Operations Alert

Printer-friendly Version

---

OPERATIONS ALERT: UDAP and regulatory problems with overdraft fees on debit cards in ad hoc programs.
 
Before a fee can be charged to a consumer who overdraws his or her account through a debit or ATM card, the bank must comply with Regulation E by providing a notice to the customer and obtaining an affirmative written consent from the customer as to the imposition of the fee.  This requirement applies to all overdraft programs including both automated and ad hoc ones.  A debit card transaction in an ad hoc environment could create an overdraft due to a “forced pay” resulting from the network rules.  For example, a person pumping gas could swipe their card, be preauthorized for $1, pump $60 worth of gas, and the transaction must pay whether or not the customer actually has the full $60 in their account.  The bank can’t charge a fee for the transaction unless the customer has authorized it in accordance with Reg E.
 
However, the Reg E form potentially misleads the customers into thinking that they are getting overdraft protection when in fact they will have overdrafts covered only when a card use is required to be covered by the depository bank due to the preauthorization system (forced pay).  Thus, the only thing that the customer is opting in to is the right to be charged a fee.  From a UDAP analysis, this situation is unfair and deceptive.
 
Currently, there is no sample notice that would be consistent with the model form but that would not be misleading.  Thus, banks with ad hoc overdraft coverage can either stop charging an NSF fee for debit card usage or convert to automated programs.  Regulators have required banks that have ad hoc programs to refund fees assessed on debit card overdrafts.