Launching the New Overdraft Services Rule within Your Institution A Final Pre-Flight Test
by Lori Moore, Director of Compliance, ATTUS Technologies Inc.

Last November when the Federal Reserve released their final rule on overdraft services under Regulation E, financial institutions had just under eight months to prepare for the changes associated with the rule.  Now, with only two weeks remaining, it is time to take stock of your preparations for the July 1st mandatory compliance date as well as your plans for ongoing adherence to the rule.  As with any compliance change, the final step before launch should be a pre-flight test throughout your institution to ensure that everyone and everything is ready for a smooth take off.

The Four W’s of the New Overdraft Services Rule
As you implement these changes, communicating the four W’s – the why, what, who and when - of the new rule to your employees is critical to their success at carrying out your revised processes and procedures accurately, and ultimately ensuring your institution’s compliance.  Even if you’ve completed rigorous training, one final communication that reminds them of the key details will solidify what they learned and help them to respond appropriately to customer questions about overdraft services as well as customer requests to opt-in or opt-out of those services.

The Why:  According to chairman Ben Bernanke in its original press release about the final rule, the Federal Reserve Board implemented these changes so that “both new and existing account holders will be able to make informed decisions to sign up for overdraft services. ” 

The What:  In order for a financial institution to charge an overdraft fee on an ATM or one-time debit card transaction, the customer must have provided their “affirmative consent,” i.e. their decision to opt-in to overdraft services. A non-response from a customer is considered an opt-out under the rule. When customers do opt-in, the financial institution is required to provide them with written confirmation of their choice to utilize this service.

The Who:  The new rule applies to all consumers, including current customers and any customers acquired after the effective date of the rule.  In the case of jointly held accounts, the consent of one account holder can be accepted as the declaration of opt-in for the entire account.  In addition, the rule requires that financial institutions offer the same account terms, conditions and features to all customers regardless of their opt-in decision.   

The When: The final rule was issued on November 12, 2009 by the Federal Reserve Board with the following mandatory compliance dates: July 1, 2010 for any new accounts opened on or after July 1st and August 15, 2010 for any accounts opened prior to July 1st.  In addition, at any time a customer can revoke their previous opt in selection. There is no limit on how often a customer can opt in and then revoke their opt in status. 

Preparation Phase – November, 2009 through June 2010
There is much debate about the impact of this new rule on financial institutions which makes a coordinated preparation phase that much more important.  If you haven’t already done so, check to make sure you’ve taken the following steps to protect your institution from any negative fallout, including the risk of non-compliance.  

• Assess the impact to your financial institution’s fee income.  During this assessment consider all variables, including the posting priority for your institution and whether chronological, high-to-low or low-to-high posting makes the most sense; the segment of your customer base most likely to incur NSF charges; and even the potential positive impact of a reduction in charge offs related to overdraft services on checking accounts and the corresponding decrease in back office costs.
• Develop and send out the written notice to your customers about your financial institution’s overdraft services on ATM and one-time debit card transactions.  The Federal Reserve Board has developed suggested language in a prototype notice available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20091112a3.pdf.
• Implement appropriate procedures for facilitating customer opt-in requests, including the ability to retain customer consents for proof of compliance.
• Add a step to your new account opening procedures, whether it occurs in the branch, online or over the phone, that explains the details and benefits of your overdraft services and then facilitates the opt-in request if it is chosen.

For instance, it is important to point out to a customer, whose history shows the occasional need for overdraft services on their ATM or one-time debit card transactions, that the choice not to opt-in means that your financial institution may decline to authorize these types of transactions if  inadequate funds are available at the time of the request.  However if a customer chooses to opt-in to the overdraft service, their transactions will be eligible to be covered at your discretion. 

This opt-in choice also effects a customer’s account balance. For those who have opted-in, if ATM and debit card transactions cause the account to go to $0.00 or below, the bank has the authority to add into the account the amount the customer is overdrawn, with the available balance reflecting that addition. For example, if the customer’s account balance is $0 and $300 in bounce protection is added then the available balance may reflect $300. If that same customer has opted-out of the service, their account balance would reflect a $0.00 or negative balance and any subsequent ATM and debit card transactions would be declined. 

Customers will also likely be confused about which types of transactions are included in this new rule. Your employees should be fully versed on what transactions require an opt-in consent for overdraft services and what transactions do not. They can use the following chart as a reminder:

During the initial launch phase, financial institutions have several opportunities to educate their customers:

1. Within your financial institution’s written notice about your overdraft services
2. During an employee-to-customer conversation specifically initiated to obtain an opt-in consent
3. In your written confirmation of the customer’s opt-in consent
4. Anytime an employee has the opportunity to discuss your products and services with a customer

• The level of customer participation in your overdraft services on ATM and one-time debit card transactions
• The segments of your customer base that are participating and/or those that would benefit from participation but are not currently doing so
• The frequency of customers’ switching back and forth (i.e. opting-in and then revoking the opt-in)
• Your ability to cost effectively process opt in requests
• Your ongoing strategy for educating new and existing customers about the pros and cons of your overdraft services

1. Are you prepared to or have you already provided a written notice of your overdraft services on ATM and one-time debit card transactions to your existing customers, as well as added this as a component of your new account opening process?  Note:  If your financial institution has sent out opt-in notices and customers have already told you that they do not want to opt-in, the guidance states that you should go ahead and comply with that request, rather than waiting for the July 1st or August 15th date. 
2. Do you have the appropriate processes in place to obtain customers’ affirmative consents?
3. Are you prepared to provide customers requesting to opt-in to your services with a written confirmation of their consent? 
4. And finally, are your employees and your processes prepared for handling both one-time revocations of consent (where the customer initially opted-in but then revokes and remains so henceforth) or multiple revocations of consent (where the customer opts-in and back out more than once). 

If your institution can confidently answer yes to the questions above than you should be in good shape for compliance on July 1st.  If your financial institution can’t answer yes to one or more of the above questions, then there is no time to waste because the launch date is a go whether you are or not. 

Lori Moore is a Certified Regulatory Compliance Manager. She is currently the director of compliance for ATTUS Technologies Inc., and has more than 25 years of experience in the financial services industry. During her career, she has gained in-depth knowledge and practical experience within all areas of community banking and has served in key positions, including vice president of operations, BSA officer, compliance officer, internal auditor and vice president of risk management. Moore was also designated as the Outstanding Graduate of the Texas Bankers Association Operations School.