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New Banking Regulation Tightens Overdraft Fee Disclosure Rules

June 23, 2005
New federal rules that become effective July 1 require banks to more clearly disclose the charges they impose for "bounced-check protection" and "courtesy overdraft protection" services.

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The rules adopted by the Board of Governors of the Federal Reserve System require banks to disclose information about overdraft fees on periodic statements and account-opening disclosures, and to include certain disclosures in advertisements for overdraft services. The principal changes made by the amendments include:

However, the new rules apply only to national banks, which tend to be smaller local and regional banks. A recent study by the Consumer Federation of America (CFA) found that 80 percent of the nation's large banks also charge consumers high overdraft fees without their knowledge or consent.

While the new federal rule singles out smaller banks that promote "courtesy" overdraft loans, the nation's largest banks have also included identical provisions in their checking accounts but do not advertise them, the CFA said.

Meanwhile, the acting Comptroller of the Currency, Julie L. Williams, testified before a Congressional committee that efforts to streamline massive consumer disclosure requirements present an opportunity both to reduce the "regulatory burden" on banks and improve the quality of information provided to consumers.

“Today our system imposes massive disclosure requirements -- and massive costs -- on financial institutions,” Ms. Williams said. “But do these requirements effectively inform consumers?”

Williams, who is responsible for supervising national banks, said her agency has "broken new ground" by employing consumer testing as part of its effort to simplify privacy notices.

Details of the new disclosure rule:

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Previous rules "advertisement" in a manner that generally excluded communications with existing customers about existing accounts. The new rule expands this definition, in certain cases, to include communications with existing customers.

Under the new rule, "advertisements" include communications that are misleading or inaccurate, or misrepresent the deposit contract. Second, "advertisements" include any communications about overdraft services.

Advertisements that promote the payment of overdrafts must include certain disclosures about the service. In particular, banks must clearly and conspicuously disclose:

• the applicable fees for the payment of overdrafts,
• the categories of transactions for which an overdraft fee may be imposed,
• the time period consumers have to repay or cover an overdraft, and
• the circumstances under which the bank will not pay an overdraft.

However, banks do not need to provide these additional disclosures, in certain educational materials; on an ATM receipt; on television, radio, or billboard advertisements; or in response to a consumer-initiated inquiry.

Periodic Statement Disclosures

Banking regulations generally require that if an institution mails or delivers a periodic statement, the institution must disclose fees imposed in connection with the account during the statement period.

Under the new rule, if a bank promotes the payment of overdrafts in an advertisement, the bank must separately disclose on each periodic statement the total dollar amount of fees imposed:

• On the deposit account for paying overdrafts and
• For returning items unpaid.

These disclosures must be provided both for the statement period and for the calendar year to date. Banks that do not promote the payment of overdraft services would not be required to provide the new periodic statement disclosures.

Account Opening Disclosures

Banking regulations generally require that banks disclose the amount of any fee that may be imposed in connection with the account and the conditions under which a fee may be imposed.

The new rule states that banks must specify the categories of transactions for which an overdraft fee may be imposed. An exhaustive list of such transactions is not required. It is sufficient for an institution to disclose that a fee may be imposed for covering overdrafts "created by check, in-person withdrawal, ATM withdrawal, or other electronic means," as applicable.

Simply disclosing a fee "for overdraft items would not be sufficient." This account-opening disclosure requirement applies to all banks, including those that do not promote overdraft services in an advertisement.

The new rules apply to national banks supervised by the Office of the Comptroller of the Currency.

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