We currently offer ad hoc overdraft protection, but we want to establish a formal overdraft protection program for checking accounts, ACH transactions, and debit transactions. We have not yet established the exact parameters of our program, but we are planning to charge a fee for the service. What notice do we have to provide before rolling out the program? Can the notice be included in a periodic statement? Can we establish criteria that customers must meet in order to qualify for the program, such as that the customer does not have any delinquent loans? Or do we have to offer the program to all customers?

Yes, your bank should provide advance notice and an opportunity to opt in to a new overdraft program. Regulation E requires financial institutions to complete a four-step process before charging a fee for paying an overdraft on an ATM or on a one-time debit card transaction. This process includes providing written notice of the overdraft program and obtaining the consumer’s affirmative consent (the opt-in). Because your bank’s overdraft program will assess a fee when covering ATM and debit overdrafts, you do need to complete this four-step process before beginning the program.

Additionally, Regulation E and Regulation DD require advance notice of changes in account terms that result in increased fees. Regulation E requires 21 days advance notice of changes in account terms, and compliance with Regulation E will be deemed to satisfy Regulation DD’s advance notice requirements. Regulations E and DD both provide that these required change in terms notices may be provided in a periodic statement.

We do think that you can and should establish criteria that customers must meet in order to qualify for overdraft protection. The interagency Joint Guidance on Overdraft Protection Programs states that overdraft programs should have procedures for suspending overdraft services when a customer “no longer meets the eligibility criteria (such as when the account holder has declared bankruptcy or defaulted on another loan at the bank).” As this statement suggests, it is permissible to have qualifying criteria for your overdraft program, including a requirement that the customer not have any delinquent loans. (However, we also should note that the Joint Guidance was published before the adoption of an opt-in requirement in Regulation E, and consequently its section discussing notice requirements for overdraft programs is outdated.)

For resources related to our guidance, please see:

Regulation E, 12 CFR 1005.17(b)(1) (“Except as provided under paragraph (c) of this section, a financial institution holding a consumer’s account shall not assess a fee or charge on a consumer’s account for paying an ATM or one-time debit card transaction pursuant to the institution’s overdraft service, unless the institution: (i) Provides the consumer with a notice in writing, or if the consumer agrees, electronically, segregated from all other information, describing the institution’s overdraft service; (ii) Provides a reasonable opportunity for the consumer to affirmatively consent, or opt in, to the service for ATM and one-time debit card transactions; (iii) Obtains the consumer's affirmative consent, or opt-in, to the institution's payment of ATM or one-time debit card transactions; and (iv) Provides the consumer with confirmation of the consumer's consent in writing, or if the consumer agrees, electronically, which includes a statement informing the consumer of the right to revoke such consent.”)

Regulation E, 12 CFR 1005.8(a)(1) (“A financial institution shall mail or deliver a written notice to the consumer, at least 21 days before the effective date, of any change in a term or condition required to be disclosed under § 1005.7(b) of this part if the change would result in: . . . (i) Increased fees for the consumer.”)

Regulation E, Official Interpretations, 12 CFR 1005, Paragraph 8(a), Comment 1 (“Form of notice. No specific form or wording is required for a change-in-terms notice. The notice may appear on a periodic statement, or may be given by sending a copy of a revised disclosure statement, provided attention is directed to the change (for example, in a cover letter referencing the changed term).”)

Regulation DD, 12 CFR 1030.5(a)(1) (“A depository institution shall give advance notice to affected consumers of any change in a term required to be disclosed under § 1030.4(b) of this part if the change may . . . adversely affect the consumer. The notice shall include the effective date of the change. The notice shall be mailed or delivered at least 30 calendar days before the effective date of the change.”)

Regulation DD, Official Interpretations, 12 CFR 1030, Paragraph 3(c), Comment 1 (“Compliance with Regulation E (12 CFR Part 1005) is deemed to satisfy the disclosure requirements of this part, such as when: (i) An institution changes a term that triggers a notice under Regulation E, and uses the timing and disclosure rules of Regulation E for sending change-in-term notices. . . .”)

Regulation DD, Official Interpretations, 12 CFR 1030, Paragraph 5(a)(1), Comment 1 (“Institutions may provide a change-in-term notice on or with a periodic statement or in another mailing. If an institution provides notice through revised account disclosures, the changed term must be highlighted in some manner. For example, institutions may note that a particular fee has been changed (also specifying the new amount) or use an accompanying letter that refers to the changed term.”)

Joint Guidance on Overdraft Protection Programs, 70 Fed. Reg. 9127, 9129 (February 24, 2005) (“[T]here should be established procedures for the suspension of overdraft services when the account holder no longer meets the eligibility criteria (such as when the account holder has declared bankruptcy or defaulted on another loan at the bank) as well as for when there is a lack of repayment of an overdraft.”)

Joint Guidance on Overdraft Protection Programs, 70 Fed. Reg. 9127, 9129 (February 24, 2005) (“Overdraft protection programs should be administered and adjusted, as needed, to ensure that credit risk remains in line with expectations. This may include, where appropriate, disqualification of a consumer from future overdraft protection. Reports sufficient to enable management to identify, measure, and manage overdraft volume, profitability, and credit performance should be provided to management on a regular basis.”)