Overdraft Protection Services

Issue

Retention of the ability to provide a variety of overdraft accommodation programs to customers who value the benefits of overdraft protection.

Position Statement

ABA supports the ability of banks to provide both credit-based and discretionary overdraft protection services for customers within a rational regulatory scheme that incorporates efforts to inform and educate customers regarding appropriate use of such services and other available alternatives for covering overdraft transactions. Consumers benefit when they are educated as to the characteristics of overdraft accommodation programs and are empowered to choose to participate.

ABA supports the regulatory framework established by the Federal Reserve Board’s 2009 amendments of Regulations E and DD. We believe these rules establish a strong, pro-consumer baseline that preserves and promotes the customer’s ability to make an informed choice when seeking overdraft coverage. We encourage our members to apply sound risk management principles that reinforce the policies of the framework and encourage customers to conduct their account transactions responsibly. 

ABA opposes individual agency efforts to supplement Regulation E with guidance; we believe that any statements of supervisory expectation regarding such an important banking service should apply consistently and fairly across all depository institutions. ABA calls upon policy makers to preserve a regulatory environment that allows banks to evaluate their regulatory obligations and to design overdraft programs that deliver choice to consumers in a transparent, responsible manner. This process will yield a variety of programs designed to address customer needs fairly, disciplined by free choice and healthy competition. It will also encourage the further development of overdraft services as technology and consumer needs change.

Explanation

Banks offer a variety of options to their customers related to overdrafts. Overdrafts may be paid on a discretionary basis (which may rely on an automated, formal program), or through a link to an overdraft line of credit, credit card, or savings account. Banks that pay overdrafts on a discretionary basis do so to accommodate their customers. Customers value the accommodation and benefit by avoiding additional merchant charges for returned checks and the inconvenience and embarrassment of making the payment good or having payment efforts rejected. ABA encourages its members to make it known to their customers that overdraft fees are avoidable by keeping track of transactions, keeping a cushion, or linking to another account. Customers not only have the ability to choose whether to participate in overdraft accommodation programs, but they also have the power to determine whether to take advantage of the protection by monitoring their account balances and pending transactions.

In 2009, the Federal Reserve amended Regulation E to prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions unless a consumer consents, or opts in, to the overdraft service for those types of transactions. Soon after the amendments to Regulation E became effective, interagency discussions to update exam procedures and to supplement the 2005 Interagency Overdraft Guidance were initiated but ultimately abandoned. Thereafter, the OTS, then the FDIC, and finally, the OCC each proposed supplemental “guidance” for the management and oversight of automated overdraft programs.

ABA strongly opposed the issuance of individual agency statements of supervisory guidance and urged the federal banking agencies, including the CFPB, to work through the FFIEC to replace the 2005 Joint Guidance on Overdraft Protection Programs with new interagency guidance that reflects the new rules and addresses supervisory gaps, if and when they become apparent. We believe that any new statements of supervisory expectation must apply consistently and fairly across all depository institutions offering automated overdraft protection. Otherwise, the Federal Reserve’s policy determinations, as reflected in Regulations E and DD, will be eviscerated by individual bank regulatory agencies seeking to demonstrate their independent visions for consumer protection. Ironically, the consumer will lose as a result of this agency one-upmanship as choice will be limited rather than empowered; and simplicity and clarity will be sacrificed to compliance complexity.

 

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​Contact for further information: Virginia O'Neill (202) 663-5073.

 

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