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Highlights of Federal Reserve Board (FRB) Final Rules Regarding Overdraft Services, as amended in Reg. E

Background

Regulation E applies to all financial institutions (FIs), not just state member banks. The final FRB rule provides consumers (Reg. E is not applicable to business customers) a choice regarding payment of overdrafts for ATM and one-time debit card transactions. FIs will have to reprogram their systems to differentiate between overdrafts for different transaction types (i.e. Check payments, ACH transactions and automatic bill payments are not included in the amended overdraft rules): this may force smaller institutions (>$500MM in assets) to altogether eliminate overdraft services due to systems cost. Consumers will also receive clear disclosure of the fees and terms associated with the institution’s overdraft service.

Summary of major changes

i. Opt-In. The final rule requires consumers to opt in, or affirmatively consent, to the FI’s overdraft service for ATM and one-time debit card transactions, before overdraft fees may be assessed on the account. The rule also provides consumers an ongoing right to revoke consent.

ii. Consumers Covered. The opt-in right applies to all consumers, including existing account holders.

iii. Conditioning the Opt-In. The final rule prohibits FIs from tying the payment of overdrafts for checks and other transactions to the consumer opting into the overdraft service for ATM and debit card.

iv. Same Account Terms, Conditions and Features. The final rule requires FIs to provide consumers who do not opt in with the same account terms, conditions and features, including price, as provided to consumers who do opt in.

v. Mandatory Compliance Date. The mandatory compliance date is July 1, 2010 (for new and existing personal customers). For accounts opened prior to July 1, 2010, FIs must assess any OD fees (depending on customer response from notice) as of August 15, 2010.

Comparison between FRB final rules and proposed legislation

|Topic |FRB Overdraft Rule |H.R. 3904 (Maloney)/ |

| | |S. 1799 (Dodd) |

|OD Service Opt-In for Debit*/ATM transactions (proprietary |Yes |Yes |

|and foreign ATMs) | | |

|OD Service Opt-In for Checks, ACH and automatic bill |No |Maloney: Yes |

|payments | | |

| | |Dodd: No |

|Amendment to TILA (Reg. Z) |No |Yes |

|Overdraft Fee as Finance Charge under TILA |No |Yes |

|Safe harbor on OD fee for clients who do not opt in: |(i) At the time FI had a reasonable belief that there were |None |

| |sufficient funds at time of authorization (e.g. ATM | |

| |w/drawal at a bank w/ no real time system batch posted that| |

| |night ) | |

| |(ii) Debit transaction is presented through paper-based | |

| |means | |

|Topic |FRB Overdraft Rule |H.R. 3904 (Maloney)/ |

| | |S. 1799 (Dodd) |

|Debit Holds |The final rule does not include the provision on debit |A depository institution may not charge an |

| |holds. Banks are still allowed to charge an overdraft as a|overdraft fee if the overdraft results solely |

| |result of a debit hold. |from a “debit hold amount” placed on a |

| | |transaction account that exceeds the actual |

| | |dollar amount of the transaction. |

|Account Term Differentiation |(i) FI may not condition payment of any overdrafts on opt |Bank must offer same terms, conditions, or other|

| |in for ATM/debit transactions, or decline to pay check |features (other than overdraft features) |

| |overdrafts if consumer does not opt in to ATM/debit |regardless of whether consumer opts in |

| |transactions. | |

| |(ii) FIs to provide consumers who do not opt in with the | |

| |same account terms, conditions and features, as to | |

| |consumers who opt in. | |

|General Disclosures |Yes, (Description of overdraft policy, fee amounts, any |Yes (Fee limitations, retention of discretion to|

| |maximum fee limitations, explanation of opt-in right, and |pay, information about alternative products, and|

| |information about alternative products). Disclosure not to |information required by regs) |

| |be included in Account Agreement: to be segregated from | |

| |existing DDA required info. | |

|Marketing Disclosures |Not specified |Yes, amount of fee |

|Periodic Statement Disclosures |Yes, included in recent revisions to Regulation DD (total |Yes, periodic and YTD fee totals |

| |dollar amount of overdraft and NSF fees for period and YTD)| |

|Periodic notices of right to opt-in or out |No |Yes |

|Written confirmation of opt in choice |Yes |Yes |

|Notice of Termination of Access to Overdraft Program |No |Yes |

|Overdraft Fee Frequency Limitations |No |Yes (1x/month, 6x/year) |

|Overdraft Fee Amount Limitations |No |“Reasonable and proportional to the cost of |

| | |processing the [overdraft] transaction” |

|OD Fee Increase Moratorium |No |During 1-year period after date of enactment, |

| | |banks may not increase overdraft or NSF fees |

|Exclusion from Balance Information |Recent revisions to Regulation DD provide that if balance |Yes |

| |disclosed through automated system, balance may include | |

| |overdraft availability only if provided with a balance that| |

| |does not include overdraft availability | |

|Changes to Posting Order |No. Posting order falls under OCC issued guidelines, not |Must post transactions in such a manner that the|

| |FRB |consumer does not incur avoidable overdraft fees|

|Effective Date |Regulation DD provisions effective Jan 1, 2010; Reg. E |1 year from date of enactment |

| |provisions effective July 1, 2010. | |

| |For accounts opened prior to July 1, 2010, banks may not | |

| |assess any OD fees (unless customer opts in) as of August | |

| |15, 2010. | |

Q&A (from a review of the Federal Register Notice)

(Q) Can FIs pay the ATM and one-time debit card overdrafts for customers who opt out?

(A) Yes, they can, (e.g. FIs can attach this functionality to high-end checking products, if they so desire), but they cannot charge them a fee. Since this is not a punitive provision against opt-out clients, this type of overdraft pay discrimination does not go against rule iv described on page 1

(Q) Do FIs have to pay all overdrafts generated by clients who opt-in?

(A) No, an opt-in choice by the client does not automatically imply that the bank will have a contractual obligation to pay all overdrafts generated by that client. In fact, FIs have the discretionary right to set up or not overdraft service for customers who opt-in (theoretically they can use any existing OD matrix for clients who opt-in).

(Q) Can FIs enforce sustained overdraft fees (i.e. an additional fee if the account is in negative balance status for x number of days)?

(A) Yes, the FRB did not create any new provisions eliminating sustained overdraft fees, or daily fees as long as these fees are properly disclosed.

(Q) Can FIs charge opt-out clients w/ a “transaction declined” fee?

(A) No, the FRB is very clear in stating that such a fee would go against FTC Act.

(Q) Is there a specific time statute tied to the decision to opt-in when a new account is opened?

(A) None, as discussed by FRB, but obviously no fee can be assessed prior to disclosure. The stand-alone opt-in notice has to be provided in writing (or electronically), and if the bank so desires, it could be done at new account opening. The notice requires a signature or check box (and obviously the answer would have to be imaged and stored somewhere). Joint accounts require a minimum of 1 person to opt-in (or revoke a prior opt-in).

(Q) What are the methods available to consumers to opt in?

(A) There are 4 methods available for consumers to opt in overdraft service for one-time debit card transactions and ATM withdrawals. All methods require the FI to provide to the consumer a copy of the completed opt-in form or to send a letter/ notice to the consumer acknowledging the election to opt in. The notice must include a statement informing the consumer of his right to revoke the opt-in at any time.

i. By mail. FI provides a form for the consumer to fill out and mail to opt in

ii. By telephone. FI provides a telephone line that consumers may call to opt in

iii. By electronic means. FI provides an electronic means for the consumer to opt in (e.g., FI provides a form on its web site: consumer can click on a check box to provide consent and confirm that choice by clicking on a button that affirms the consent.)

iv. In person. FI provides a form for the consumer to complete and present at a branch to opt in. This can occur at account opening (see page 5 in the Appendix for a sample)

(Q) Can an FI internally segment consumers who opt out and offer them different products?

(A) I would advise against that. The FRB does not implicitly say that internal segmentation is a non-compliance issue, but it may portray a discriminatory bias. FIs can create a system flag that would allow them to track the percentage of opt-ins it, but its value would be minimal from a marketing standpoint since consumers who do not opt in cannot be offered different products, pricing etc.

(Q) Can FIs provide different types ATM or debit card according to how clients opt in or not? (e.g., consumers who do not opt would get a PIN-only card, while consumer who opt in would get a debit card with both PIN and signature-debit functionality)

(A) No.

(Q) Are decoupled debit cards excluded from the opt-in rule? What about payroll cards?

(A) Decoupled debit cards are excluded from opt-in provisions, since the payment relies on ACH transactions between card issuer and account holding institution. Payroll card, on the other hand, fall into opt-in rule.

Q) How can FIs differentiate between one-time debit payments from recurring debit payments?

(A) One-time debit transactions are included in opt-in rule while recurring debit transactions are not. Operationally this will be challenging because recurring debit transactions (mobile service provider, for instance) can occur at different dates and have different amounts. FIs and merchants will need to collaborate in creating proper coding for recurring debit transactions (it's in the best interest of biller not to have recurring debits declined due to an opt-out status).

Appendix A - Sample of an Opt-in Consent Form for Overdraft Services

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Appendix B - Summary of Recent Changes to Bank Overdraft Practices (prior to FRB rules finalization)

Bank of America will not charge overdraft fees if the total amount overdrawn in a day is less than $10. The bank is reducing the total number of overdraft fees it can impose in a single day from the current ten to four. As recently as February of this year, however, Bank of America had limited the number of overdrafts to five per day.

Next June, Bank of America will make it easier for customers to opt out of using overdraft service and new customers will not be automatically protected according to OD matrix (they will have to opt-in). Regardless of the recent Reg. E changes, indications are that BofA will keep the announced overdraft set-up for checks, ACH and other recurring transactions.

BB&T is changing its overdraft practices for debit cards and ATM withdrawals starting the first quarter of 2010 (the new provisions allow banks to be compliant prior to July 1, 2010) and will not charge fees for overdrafts totaling $5 or less in a day. The bank, which currently has no limit on the number of fees it charges per day, will limit overdraft fees to four per day. The bank will start alerting ATM users when a withdrawal will overdraw the account. The bank currently permits customers to opt out of overdraft coverage.

Chase announced that, effective Q1 2010, it will give its 25 million current and new accountholders the right to opt in to overdrafts triggered by a debit card, but not for checks and other transfers. Debit card transactions and ATM withdrawals will be posted as they occur, which will result in fewer fees. Chase will not charge its overdraft fee for overdrafts of $5 or less in a day and is reducing the maximum number of overdraft fees from six to three per day. Chase will also start to post DDA transactions in chronological order.

Regions Bank is also setting a $5 total overdraft trigger for charging overdraft fees and limiting the number of overdraft fees per day to four, effective the first quarter of 2010. The bank permits customers to opt out of overdrafts and alerts ATM users that a withdrawal could create an overdraft. Regions Bank waives the first overdraft fee a customer triggers, then charges tiered fees for any subsequent overdrafts.

US Bank’s changes as of the first quarter 2010 include a $10 threshold of total overdrafts per day to trigger an overdraft fee and a three overdraft fees per day limit. Currently, US Bank permits up to six overdraft fees to be charged in one day. US Bank announced it would permit current customers to opt out of using overdraft loans and new customers the ability to opt in having overdrafts paid for a fee. The bank will set an annual unspecified cap on the total amount of overdraft fees that can be assessed on a single account and will evaluate its order of posting payments to accounts.

Wells Fargo/Wachovia customers will not be charged overdraft fees if the total amount overdrawn per day is $5 or less and will limit the total number of overdraft fees per day to four. Wells Fargo and Wachovia customers can opt out overdraft coverage.

TCF will launch in January 2010 a new checking product (Convenience Checking) that will charge a daily fee on any account with a negative balance. The daily fee (its amount is still TBD) is charged until the balance of the account goes positive. The product will also have tier monthly maintenance fees (e.g. depending upon monthly average balance, different monthly fees can be charged to the account. Fee amounts and a balance trigger levels are still TBD).

Convenience Checking will not charge a returned item fee. In addition, it will not be impacted by possible legislative provisions to posting order since the product is set up to charge a fee only when account has a negative balance. The appeal of the product to the consumer is ‘forward knowledge’: when the account balance goes negative, the customer knows in advance how much it will cost him every day.

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