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We plan to start offering a bill pay service through a third party vendor. When paying a customer’s bill, the vendor will pay the bill directly (by check) and separately initiate an ACH debit against the customer’s account for the bill amount. If the customer’s account has insufficient funds, we will reject the ACH debit and charge the customer an insufficient funds (NSF) fee. We will not charge any other fees and will not pass on the vendor’s fees to the customer. In the event of a rejected ACH payment, the vendor will attempt to collect the unpaid amount from the customer and will freeze the customer’s other bill payments made through its service for three days. If the bill pay vendor cannot collect from the customer within sixty days, it will collect the unpaid amount directly from our bank, and we will assume the collection efforts. Would this arrangement be considered an overdraft program requiring the customer’s opt-in under Regulation E?

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No, we do not believe this arrangement would be considered an overdraft program, nor does Regulation E require a customer to opt-in before charging an overdraft fee for an ACH transaction.

Regulation E defines “overdraft service” as “a service under which a financial institution assesses a fee or charge . . . for paying a transaction (including a check or other item) when the customer has insufficient or unavailable funds in the account.” We do not believe that this definition encompasses the program you described — your bank’s NSF fee would be charged when rejecting the transaction, not when “paying a transaction.” In addition, Regulation E’s opt-in requirement (which imposes limits on when overdraft fees may be charged) applies only to “ATM or one-time debit card” transactions — it does not apply to ACH, check or other transactions.

However, we recommend carefully reviewing the program’s component that would freeze a customer’s bill payments for three days following a rejected ACH transaction. As you described it to us, this feature could result in bill payments being unfairly rejected, conceivably raising UDAAP concerns. For example, if a customer has insufficient funds for a bill payment, that would result in a three-day freeze for all bill payment transactions, even if the customer were to deposit additional funds into the account on the next day. In such case, the customer’s other bill payments would remain unpaid for that three-day period, potentially causing payment delinquencies and third-party late fees even though there are sufficient funds in the customer’s account.

If your bank moves forward with the program as proposed, we recommend reviewing the 2005 Joint Guidance on Overdraft Protection Programs. While the bill payment program is not an overdraft program, the Joint Guidance contains a number of recommendations that could help to mitigate similar concerns over fairness and disclosures.

For resources related to our guidance, please see:

  • Regulation E, 12 CFR 1005.17(a) (“For purposes of this section, the term ‘overdraft service’ means a service under which a financial institution assesses a fee or charge on a consumer’s account held by the institution for paying a transaction (including a check or other item) when the consumer has insufficient or unavailable funds in the account. . . .”)
  • Regulation E, 12 CFR 1005.17(b) (“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: . . .”)
  • Joint Guidance on Overdraft Protection Programs, 70 Fed. Reg. 9127, 9132 (February 24, 2005), (Best Practices, Marketing and Communications With Consumers: “Avoid promoting poor account management. . . . Train staff to explain program features and other choices. . . . Clearly disclose program fees. . . . Explain impact of transaction clearing policies. . . .”)
  • Joint Guidance on Overdraft Protection Programs, 70 Fed. Reg. 9127, 9132 (February 24, 2005) (Best Practices, Program Features and Operation: “Alert consumers before a transaction triggers any fees. . . . Promptly notify consumers of [program] usage each time used. . . . Monitor [program] usage. . . . ”)