a debit hold. The Board has received few 
complaints regarding overdraft fees incurred as a result of debit holds 
placed in connection with hotel and car rental transactions.
    For these reasons, the Board is proposing a targeted rule for debit 
holds that would apply only in circumstances when the actual 
transaction amount can be determined within a short period of time 
after the institution authorizes the transaction. As stated above, the 
proposed rule would appear to cover approximately 95 percent of all 
transactions (pay-at-the-pump and restaurants) in which the actual 
transaction amount and the authorization amount do not match. Thus, the 
proposed rule would cover the areas of greatest concern regarding 
overdraft fees incurred because of a debit hold. Proposed comment 
19(a)-1 provides examples of transactions covered by the proposed rule.
    The prohibition against assessing an overdraft fee in connection 
with a debit hold applies only if the overdraft is caused solely by the 
existence of the hold. Proposed comment 19(a)-2 provides that an 
institution may assess an overdraft fee or charge if the consumer's 
account is overdrawn for other reasons. These reasons may include prior 
debit card transactions that may have been authorized but not yet 
presented for settlement, or when a deposited check in the consumer's 
account is returned.
    Proposed comment 19(a)-3 clarifies that a financial institution 
does not violate the prohibition in Sec.  205.19 if it promptly waives 
or refunds any overdraft fees assessed on a consumer's account caused 
by a debit hold placed on funds in the consumer's account that is in 
excess of the actual amount of the transaction. However, the 
institution may not require the consumer to provide notice or other 
information that an overdraft fee was caused by a debit hold on funds 
in the consumer's account before waiving or refunding the fee. Proposed 
comment 19(a)-3 includes an example illustrating this provision.
    Proposed comments 19(a)-4 through -7 set forth examples to 
illustrate application of the rule.
B. Safe Harbor--Sec.  205.19(b)
    The proposed rule provides a safe harbor that would allow a 
financial institution to assess a fee or charge for paying an overdraft 
that is caused solely by a debit hold in certain cases. Specifically, 
proposed Sec.  205.19(b) permits an institution to assess an overdraft 
fee or charge to the consumer's account in connection with a debit hold 
if the institution has adopted procedures and practices designed to 
remove the hold within a reasonable period of time. This safe harbor is 
intended to mitigate the potential compliance burden on institutions. 
Thus, an institution would not be required to recalculate each 
transaction which may appear to be overdrawn due to an excess hold to 
determine whether an overdraft fee was properly assessed if the hold is 
removed within a reasonable period of time following authorization. 
Proposed Sec.  205.19(b) provides that an institution has procedures 
and practices designed to release the hold within a reasonable period 
of time if the institution releases debit holds for the transactions 
covered by the proposed rule within two hours of authorization.\41\ 
Proposed comment 19(b)-1 illustrates the safe harbor.
---------------------------------------------------------------------------

    \41\ Where an institution has released a debit hold before the 
transaction is presented for payment in order to take advantage of 
the safe harbor, it would be permitted to assess an overdraft fee if 
the actual transaction amount presented for settlement causes the 
consumer to overdraw his or her account.
---------------------------------------------------------------------------

    The two-hour time period for removing a hold is consistent with 
industry efforts to minimize current hold times in certain retail 
environments. As discussed above, one payment card network has recently 
implemented changes designed to significantly reduce the hold times at 
pay-at-the-pump fuel dispensers. This industry initiative, however, is 
voluntary and, by itself, may not be sufficient to protect consumers 
from being assessed overdraft fees caused by an excess hold. In 
addition, this initiative is currently limited to pay-at-the-pump debit 
card transactions, and would not apply in other circumstances in which 
the actual transaction amount can be determined within a short period 
of time after authorization was obtained, such as at restaurants. 
Nonetheless, the introduction of a two-hour hold period, even on a 
voluntary basis, suggests that such a standard is feasible.
    The Board recognizes that the proposed safe harbor in Sec.  
205.19(b) would not prevent in all cases the assessment of overdraft 
fees caused by a debit hold even though the consumer had sufficient 
funds in the account. For example, a consumer may use his or her debit 
card to purchase groceries an hour after completing a fuel purchase. 
The proposed safe harbor would not preclude the consumer's financial 
institution from assessing an overdraft fee or charge for the grocery 
purchase where an excess hold placed in connection with the fuel 
purchase causes the consumer to have insufficient funds at the time of 
authorization for the grocery purchase. (However, if the consumer has 
opted out under Sec.  205.17 (or not opted in), the institution would 
not be permitted to assess a fee or charge for paying the debit card 
overdraft. See proposed comment 19(b)-2, discussed below.) The Board 
nonetheless believes that in the vast majority of cases, consumers 
would not be assessed a fee for an overdraft that was caused by an 
excess debit hold in light of the short time period (2 hours) that the 
hold would be in place before it would be released by institutions that 
follow the safe harbor. However, the Board solicits comment on this 
approach.
    Proposed comment 19(b)-2 illustrates the interaction between the 
debit hold provision in Sec.  205.19 and the opt-out (or opt-in) 
requirements in Sec.  205.17. Specifically, if a consumer is not 
enrolled in the institution's overdraft service for ATM withdrawals and 
one-time debit card transactions (because the consumer has opted out or 
not opted in), the institution may not assess any overdraft fees 
incurred in connection with a debit hold even if the institution 
otherwise is not prohibited from doing so by the debit hold provision. 
For example, assume a consumer has $100 in his or her deposit account 
and has opted out of the institution's overdraft service. The consumer 
uses his or her debit card to purchase $30 of fuel at a pay-at-the-pump 
fuel dispenser. At the time of authorization, the financial institution 
increased the gas station's $1 preauthorization hold to $75. One hour 
after completing the fuel purchase, the consumer makes a $60 debit card 
purchase at a grocery store. Notwithstanding the fact that the consumer 
made the purchase within the two-hour safe harbor, the institution 
would not be permitted to assess an

[[Page 5231]]

overdraft fee because the consumer had opted out of (or not opted in 
to) the institution's overdraft service.
C. Other Potential Approaches
    The proposal does not require merchants to disclose debit holds as 
a substitute for a substantive rule, as some industry commenters had 
suggested. The Board does not believe that a disclosure-based approach 
would be effective in pay-at-the-pump and restaurant transactions. For 
example, a notice posted at a gas pump or in a restaurant is unlikely 
to be noticed by the consumer. Even if the consumer were to notice a 
point-of-sale disclosure about debit holds, the consumer would not know 
how long the hold will remain in place. Moreover, for signature-based 
pay-at-the-pump debit card purchases, the merchant does not know 
whether the financial institution will increase the $1 pre-
authorization hold. Therefore, merchant disclosures at point-of-sale 
regarding debit holds do not appear to provide a workable solution in 
most circumstances.
D. Request for Comment
    The Board requests comment on all aspects of the debit hold 
proposal, including whether additional guidance is necessary regarding 
transactions in which the actual purchase amount is determined within 
``a short period of time.'' Comment is also requested on the costs and 
benefits of the proposed rule to consumers and financial institutions.
    Comment is requested on the appropriateness of the proposed safe 
harbor, including whether other time periods may be more appropriate in 
light of operational constraints at smaller institutions which may only 
receive authorization and settlement information periodically during 
the day.
    In addition, comment is requested whether the Board should exercise 
its authority under Section 904 of the EFTA to also require merchants 
(or their acquirers or processors) to promptly submit transactions 
covered by this rule for settlement. Specifically, the Board seeks 
comment on whether the final rule should also require merchants (or 
their acquirers or processors) to submit such transactions for 
settlement within the safe harbor period.

VI. Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) 
generally requires an agency to perform an assessment of the impact a 
rule is expected to have on small entities.
    However, under section 605(b) of the RFA, 5 U.S.C. 605(b), the 
regulatory flexibility analysis otherwise required under section 604 of 
the RFA is not required if an agency certifies, along with a statement 
providing the factual basis for such certification, that the rule will 
not have a significant economic impact on a substantial number of small 
entities. Based on its analysis and for the reasons stated below, the 
Board believes that this proposed rule is likely to have a significant 
economic impact on a substantial number of small entities. A final 
regulatory flexibility analysis will be conducted after consideration 
of comments received during the public comment period.
    1. Statement of the need for, and objectives of, the proposed rule. 
The Board is proposing revisions to Regulation E to prohibit financial 
institutions that hold a consumer's account from assessing a fee or 
charge for paying ATM withdrawals and one-time debit card transactions 
pursuant to the institution's overdraft service, unless the consumer is 
given the right to opt out of the service, and the consumer does not 
opt out. The proposal also sets forth an alternative approach that 
would require that a consumer affirmatively consent to the 
institution's overdraft service before overdraft fees could be assessed 
for these transactions. Under the proposal, financial institutions 
would be prohibited from assessing a fee or charge for certain debit 
card transactions that overdraw the consumer's account if the overdraft 
would not have occurred but for a hold placed on funds in the 
consumer's account in excess of the actual transaction, unless the 
institution has adopted procedures and practices designed to release 
the hold within a reasonable period of time. A safe harbor is provided 
if an institution has adopted procedures to release the hold within two 
hours after the institution authorized the transaction.
    The EFTA was enacted to provide a basic framework establishing the 
rights, liabilities, and responsibilities of participants in electronic 
fund transfer systems. The primary objective of the EFTA is the 
provision of individual consumer rights. 15 U.S.C. 1693. The EFTA 
authorizes the Board to prescribe regulations to carry out the purpose 
and provisions of the statute. 15 U.S.C. 1693b(a). The Act expressly 
states that the Board's regulations may contain ``such classifications, 
differentiations, or other provisions, . . . as, in the judgment of the 
Board, are necessary or proper to effectuate the purposes of [the Act], 
to prevent circumvention or evasion [of the Act], or to facilitate 
compliance [with the Act].'' 15 U.S.C. 1693b(c). The Board believes 
that the revisions to Regulation E discussed above are within 
Congress's broad grant of authority to the Board to adopt provisions 
that carry out the purposes of the statute. These revisions facilitate 
a consumer's ability to avoid overdrawing his or her account in 
connection with an electronic fund transfer the consumer has requested.
    2. Small entities affected by the proposed rule. The number of 
small entities affected by this proposal is unknown. Account-holding 
institutions would be required to provide consumers with a notice of 
their right to opt out of the payment of overdrafts at ATMs and for 
one-time debit transactions, and a reasonable opportunity to opt out, 
before assessing any overdraft fee. These institutions would also be 
required to provide notice of the opt-out right subsequent to any 
overdraft fee assessment, whether on the consumer's periodic statement 
or on a notice provided promptly after the occurrence of the overdraft. 
Under the alternative proposed approach, account-holding institutions 
would be required to obtain affirmative consent to the institution's 
overdraft service before assessing overdraft fees for ATM withdrawals 
and one-time debit card transactions. According to the FDIC's Study of 
Bank Overdraft Programs, 75.1 percent of banks with an automated 
overdraft program currently provide some form of an opt-out right to 
consumers, and 11.1 percent provide an opt-in right.\42\ Thus, 
institutions that already have an opt-out or an opt-in process in place 
would have to reprogram their systems to provide the notices required 
by the proposal. Institutions would also have to reprogram their 
systems to differentiate between overdrafts for different transaction 
types. As some industry commenters noted, some systems are not 
currently set up to pay overdrafts for certain transaction types (e.g., 
checks and ACH), but not others (e.g., ATM and one-time debit card 
transactions).
---------------------------------------------------------------------------

    \42\ See FDIC Study at 27.
---------------------------------------------------------------------------

    The Board is aware that some small institutions do not pay 
overdrafts at ATMs or for one-time debit card transactions.\43\ These 
institutions would not be subject to the proposed opt-out (or opt-in) 
requirements. With respect to the opt-out approach, the Board believes 
that many institutions are already providing customers a method to opt 
out of their overdraft service, or an affirmative opt-in. These 
institutions would need to conform their opt-out (or

[[Page 5232]]

opt-in) procedures to the proposal. Also, those institutions that 
currently provide a form of opt-out or opt-in notice would need to 
review and revise this disclosure. Further, the Board believes that 
many institutions currently notify consumers who have incurred 
overdrafts promptly following an overdraft. Under the proposed opt-out 
approach, these institutions may need to review and perhaps revise this 
notification to add the opt-out notice.
---------------------------------------------------------------------------

    \43\ See FDIC Study at 10 (reporting that 81 percent of 
institutions surveyed provide overdraft services for ATM and POS/
debit card transactions).
---------------------------------------------------------------------------

    In addition, financial institutions would be prohibited from 
assessing a fee or charge for certain debit card transactions that 
overdraw the consumer's account if the overdraft would not have 
occurred but for a hold placed on funds in the consumer's account in 
excess of the actual transaction, unless they have adopted procedures 
designed to release the hold within a reasonable period of time. A safe 
harbor is provided if an institution has adopted procedures to release 
the hold within two hours after the institution authorized the 
transaction. The Board believes the proposed safe harbor will 
significantly decrease the burden of compliance with the rule.
    3. Other federal rules. The Board has not identified any federal 
rules that duplicate, overlap, or conflict with the proposed revisions 
to Regulation E.
    4. Significant alternatives to the proposed revisions. The Board 
solicits comment on any significant alternatives that would reduce 
regulatory burden associated with this proposed rule on small entities.

VII. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR Part 1320 Appendix A.1), the Board reviewed the rule 
under the authority delegated to the Board by the Office of Management 
and Budget (OMB). The collection of information that is subject to the 
PRA by this proposed rule is found in 12 CFR part 205. The Federal 
Reserve may not conduct or sponsor, and an organization is not required 
to respond to, this information collection unless the information 
collection displays a currently valid OMB control number. The OMB 
control number is 7100-0200.
    This information collection is required to provide benefits for 
consumers and is mandatory (15 U.S.C. 1693 et seq.). Since the Board 
does not collect any information, no issue of confidentiality arises. 
The respondents/recordkeepers are for-profit financial institutions, 
including small businesses. Institutions are required to retain records 
for 24 months, but this regulation does not specify types of records 
that must be retained.
    The EFTA and Regulation E are designed to ensure adequate 
disclosure of basic terms, costs, and rights relating to electronic 
fund transfer (EFT) services debiting or crediting a consumer's 
account. The disclosures required by the EFTA and Regulation E are 
triggered by certain specified events. The disclosures inform consumers 
about the terms of the electronic fund transfer service, activity on 
the account, potential liability for unauthorized transfers, and the 
process for resolving errors. To ease institutions' burden and cost of 
complying with the disclosure requirements of Regulation E 
(particularly for small entities), the Board publishes model forms and 
disclosure clauses.
    Regulation E applies to all financial institutions, not just state 
member banks (SMBs). In addition, certain provisions in Regulation E 
apply to entities that are not financial institutions, including those 
that act as service providers or ATM operators, as well as merchants 
and other payees that engage in electronic check conversion 
transactions, the electronic collection of returned item fees, or 
preauthorized transfers. The Federal Reserve accounts for the paperwork 
burden associated with Regulation E only for the financial institutions 
it supervises \44\ and that meet the criteria set forth in the 
regulation. Other federal agencies account for the paperwork burden 
imposed on the entities for which they have regulatory enforcement 
authority.
---------------------------------------------------------------------------

    \44\ State member banks, branches and agencies of foreign banks 
(other than Federal branches, Federal agencies, and insured state 
branches of foreign banks), commercial lending companies owned or 
controlled by foreign banks, and Edge and agreement corporations, 
organizations operating under section 25 or 25(a) of the Federal 
Reserve Act.
---------------------------------------------------------------------------

    As mentioned in the SUPPLEMENTARY INFORMATION above, under 
Alternative 1, the proposed rule (Sec.  205.17) would prohibit account-
holding financial institutions from assessing a fee or charge for 
paying ATM withdrawals and one-time debit card transactions pursuant to 
the institution's overdraft service, unless the consumer is given the 
right to opt out of the service, and the consumer does not opt out. 
Alternative 1 would also require these institutions to provide notice 
of the opt-out right subsequent to any overdraft fee assessment, 
whether on the consumer's periodic statement or on a notice provided 
promptly after the occurrence of the overdraft. The proposal also sets 
forth an alternative approach, Alternative 2, that would require that a 
consumer affirmatively consent, or opt-in, to the institution's 
overdraft service before overdraft fees could be assessed for these 
transactions.
    Under alternative 1 the Federal Reserve estimates that, to comply 
with the proposed opt-out notice requirement, 1,205 respondents 
regulated by the Federal Reserve would take, on average, 16 hours (two 
business days) to revise and update initial disclosures (Sec.  
205.7(b)) for new customers and that 327 respondents \45\ regulated by 
the Federal Reserve would take, on average, 16 hours (two business 
days) to revise and update periodic statements (Sec.  205.9(b)) for 
existing customers.
---------------------------------------------------------------------------

    \45\ To avoid double counting and to be consistent with the 
current burden associated with periodic statements, burden for the 
878 state member banks will be taken under Regulation DD.
---------------------------------------------------------------------------

    The Federal Reserve estimates the total annual one-time burden for 
respondents to be 24,512 hours and believes that, on a continuing 
basis, there would be no additional increase in burden as the 
disclosures would be sufficiently accounted for once incorporated into 
the current initial account disclosure (Sec.  205.7(b)) and periodic 
statements (Sec.  205.9(b)). This would increase the total annual 
burden to 84,414 hours for Federal Reserve-regulated financial 
institutions that are required to comply with Regulation E. To ease the 
burden of compliance model forms that institutions may use are 
available in Appendix A (See proposed Model Forms A-9(A) and A-9(B)).
    Under alternative 2 the Federal Reserve estimates that, to comply 
with the proposed opt-in notice requirement, 1,205 respondents 
regulated by the Federal Reserve would again take, on average, 16 hours 
(two business days) to revise and update initial disclosures (Sec.  
205.7(b)) for new customers. The Federal Reserve estimates that 1,205 
respondents regulated by the Federal Reserve would take, on average, 16 
hours (two business days) to prepare and send new opt-in notices for 
existing customers.
    The Federal Reserve estimates the total annual one-time burden for 
respondents to be 38,560 hours and believes that, on a continuing 
basis, there would be no additional increase in burden as the 
disclosure would be sufficiently accounted for once incorporated into 
the current initial account disclosure (Sec.  205.7(b)). This would 
increase the total annual burden to 98,462 hours for Federal Reserve-
regulated financial institutions that are required to comply with 
Regulation E. To ease the burden of compliance a

[[Page 5233]]

model form that institutions may use is available in Appendix A (See 
proposed Model Forms A-9).
    The Federal Reserve estimates that on average 5,136,693 consumers 
would spend as much as 5 minutes reviewing and responding to an opt-in 
or opt-out notice. This would increase the total annual burden for this 
information collection by 428,058 hours.
    Overall, the burden could increase, depending on the alternative 
implemented, between 452,570 hours for alternative 1 and 466,618 hours 
for alternative 2 (for 512,472 hours or 526,520 hours total, 
respectively).
    The other federal financial agencies are responsible for estimating 
and reporting to OMB the total paperwork burden for the institutions 
for which they have administrative enforcement authority. They may, but 
are not required to, use the Federal Reserve's burden estimation 
methodology. Using the Federal Reserve's method, the total estimated 
annual burden for all financial institutions subject to Regulation E, 
including Federal Reserve-supervised institutions, would be 
approximately 1,041,011 hours.\46\ The above estimates represent an 
average across all respondents and reflect variations between 
institutions based on their size, complexity, and practices. All 
covered institutions, including depository institutions (of which there 
are approximately 17,200), potentially are affected by this collection 
of information, and thus are respondents for purposes of the PRA.
---------------------------------------------------------------------------

    \46\ This estimate does not include consumer burden.
---------------------------------------------------------------------------

    Comments are invited on: a. whether the proposed collection of 
information is necessary for the proper performance of the Federal 
Reserve's functions including (a) Whether the information has practical 
utility; (b) the accuracy of the Federal Reserve's estimate of the 
burden of the proposed information collection, including the cost of 
compliance; (c) ways to enhance the quality, utility, and clarity of 
the information to be collected; and (d) ways to minimize the burden of 
information collection on respondents, including through the use of 
automated collection techniques or other forms of information 
technology. Comments on the collection of information should be sent to 
Michelle Shore, Federal Reserve Board Clearance Officer, Division of 
Research and Statistics, Mail Stop 151-A, Board of Governors of the 
Federal Reserve System, Washington, DC 20551, with copies of such 
comments sent to the Office of Management and Budget, Paperwork 
Reduction Project (7100-0200), Washington, DC 20503.

Text of Proposed Revisions

    Certain conventions have been used to highlight the proposed 
changes to the text of the regulation and staff commentary. New 
language is shown inside bold-faced arrows, while language that would 
be deleted is set off with bold-faced brackets.

List of Subjects in 12 CFR Part 205

    Consumer protection, Electronic fund transfers, Federal Reserve 
System, Reporting and recordkeeping requirements.

    For the reasons set forth in the preamble, the Board proposes to 
amend 12 CFR part 205 and the Official Staff Commentary, as follows:

PART 205--ELECTRONIC FUND TRANSFERS (REGULATION E)

    1. The authority citation for part 205 continues to read as 
follows:

    Authority: 15 U.S.C. 1693b.

    2. Section 205.12 is amended by revising paragraph (a) to read as 
follows:


Sec.  205.12  Relation to other laws.

    (a) Relation to truth in lending. (1) The Electronic Fund Transfer 
Act and this part govern--
    (i) The addition to an accepted credit card as defined in 
Regulation Z (12 CFR 226.12[lsqbb](a)(2), footnote 21[rsqbb][rtrif], 
comment 12-2[ltrif]), of the capability to initiate electronic fund 
transfers;
    (ii) The issuance of an access device that permits credit 
extensions (under a preexisting agreement between a consumer and a 
financial institution [rtrif] or an overdraft service, as defined in 
Sec.  205.17(a)[ltrif]) only when the consumer's account is overdrawn 
or to maintain a specified minimum balance in the consumer's account; 
[and]
    [rtrif](iii) The addition of an overdraft service, as defined in 
Sec.  205.17(a), to an accepted access device; and[ltrif]
    [lsqbb](iii)[rsqbb][rtrif](iv)[ltrif] A consumer's liability for an 
unauthorized electronic fund transfer and the investigation of errors 
involving an extension of credit that occurs under an agreement between 
the consumer and a financial institution to extend credit [rtrif]or an 
overdraft service, as defined in Sec.  205.17(a),[ltrif] when the 
consumer's account is overdrawn or to maintain a specified minimum 
balance in the consumer's account.
    (2) The Truth in Lending Act and Regulation Z (12 CFR 
[rtrif]part[ltrif] 226), which prohibit the unsolicited issuance of 
credit cards, govern--
    (i) The addition of a credit feature to an accepted access device; 
and
    (ii) Except as provided in paragraph (a)(1)(ii) of this section, 
the issuance of a credit card that is also an access device.
* * * * *
    3. Section 205.17 is added to read as follows:

Alternative 1


[rtrif]Sec.  205.17  Requirements for overdraft services.

    (a) Definition. For purposes of this section, the term ``overdraft 
service'' means a service under which a financial institution assesses 
a fee or charge on a consumer's account held by the institution for 
paying a transaction (including a check or other item) when the 
consumer has insufficient or unavailable funds in the account. The term 
``overdraft service'' does not include any payment of overdrafts 
pursuant to--
    (1) A line of credit subject to the Federal Reserve Board's 
Regulation Z (12 CFR part 226), including transfers from a credit card 
account, home equity line of credit, or overdraft line of credit; or
    (2) A service that transfers funds from another account held 
individually or jointly by a consumer.
    (b) Opt-out requirement. (1) General. Except as provided under 
paragraphs (b)(4) and (b)(5) of this section, a financial institution 
holding a consumer's account shall not assess a fee or charge on a 
consumer's account for paying an ATM withdrawal or a one-time debit 
card transaction pursuant to the institution's overdraft service, 
unless:
    (i) The institution provides notice to the consumer explaining that 
it may pay overdrafts on such transactions pursuant to the 
institution's overdraft service and assess a fee or charge on the 
consumer's account for doing so;
    (ii) The consumer is given a reasonable opportunity to opt out of 
the institution's overdraft service for such transactions; and
    (iii) The consumer has not opted out.
    (2) Conditioning the opt-out. If a consumer opts out of a financial 
institution's overdraft service for ATM withdrawals and one-time debit 
card transactions, the institution [shall not/ may]:
    (i) Condition the consumer's right to opt out of the institution's 
overdraft service for ATM withdrawals and one-time debit card 
transactions on the consumer also opting out of the institution's 
overdraft service with respect to the payment of checks, ACH 
transactions, and other types of transactions; or

[[Page 5234]]

    (ii) Decline to pay checks, ACH transactions, or other types of 
transactions that overdraw the consumer's account because the consumer 
has opted out of the institution's overdraft service for ATM 
withdrawals and one-time debit card transactions.

Alternative A--Paragraph (b)(3)

    (3) Implementation of opt-out. A financial institution shall 
implement the consumer's election to opt out of the institution's 
overdraft service for ATM withdrawals and one-time debit card 
transactions by providing to the consumer an account that has the same 
terms, conditions, and features, including interest rates paid and fees 
assessed, as are provided to consumers who do not opt out, except for 
features that limit the institution's payment of such overdrafts as 
provided in this section.

Alternative B--Paragraph (b)(3)

    (3) Implementation of opt-out. A financial institution shall 
implement the consumer's election to opt out of the institution's 
overdraft service for ATM withdrawals and one-time debit card 
transactions by providing an account on the same or reasonably 
comparable terms. The institution may vary the terms, conditions, and 
features for the account that does not permit the payment of overdrafts 
on ATM withdrawals and one-time debit card transactions, provided that 
the differences in the terms, conditions, or features are not so 
substantial that they would discourage a reasonable consumer from 
exercising his or her right to opt out of the payment of such 
overdrafts.
    (4) Exceptions to the notice and opt-out requirement. The 
requirements of this section do not apply to any financial institution 
that:
    (i) Has a policy and practice of declining to pay any ATM 
withdrawals or one-time debit card transactions for which authorization 
is requested if the institution has a reasonable belief that the 
consumer's account does not have sufficient funds available to cover 
the transaction at the time of the authorization request; or
    (ii) Requires consumers to affirmatively consent to the 
institution's overdraft service for the payment of any ATM withdrawals 
or one-time debit card transactions before the institution assesses any 
fees or charges to the consumer's account for paying such overdrafts.
    (5) Exceptions to the fee prohibition. Notwithstanding a consumer's 
election to opt out, a financial institution may assess a fee or charge 
on a consumer's account for paying an ATM withdrawal or a one-time 
debit card transaction pursuant to the institution's overdraft service 
if:
    (i) The institution has a reasonable belief that there are 
sufficient funds available in the consumer's account at the time the 
institution authorizes the transaction; or
    (ii) In the case of a debit card transaction, the transaction is 
presented for payment by the merchant through paper-based means, rather 
than electronically through a card terminal, and the institution has 
not previously authorized the transaction.
    (c) Timing. The notice described in paragraph (b)(1)(i) of this 
section shall be provided:
    (1) For accounts opened on or after [the effective date of the 
final rule], prior to the financial institution's assessment of any fee 
or charge on the consumer's account for paying an ATM withdrawal or a 
one-time debit card transaction pursuant to the institution's overdraft 
service, so long as the consumer has a reasonable opportunity to 
exercise the opt-out right before the assessment of any such fee or 
charge; and
    (2) For any account for which an opt-out has not been exercised or 
for which a prior opt-out has been revoked, following the assessment of 
any fee or charge assessed on the consumer's account for paying an ATM 
withdrawal or a one-time debit card transaction pursuant to the 
institution's overdraft service:
    (i) On each periodic statement that reflects any such fee or 
charge, in close proximity to the disclosures required to be disclosed 
by 12 CFR 230.11(a); or
    (ii) At least once per statement cycle on any notice sent promptly 
after the institution's payment of an overdraft for an ATM withdrawal 
or a one-time debit card transaction during that statement cycle.
    (d) Content and format. (1) Initial notice. The notice required by 
paragraph (c)(1) of this section shall be substantially similar to 
Model Form A-9(A) set forth in Appendix A of this part, and include all 
applicable items in this paragraph.
    (i) Overdraft policy. A general description of the financial 
institution's overdraft service, and the types of electronic fund 
transfers for which a fee or charge for paying an overdraft may be 
imposed, including ATM withdrawals and one-time debit card 
transactions.
    (ii) Fees imposed. The dollar amount of any fees or charges 
assessed on the consumer's account by the financial institution for 
paying an ATM withdrawal or a one-time debit card transaction, as 
applicable, pursuant to the institution's overdraft service. If the 
amount of the fee is determined on the basis of the number of times the 
consumer has overdrawn the account, the amount of the overdraft, or 
other factors, the institution must disclose the maximum fee that may 
be imposed or provide a range of fees that may be imposed.
    (iii) Limits on fees charged. The maximum amount of overdraft fees 
or charges that may be assessed for transactions per day, or, if 
applicable, that there is no limit to the fees that can be imposed.
    (iv) Disclosure of opt-out right. An explanation of the consumer's 
right to opt out of the financial institution's payment of overdrafts 
for ATM withdrawals and one-time debit card transactions pursuant to 
the institution's overdraft service, including the method(s) by which 
the consumer may exercise that right and how to contact the institution 
for more information.
    (v) Alternative payment options. A statement that the financial 
institution offers other alternatives for the payment of overdrafts, if 
applicable. If the institution offers a line of credit subject to the 
Board's Regulation Z (12 CFR part 226) or a service that transfers 
funds from another account of the consumer (including joint accounts) 
held at the institution to cover the overdraft, the institution shall 
also state that fact and how to obtain more information about these 
alternatives. An institution may, but is not required to, list 
additional alternatives for the payment of overdrafts.
    (2) Subsequent notice. The notice required by paragraph (c)(2) of 
this section shall be substantially similar to either Model Form A-9(A) 
in Appendix A of this part, or Model Form A-9(B) in Appendix A of this 
part.
    (e) Joint relationships. If two or more consumers jointly hold an 
account, the financial institution shall treat an opt-out direction by 
any of the joint consumers as an opt-out for that account.
    (f) Continuing right to opt-out. A consumer may opt out of the 
institution's future payment of overdrafts at any time in the manner 
described in the notice required by paragraph (b)(1)(i) of this 
section.
    (g) Time to comply with opt-out. A financial institution shall 
comply with a consumer's opt-out request as soon as reasonably 
practicable after the institution receives it.
    (h) Duration of opt-out. A consumer's opt-out is effective until 
revoked by the consumer in writing or electronically.

[[Page 5235]]

Alternative 2


[rtrif]Sec.  205.17  Requirements for overdraft services.

    (a) Definition. For purposes of this section, the term ``overdraft 
service'' means a service under which a financial institution assesses 
a fee or charge on a consumer's account held by the institution for 
paying a transaction (including a check or other item) when the 
consumer has insufficient or unavailable funds in the account. The term 
``overdraft service'' does not include any payment of overdrafts 
pursuant to--
    (1) A line of credit subject to the Federal Reserve Board's 
Regulation Z (12 CFR part 226), including transfers from a credit card 
account, home equity line of credit, or overdraft line of credit; or
    (2) A service that transfers funds from another account held 
individually or jointly by a consumer.
    (b) Opt-in requirement. (1) General. Except as provided under 
paragraphs (b)(4) and (b)(5) of this section, a financial institution 
holding a consumer's account shall not assess a fee or charge on a 
consumer's account for paying an ATM withdrawal or a one-time debit 
card transaction pursuant to the institution's overdraft service, 
unless the institution:
    (i) Provides the consumer with a notice explaining the 
institution's overdraft service for such transactions that is 
segregated from everything else, and does not contain any information 
not specified in or otherwise permitted by paragraph (d) of this 
section;
    (ii) Provides a reasonable opportunity for the consumer to 
affirmatively consent, or opt in, to the service for such transactions; 
and
    (iii) Obtains the consumer's affirmative consent, or opt-in, to the 
institution's payment of ATM withdrawals or one-time debit card 
transactions pursuant to the institution's overdraft service, and 
provides the consumer with written confirmation of the consumer's 
consent.
    (2) Conditioning payment of other overdrafts on consumer's 
affirmative consent. A financial institution [shall not/ may]:
    (i) Condition the payment of any overdrafts for checks, ACH 
transactions, and other types of transactions on the consumer also 
affirmatively consenting to the institution's payment of ATM 
withdrawals and one-time debit card transactions pursuant to the 
institution's overdraft service; or
    (ii) Decline to pay checks, ACH transactions, and other types of 
transactions that overdraw the consumer's account because the consumer 
has not affirmatively consented to the institution's overdraft service 
for ATM withdrawals and one-time debit card transactions.

Alternative A--Paragraph (b)(3)

    (3) Implementation of opt-in. A financial institution shall provide 
to consumers who do not affirmatively consent to the institution's 
overdraft service for ATM withdrawals and one-time debit card 
transactions an account with the same terms, conditions, and features, 
including interest rates paid and fees assessed, as it provides to 
consumers who affirmatively consent, except for features that limit the 
institution's payment of such overdrafts as provided in this section.

Alternative B--Paragraph (b)(3)

    (3) Implementation of opt-in. A financial institution shall 
implement the consumer's affirmative consent to the institution's 
overdraft service for ATM withdrawals and one-time debit card 
transactions by providing an account on the same or reasonably 
comparable terms. The institution may vary the terms, conditions, and 
features for the account that does not permit the payment of overdrafts 
on ATM withdrawals and one-time debit card transactions, provided that 
the differences in the terms, conditions, or features are not so 
substantial that they would compel a reasonable consumer to 
affirmatively consent to the payment of such overdrafts.
    (4) Exception to the notice and opt-in requirements. The 
requirements of this section do not apply to any financial institution 
that has a policy and practice of declining to pay any ATM withdrawals 
or a one-time debit card transactions for which authorization is 
requested when the institution has a reasonable belief that the 
consumer's account does not have sufficient funds available to cover 
the transaction at the time of the authorization request.
    (5) Exceptions to the fee prohibition. Notwithstanding the absence 
of a consumer's affirmative consent, a financial institution may assess 
a fee or charge on the consumer's account for paying an ATM withdrawal 
or a one-time debit card transaction pursuant to the institution's 
overdraft service if:
    (i) The institution has a reasonable belief that there are 
sufficient funds available in the consumer's account at the time the 
institution authorizes the transaction; or
    (ii) In the case of a debit card transaction, the transaction is 
presented for payment by the merchant through paper-based means, rather 
than electronically through a card terminal, and the institution has 
not previously authorized the transaction.
    (c) Timing. The notice required by paragraph (b)(1)(i) of this 
section shall be provided:
    (1) For accounts opened and for which an overdraft service is 
provided prior to [the effective date of the final rule], at the 
institution's option--
    (i) On or with the first periodic statement sent on or after [the 
effective date of the final rule]; or
    (ii) Following the first assessment on or after [the effective date 
of the final rule] of any fee or charge on the consumer's account for 
paying an ATM withdrawal or a one-time debit card transaction pursuant 
to the institution's overdraft service; or
    (2) For accounts opened on or after [the effective date of the 
final rule], before the financial institution assesses any fee or 
charge on the consumer's account for paying an ATM withdrawal or a one-
time debit card transaction pursuant to the institution's overdraft 
service.
    (d) Content and format. The notice required by paragraph (b)(1)(i) 
of this section shall be substantially similar to Model Form A-9 set 
forth in Appendix A of this part, and include all applicable items in 
this paragraph.
    (1) Overdraft policy. A general description of the financial 
institution's overdraft services and the types of electronic fund 
transfers for which a fee or charge for paying an overdraft may be 
imposed, including ATM withdrawals and one-time debit card 
transactions.
    (2) Fees imposed. The dollar amount of any fees or charges assessed 
on the consumer's account by the financial institution for paying an 
ATM withdrawal or a one-time debit card transaction pursuant to the 
institution's overdraft service. If the amount of the fee is determined 
on the basis of the number of times the consumer has overdrawn the 
account, the amount of the overdraft, or other factors, the institution 
must disclose the maximum fee that may be imposed or provide a range of 
fees that may be imposed.
    (3) Limits on fees charged. The maximum amount of overdraft fees or 
charges that may be assessed per day, or, if applicable, that there is 
no limit to the fees that can be imposed.
    (4) Disclosure of opt-in right. An explanation of the consumer's 
right to affirmatively consent to the financial institution's payment 
of overdrafts for ATM withdrawals and one-time debit card transactions 
pursuant to the institution's overdraft service, including the 
method(s) by which the consumer

[[Page 5236]]

may consent to the service and how to get more information; and
    (5) Alternative payment options. A statement that the financial 
institution offers other alternatives for the payment of overdrafts, if 
applicable. If the institution offers a line of credit subject to the 
Board's Regulation Z (12 CFR part 226) or a service that transfers 
funds from another account of the consumer (individual or joint) held 
at the institution to cover the overdraft, the institution must also 
state that fact and how to obtain more information about these 
alternatives. An institution may, but is not required to, list 
additional alternatives for the payment of overdrafts.
    (e) Joint relationships. If two or more consumers jointly hold an 
account, the financial institution shall treat the affirmative consent 
of any of the joint consumers as affirmative consent for that account.
    (f) Continuing right to opt-in. A consumer may affirmatively 
consent to the financial institution's overdraft service at any time in 
the manner described in the notice required by paragraph (b)(1)(i) of 
this section.
    (g) Time to comply for existing customers. For accounts opened 
prior to [lsqbb]the effective date of the final rule[rsqbb], if a 
consumer has not affirmatively consented to a financial institution's 
overdraft service within 60 days after the institution sends the notice 
required under paragraph (c)(1) of this section, the institution shall 
cease assessing any fees or charges on a consumer's account for paying 
an ATM withdrawal or a one-time debit card transaction pursuant to the 
service.
    (h) Duration of opt-in. A consumer's affirmative consent to the 
institution's overdraft service is effective until revoked by the 
consumer, or until the financial institution decides for any reason to 
terminate the service for the consumer, such as due to the consumer's 
excessive usage of the service.[ltrif]
    4. Section 205.19 is added to read as follows:


[rtrif]Sec.  205.19  Debit holds.

    (a) General rule. A financial institution shall not assess a fee or 
charge for paying an overdraft pursuant to the institution's overdraft 
service, as defined in Sec.  205.17(a), if the overdraft would not have 
occurred but for a hold placed on funds in the consumer's account in 
connection with a debit card transaction if the actual amount of the 
transaction can be determined by the merchant or other payee within a 
short period of time after the financial institution authorizes the 
transaction. A financial institution may, however, assess a fee or 
charge for paying an overdraft for a debit card transaction incurred in 
connection with a hold placed on funds for that transaction if the 
amount of the hold is less than or equal to the actual amount of the 
transaction.
    (b) Safe harbor. Notwithstanding paragraph (a) of this section, a 
financial institution may assess an overdraft fee if the institution 
has procedures and practices in place designed to release a debit hold 
subject to this section within a reasonable period of time. An 
institution is deemed to have procedures and practices designed to 
release the hold within a reasonable period of time if the institution 
releases the hold within two hours of the institution's authorization 
of the transaction.[ltrif]
    5. In Appendix A to Part 205, Appendix A-9 Model Forms for 
Overdraft Services (Sec.  205.17) is added to read as follows:

Appendix a to Part 205--Model Disclosure Clauses and Forms

* * * * *
BILLING CODE 6210-01-P

[[Page 5237]]

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[[Page 5238]]


[GRAPHIC] [TIFF OMITTED] TP29JA09.024

BILLING CODE 6210-01-C
    6. In Supplement I to part 205,
    a. Under Section 205.12 Relation to other laws, under 12(a) 
Relation to truth in lending, paragraph 2. is revised, and paragraph 3. 
is added.
    b. Section 205.17--Requirements for Overdraft Services is added.
    c. Section 205.19--Debit Holds is added.

Supplement I to Part 205--Official Staff Interpretations

* * * * *
Section 205.12--Relation to Other Laws

12(a) Relation to Truth in Lending

* * * * *
    2. Issuance rules. For access devices that also constitute credit 
cards, the issuance rules of Regulation E apply if the only credit 
feature is a preexisting credit line attached to the asset account to 
cover overdrafts (or to maintain a specified minimum balance) [rtrif]or 
an overdraft service, as defined in Sec.  205.17(a)[ltrif]. Regulation 
Z (12 CFR [rtrif]part[ltrif] 226) rules apply if there is another type 
of credit feature, for example, one permitting direct extensions of 
credit that do not involve the asset account.
    [rtrif]3. Overdraft service. The addition of an overdraft service, 
as that term is defined in Sec.  205.17(a), to an accepted access 
device does not constitute the addition of a credit feature subject to 
Regulation Z. Instead, the provisions of Regulation E apply, including 
the liability limitations (Sec.  205.6) and the requirement to provide 
consumers an opportunity to opt out of the service before any fees or 
charges for paying an overdraft may be assessed to the account (Sec.  
205.17).[ltrif]
* * * * *
[rtrif]Section 205.17--Requirements for Overdraft Services

Alternative 1

17(b) Opt-Out Requirement

    1. Effect of opt-Out. A consumer's election to opt out of a 
financial institution's overdraft service does not prohibit the 
institution from paying overdrafts for ATM withdrawals and one-time 
debit card transactions. If the institution pays such an overdraft, 
however, it may not impose a fee or charge for doing so if the consumer 
has opted out, except as permitted under the exceptions set forth in 
Sec.  205.17(b)(5). These provisions do not limit the

[[Page 5239]]

institution's ability to debit the consumer's account for the amount of 
the overdraft if permitted to do so under applicable law.
    2. Examples of reasonable opportunity to opt out. A financial 
institution gives a consumer a reasonable opportunity to opt out if:
    i. By mail. The institution provides a form for the consumer to 
fill out and mailto opt out. The consumer is given 30 days from the 
date the consumer is provided the initial opt-Out notice to opt out 
before an overdraft fee or charge is assessed to the consumer's 
account.
    ii. By telephone. The institution provides a toll-free telephone 
number that consumers may call to opt out. The consumer is given 30 
days from the date the consumer is provided the initial opt-out notice 
to opt out before an overdraft fee or charge is assessed to the 
consumer's account.
    iii. By electronic means. The institution provides an electronic 
means to opt out, such as a form that can be accessed and processed at 
an Internet Web site, provided that the institution directs the 
consumer to the specific Web site address where the form is located, 
rather than solely referring to the institution's home page. The 
consumer is given 30 days from the date the consumer is provided the 
initial opt-out notice to opt out before an overdraft fee or charge is 
assessed to the consumer's account.
    iv. At the time of account-opening. The institution provides the 
opt-out notice prior to or at account-opening and requires the consumer 
to decide whether to opt out of the institution's payment of ATM 
withdrawals and one-time debit card transactions pursuant to the 
institution's overdraft service as a necessary step to opening the 
account.
Paragraph 17(b)(3)--Implementation of Opt-out

Alternative B Only

    1. Example of impermissible variation in account terms. A financial 
institution may not vary the terms, conditions, or features of an 
account that does not permit the payment of overdrafts for ATM 
withdrawals and one-time debit card transactions such that the 
differences in the terms, conditions, or features are so substantial 
that they would discourage a reasonable consumer from opting out of the 
institution's overdraft service. For example, an institution may not 
decline to provide ATM and debit card services altogether because the 
consumer has opted out of the institution's overdraft service for ATM 
and one-time debit card transactions.
Paragraph 17(b)(4)--Exceptions to the Notice and Opt-out Requirement
    1. Compliance. A financial institution that qualifies for either of 
the exceptions in Sec.  205.17(b)(4) is not subject to the requirements 
to provide a consumer notice and a reasonable opportunity to opt out of 
the institution's payment of overdrafts for ATM withdrawals and one-
time debit card transactions.
    2. Opt-in. A financial institution that requires the consumer's 
affirmative consent before paying overdrafts on the consumer's behalf 
need not obtain the consumer's affirmative consent prior to each 
transaction that may cause the consumer to overdraw the account. It is 
sufficient for the institution to require that the consumer 
affirmatively consent to the institution's overdraft service prior to 
the institution's assessment of any fees or charges for paying an 
overdraft.
Paragraph 17(b)(5)--Exceptions to the Fee Prohibition
    1. Examples of transactions authorized on an institution's 
reasonable belief.
    i. Balances not updated in real-time. A consumer has opted out of a 
financial institution's overdraft service. The financial institution 
uses a daily batch balance method for authorizing transactions, and 
updates the balance used for authorization at the end of the processing 
day. The consumer has $100 in her deposit account after the institution 
has finished processing transactions at the end of the day. The next 
day, the consumer makes two $40 debit card purchases followed by a $25 
debit card purchase. Because the institution does not update the 
authorization balance during the day, each transaction, including the 
$25 debit card purchase, is authorized by the institution based on the 
same $100 balance that was calculated at the end of the prior day's 
processing. Under these circumstances, the institution may assess a fee 
for paying or honoring the $25 debit card purchase because the 
institution authorized the transaction on the reasonable belief that 
the consumer had sufficient funds available in her account to cover the 
transaction.
    ii. Returned deposit. A consumer has opted out of a financial 
institution's overdraft service. The consumer has $30 in his deposit 
account and deposits a $100 check. The institution provides immediate 
availability to the consumer for the deposited funds. Subsequently, the 
consumer makes a $75 debit card purchase which is authorized by the 
institution based on a balance of $130. The $100 check is later 
returned on insufficient funds. Under these circumstances, the 
institution may assess a fee for paying or honoring the $75 debit card 
transaction because the institution authorized the transaction on the 
reasonable belief that the consumer had sufficient funds available in 
his account to cover the transaction.
    iii. Settlement amount exceeds authorization amount. A consumer has 
opted out of an institution's overdraft service. The consumer has $30 
in her deposit account and uses a debit card to purchase fuel. Before 
permitting the consumer to use the fuel pump, the merchant verifies the 
validity of the card by requesting a pre-authorization hold from the 
institution for $1. The institution does not increase the amount of the 
hold. The consumer purchases $50 of fuel. If the institution pays or 
honors the transaction, it may assess an overdraft fee because the 
actual amount of the transaction exceeds the amount requested for 
authorization and causes the consumer to overdraw her account.
    iv. Intervening transactions between authorization and settlement 
of a ``force pay'' debit card transaction. A consumer has opted out of 
a financial institution's overdraft service. The consumer has $100 in 
his deposit account and uses his debit card to make a $50 purchase at a 
store, and the institution authorizes the transaction. Before the 
transaction is presented for settlement, however, checks written by the 
consumer totaling $75 are posted to the consumer's account. Under these 
circumstances, and assuming no intervening deposits are made by the 
consumer, the institution may assess a fee or charge for paying or 
honoring an overdraft when the $50 is presented for settlement because 
the institution authorized that transaction on the reasonable belief 
that the consumer had sufficient funds available in his account to 
cover the transaction.
    2. Examples of transactions not submitted for authorization. The 
exception under Sec.  205.17(b)(5)(i) permitting an overdraft fee to be 
charged to a consumer's account when a financial institution has a 
reasonable belief that the consumer has sufficient funds available for 
the requested transaction does not apply where the transaction is not 
submitted to the institution for authorization. Under these 
circumstances, the general rule in Sec.  205.17(b)(1) prohibits the 
institution from assessing a fee on the consumer's account for paying 
or honoring an ATM withdrawal or one-time debit card transaction that 
overdraws the consumer's account if the consumer has opted out of the 
institution's overdraft service. If otherwise permitted under

[[Page 5240]]

applicable law, the institution may debit the consumer's account for 
the amount of the overdraft.
    i. Small-dollar transactions not submitted for authorization. A 
consumer has opted out of a financial institution's overdraft service. 
The consumer purchases a $3 cup of coffee using his debit card. Because 
of the small dollar amount of the transaction, the merchant does not 
submit the transaction to the consumer's financial institution for 
authorization. At the time of the transaction, the consumer's account 
does not have sufficient available funds to cover the transaction. The 
institution may not assess an overdraft fee to the consumer's account 
for paying or honoring the debit card transaction. If otherwise 
permitted under applicable law, the institution may debit the 
consumer's account for the amount of the overdraft.
    ii. Stand-in processing. A consumer has opted out of a financial 
institution's overdraft service. The consumer withdraws $20 from an 
ATM. At the time the consumer initiates the withdrawal request, the 
card network is temporarily unavailable and the request is not 
submitted to the institution for authorization. Instead, the consumer's 
financial institution uses a ``stand-in'' processor to authorize 
transactions based on the institution's pre-determined amount, rather 
than the consumer's account balance. The consumer's account does not 
have sufficient available funds at settlement to cover the transaction. 
The institution may not assess an overdraft fee to the consumer's 
account for paying or honoring the debit card transaction. If otherwise 
permitted under applicable law, the institution may debit the 
consumer's account for the amount of the overdraft.
    3. Example of a transaction presented by paper-based means. A 
consumer has opted out of a financial institution's overdraft service. 
The consumer has $50 in her deposit account and presents her debit card 
to make a $60 purchase. At that time, the merchant takes an imprint of 
the card but does not submit the transaction for authorization. Later 
that day, the merchant submits a sales slip with the card imprint to 
its processor for payment. If the transaction overdraws the consumer's 
account and the consumer's institution pays the transaction, the 
institution may assess a fee or charge for paying or honoring the 
overdraft.

17(c) Timing

Paragraph 17(c)(1)
    1. Existing customers. The requirement to provide notice before 
overdraft fees are assessed for payment of an ATM withdrawal or one-
time debit card transaction pursuant to a financial institution's 
overdraft service is applicable only to accounts opened on or after 
[lsqbb]the effective date of the final rule[rsqbb]. However, the 
requirement to provide notice of the opt-out right following the 
institution's assessment of a fee or charge for paying an ATM 
withdrawal or a one-time debit card transaction pursuant to the 
institution's overdraft service applies on or after [the effective date 
of the final rule], unless the consumer has previously opted out and 
the consumer has not revoked the opt-out.

17(d) Content and Format

Paragraph 17(d)(1)--Initial Notice
    1. Range of fees. If the amount of a fee will vary from transaction 
to transaction, the financial institution may indicate that the 
consumer may be assessed a fee ``up to'' the maximum fee or provide the 
range of fees.
    2. Additional opt-out notice content. Section 205.17(b)(1) requires 
an opt-out notice that is substantially similar to Model Forms A-9(A) 
and A-9(B). A financial institution, may, however, briefly describe in 
its notice the consequences of the consumer's election to opt out of 
the institution's payment of overdrafts. For example, the institution 
may state that if a consumer opts out of the institution's overdraft 
service for ATM withdrawals and one-time debit card transactions, the 
institution may decline such transactions if the consumer's account 
does not have sufficient funds. An institution may also include 
language describing other types of transactions that are not subject to 
the opt-out right or indicating that the institution pays overdrafts at 
its discretion.

17(g) Time to Comply With Opt-Out

    1. Fees or charges assessed prior to implementing opt-out. Section 
205.17(g) provides that a consumer may opt out of a financial 
institution's future payment of overdrafts at any time. If a consumer, 
who has not initially opted out, later elects to exercise his or her 
opt-out right, this provision does not require the institution to waive 
or reverse any overdraft fees or charges assessed to the consumer's 
account prior to the institution's implementation of the consumer's 
opt-out request.

Alternative 2

17(b) Opt-In Requirement

    1. No affirmative consent. A financial institution may pay 
overdrafts for ATM withdrawals and one-time debit card transactions 
even if a consumer has not affirmatively consented or opted in to the 
institution's overdraft service. If the institution pays such an 
overdraft, however, it may not impose a fee or charge for doing so 
without the consumer's affirmative consent, except as permitted under 
the exceptions set forth in Sec.  205.17(b)(5). These provisions do not 
limit the institution's ability to debit the consumer's account for the 
amount of the overdraft if the institution is permitted to do so under 
applicable law.
    2. Overdraft transactions not required to be paid or honored. 
Section 205.17 does not require a financial institution to pay or honor 
an overdraft on an ATM withdrawal or a one-time debit card transaction 
even if the consumer has affirmatively consented to an institution's 
overdraft service for such transactions.
    3. Examples of reasonable opportunity to provide affirmative 
consent. A financial institution provides a reasonable opportunity for 
the consumer to affirmatively consent to the institution's overdraft 
service if--
    i. By mail. The institution provides a form for the consumer to 
fill out and mail to affirmatively request the service.
    ii. By telephone. The institution provides a toll-free telephone 
number that consumers may call to provide affirmative consent.
    iii. By electronic means. The institution provides an electronic 
means for the consumer to affirmatively consent, such as a form that 
can be accessed and processed at an Internet Web site, provided that 
the institution directs the consumer to the specific Web site address 
where the form is located, rather than solely referring to the 
institution's home page.
    4. Implementing opt-in at account-opening. A financial institution 
may provide a notice regarding the institution's overdraft service 
prior to or at account-opening and, as a necessary step to opening an 
account, require a consumer to choose whether to opt in to the payment 
of ATM withdrawals or one-time debit card transactions pursuant to the 
institution's overdraft service. For example, the institution could 
require the consumer at account opening to choose between an account 
that does not permit the payment of ATM withdrawals or one-time debit 
card transactions pursuant to the institution's overdraft service or an

[[Page 5241]]

account that permits the payment of such overdrafts.
Paragraph 17(b)(3)--Implementation of Opt-In

Alternative B Only

    1. Example of impermissible variation in account terms. A financial 
institution may not vary the terms, conditions, or features of an 
account that does not permit the payment of overdrafts for ATM 
withdrawals and one-time debit card transactions such that the 
differences in the terms, conditions, or features are so substantial 
that they would compel a reasonable consumer to opt in to the 
institution's overdraft service. For example, an institution may not 
decline to provide ATM and debit card services altogether unless the 
consumer affirmatively consents to the institution's overdraft service 
for ATM withdrawals and one-time debit card transactions.
Paragraph 17(b)(5)--Exceptions to the Fee Prohibition
    1. Examples of transactions authorized on an institution's 
reasonable belief.
    i. Balances not updated in real-time. A consumer has not 
affirmatively consented to a financial institution's overdraft service. 
A financial institution uses a daily batch balance method for 
authorizing transactions, and updates the balance used for 
authorization at the end of the processing day. The consumer has $100 
in her deposit account after the institution has finished processing 
transactions at the end of the day. The next day, the consumer makes 
two $40 debit card purchases followed by a $25 debit card purchase. 
Because the institution does not update the authorization balance 
during the day, each transaction, including the $25 debit card 
purchase, is authorized by the institution based on the same $100 
balance that was calculated at the end of the prior day's processing. 
Under these circumstances, the institution may assess a fee for paying 
or honoring the $25 debit card purchase because the institution 
authorized the transaction on the reasonable belief that the consumer 
had sufficient funds available in her account to cover the transaction.
    ii. Returned deposit. A consumer has not affirmatively consented to 
a financial institution's overdraft service. The consumer has $30 in 
his deposit account and deposits a $100 check. The institution provides 
immediate availability to the consumer for the deposited funds. 
Subsequently, the consumer makes a $75 debit card purchase which is 
authorized by the institution based on the $130 balance. The $100 check 
is later returned on insufficient funds. Under these circumstances, the 
institution may assess a fee for paying or honoring the $75 debit card 
transaction because the institution authorized the transaction on the 
reasonable belief that the consumer had sufficient funds available in 
his account to cover the transaction.
    iii. Settlement amount exceeds authorization amount. A consumer has 
not affirmatively consented to a financial institution's overdraft 
service. The consumer has $30 in her deposit account and uses a debit 
card to purchase fuel. Before permitting the consumer to use the fuel 
pump, the merchant verifies the validity of the card by requesting a 
pre-authorization hold from the institution for $1. The institution 
does not increase the amount of the hold. The consumer purchases $50 of 
fuel. If the institution pays or honors the transaction, it may assess 
an overdraft fee because the actual amount of the transaction exceeds 
the amount requested for authorization and causes the consumer to 
overdraw her account.
    iv. Intervening transactions between authorization and settlement 
of a ``force pay'' debit card transaction. A consumer has not 
affirmatively consented to a financial institution's overdraft service. 
The consumer has $100 in a deposit account and uses his debit card to 
make a $50 purchase at a store. The institution authorizes the 
transaction. Before the transaction is presented for settlement, 
however, checks written by the consumer totaling $75 are posted to the 
consumer's account. Under these circumstances, and assuming no 
intervening deposits are made by the consumer, the institution may 
assess a fee or charge for paying or honoring an overdraft when the $50 
is presented for settlement because the institution authorized that 
transaction on the reasonable belief that the consumer had sufficient 
funds available in his account to cover the transaction.
    2. Examples of transactions not submitted for authorization. The 
exception under Sec.  205.17(b)(5)(i) permitting an overdraft fee to be 
charged to a consumer's account when a financial institution has a 
reasonable belief that the consumer has sufficient funds available for 
the requested transaction does not apply where the transaction is not 
submitted to the institution for authorization. Under these 
circumstances, the general rule in Sec.  205.17(b)(1) prohibits an 
institution from assessing a fee to the consumer's account for paying 
or honoring an ATM withdrawal or one-time debit card transaction that 
overdraws the consumer's account if the consumer has not affirmatively 
consented to the institution's overdraft service. If otherwise 
permitted under applicable law, the institution may debit the 
consumer's account for the amount of the overdraft.
    i. Small-dollar transactions not submitted for authorization. A 
consumer has not affirmatively consented to a financial institution's 
overdraft service. The consumer purchases a $3 cup of coffee using his 
debit card. Because of the small dollar amount of the transaction, the 
merchant does not submit the transaction to the consumer's financial 
institution for authorization. At the time of the transaction, the 
consumer's account does not have sufficient available funds to cover 
the transaction and the consumer has not affirmatively consented to the 
institution's overdraft service. The institution may not assess an 
overdraft fee to the consumer's account for paying or honoring the 
debit card transaction. If otherwise permitted under applicable law, 
the institution may debit the consumer's account for the amount of the 
overdraft.
    ii. Stand-in processing. A consumer has not affirmatively consented 
to a financial institution's overdraft service. The consumer withdraws 
$20 from an ATM. At the time the consumer initiates the withdrawal 
request, the card network is temporarily unavailable and the request is 
not submitted to the consumer's financial institution for 
authorization. Instead, the institution uses a ``stand-in'' processor 
to authorize transactions based on the institution's pre-determined 
amount, rather than the consumer's account balance. The consumer's 
account does not have sufficient available funds at settlement to cover 
the transaction. The institution may not assess an overdraft fee to the 
consumer's account for paying or honoring the debit card transaction. 
If otherwise permitted under applicable law, the institution may debit 
the consumer's account for the amount of the overdraft.
    3. Example of a transaction presented by paper-based means. A 
consumer has not affirmatively consented to a financial institution's 
overdraft service. The consumer has $50 in her deposit account and 
presents her debit card to make a $60 purchase. At that time, the 
merchant takes an imprint of the card but does not submit the 
transaction for authorization. Later that day, the merchant submits a 
sales slip with the card imprint to its processor for payment. If the 
transaction overdraws the consumer's account and the

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consumer's institution pays the transaction, the institution may assess 
a fee or charge for paying or honoring the overdraft.

17(d) Content and Format

    1. Range of fees. If the amount of a fee may vary from transaction 
to transaction, the financial institution may indicate that the 
consumer may be assessed a fee ``up to'' the maximum fee or provide the 
range of fees.
    2. Additional consent notice content. Section 205.17(d)(1) requires 
an opt-in notice that is substantially similar to Model Form A-9. A 
financial institution may, however, briefly describe in its notice the 
benefits of the institution's payment of ATM withdrawals or debit card 
transactions. For example, the institution may state that if a consumer 
does not affirmatively consent to the institution's overdraft service 
in connection with ATM withdrawals and one-time debit card 
transactions, the institution may decline such transactions if the 
consumer's account does not have sufficient funds. An institution may 
also include language describing other types of transactions that are 
not subject to the opt-in right or indicating that even if the consumer 
affirmatively consents to the overdraft service, the institution pays 
overdrafts at its discretion.[ltrif]
* * * * *
[rtrif]Section 205.19--Debit Holds

19(a) General Rule

    1. Transactions for which the actual transaction amount can be 
determined shortly after authorization. Examples of transactions 
involving a hold in connection with a debit card transaction for which 
the actual transaction amount can be determined within a short period 
of time after authorization is obtained include:
    i. A fuel purchase at a pay-at-the-pump dispenser.
    ii. The payment of a restaurant bill where an estimated amount is 
added to the amount of the requested authorization to account for 
service tips.
    2. Additional reasons for overdraft. Section 205.19 does not limit 
a financial institution from assessing an overdraft fee or charge for 
paying a particular transaction pursuant to the institution's overdraft 
service if the consumer would have incurred an overdraft for other 
reasons, such as a prior debit card transaction that may have been 
authorized but not yet presented for settlement or if a deposited check 
is returned.
    3. Waiver of overdraft fees caused by debit holds. A financial 
institution does not violate Sec.  205.19 if it promptly waives or 
refunds any overdraft fees or charges assessed to the consumer's 
account caused by a debit hold in excess of the actual amount of the 
transaction. For example, assume that a consumer has $50 in a deposit 
account. An institution does not violate Sec.  205.19 if it assesses an 
overdraft fee on the consumer's account as a result of a $75 hold 
placed in connection with a pay-at-the-pump fuel transaction, but 
promptly waives or refunds the overdraft fee after determining that the 
consumer has only purchased $40 worth of fuel. The institution may not 
require the consumer to provide notice or other information that an 
overdraft fee was caused by a debit hold on funds in the consumer's 
account before the institution waives or refunds the fee.
    4. Example of prohibition in connection with a debit hold placed 
for same transaction. A consumer has $50 in a deposit account and is 
enrolled in a financial institution's overdraft service. The consumer 
makes a fuel purchase using his debit card. Before permitting the 
consumer to use the fuel pump, the merchant obtains a pre-authorization 
hold for $1 to verify that the consumer's account is valid. The 
institution increases the amount of the hold to $75, or the maximum 
amount it guarantees to the merchant for the authorized transaction 
under card network rules. The $75 hold exceeds the consumer's funds. 
The consumer purchases $20 of fuel. Under these circumstances, the 
financial institution is prohibited from assessing a fee or charge in 
connection with the debit hold because the overdraft would not have 
occurred but for the excess amount of the debit hold. However, if the 
consumer had purchased $60 of fuel, the institution could assess a fee 
or charge for an overdraft because the transaction exceeds the funds in 
the consumer's account.
    5. Example of prohibition in connection with a debit hold placed 
for another transaction. A consumer has $100 in a deposit account and 
is enrolled in a financial institution's overdraft service. The 
consumer makes a fuel purchase using her debit card. Before permitting 
the consumer to use the fuel pump, the merchant obtains a pre-
authorization hold for $1, which the institution increases to $75, or 
the maximum amount it guarantees to the merchant for the authorized 
transaction under card network rules. The consumer purchases $20 of 
fuel, but the transaction is not presented for settlement for two days. 
The next day, the consumer withdraws $75 at an ATM. Under these 
circumstances, Sec.  205.19 prohibits the institution from assessing a 
fee or charge for paying an overdraft with respect to the $75 
withdrawal because the overdraft would not have occurred but for the 
$75 hold.
    6. Example of prohibition when authorization and settlement amounts 
are held for the same transaction. A consumer has $100 in a deposit 
account and is enrolled in a financial institution's overdraft service. 
The consumer makes a $50 fuel purchase using his debit card. Before 
permitting the consumer to use the fuel pump, the merchant obtains a 
pre-authorization hold for $1, which the institution increases to $75, 
or the maximum amount it guarantees to the merchant for the authorized 
transaction. The consumer purchases $50 of fuel. When the merchant 
presents the $50 transaction for settlement, it uses a different 
transaction code to identify the transaction than it had used for the 
pre-authorization, causing both the $75 hold and the $50 purchase 
amount to be temporarily posted to the consumer's account at the same 
time. As a result, the consumer's account becomes overdrawn. Under 
these circumstances, and assuming no other transactions, Sec.  205.19 
prohibits the institution from assessing a fee or charge for paying an 
overdraft because the overdraft would not have occurred but for the $75 
hold.
    7. Example of permissible overdraft fees in connection with a debit 
hold. A consumer has $100 in a deposit account and is enrolled in a 
financial institution's overdraft service. The consumer makes a fuel 
purchase using her debit card. Before permitting the consumer to use 
the fuel pump, the merchant obtains a pre-authorization hold for $1, 
which the institution increases to $75, or the maximum amount it 
guarantees to the merchant for the authorized transaction. The consumer 
purchases $35 of fuel, but the transaction is not presented for 
settlement for two days. The next day, the consumer withdraws $75 at an 
ATM. Notwithstanding the existence of the hold, the consumer's 
financial institution may charge the consumer an overdraft fee for the 
$75 ATM withdrawal because the consumer would have incurred the 
overdraft even if the debit hold had been for the actual amount of the 
fuel purchase.

19(b) Safe Harbor

    1. Example of two-hour safe harbor. A consumer has $100 in his 
deposit account and is enrolled in a financial institution's overdraft 
service. The consumer makes a $35 fuel purchase using his debit card. 
Before permitting the consumer to use the fuel pump, the

[[Page 5243]]

merchant obtains pre-authorization hold for $1, which the institution 
increases to $75, or the maximum amount it guarantees to the merchant 
for the authorized transaction. One hour after the transaction is 
completed, but before the transaction is presented for settlement, the 
consumer withdraws $55 at an ATM. Notwithstanding the existence of the 
debit hold, the consumer's financial institution may charge the 
consumer an overdraft fee for the $55 ATM withdrawal even though the 
overdraft was caused by the hold, because the institution has 
procedures and practices to release the hold within two hours and the 
ATM withdrawal occurred within the two-hour safe harbor period.
    2. Relationship between Sec.  205.17 and Sec.  205.19. If a 
consumer is not enrolled in the institution's overdraft service for ATM 
withdrawals and one-time debit card transactions (because the consumer 
has opted out or not opted in), the institution may not assess any fees 
or charges to the consumer's account for paying a debit card overdraft 
even if the institution is not otherwise prohibited from doing so by 
the debit hold provision in Sec.  205.19. For example, assume a 
consumer has $100 in her deposit account and has opted out of the 
institution's overdraft service. The consumer uses her debit card to 
purchase $30 of fuel at a pay-at-the-pump fuel dispenser. At the time 
of authorization, the financial institution increased the gas station's 
$1 preauthorization hold to $75. One hour after completing the fuel 
purchase, the consumer makes a $60 debit card purchase at a grocery 
store. Notwithstanding the fact that the consumer made the purchase 
within the two-hour safe harbor, the institution would not be permitted 
to assess an overdraft fee because the consumer had opted out of the 
institution's overdraft service.[ltrif]

    By order of the Board of Governors of the Federal Reserve 
System, December 18, 2008.
Jennifer J. Johnson,
Secretary of the Board.
 [FR Doc. E8-31184 Filed 1-28-09; 8:45 am]
BILLING CODE 6210-01-P