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Overdraft Fees: Regulation E's New Consumer Opt-In Requirement and the Ongoing Litigation Threat

April 9, 2010

There are signs that a new rash of class action suits regarding the imposition of overdraft fees may be in the offing. Plaintiffs have now filed a number of suits alleging that banks manipulated the debiting of advances that caused overdrafts in order to increase the amount of overdraft and over-the-limit fees that they could impose. The Regulation E amendments (discussed below), which require consumer consent to overdraft services, will not necessarily protect financial institutions from allegations that the processing of overdrafts were manipulated to create greater revenue.

In the lawsuits that have been filed, it is the manner and order in which the debiting and crediting process is applied that have been called into question, more than the institution's right to charge the overdraft fees. Plaintiffs argue that processing large debits before smaller ones, thereby causing an increase in the number of overdraft fees that are imposed, constitutes an unfair and deceptive practice; particularly if the smaller debits that could have been covered by available funds were made by the consumer prior to the larger one. Moreover, plaintiffs argue that the bank's agreement with the customer inadequately addresses the overdraft protection or fails to clearly set forth the bank's overdraft procedures and fees.

The Federal Reserve Board's final rule on overdraft fees contained in amendments to Regulation E was issued last November. Under the amendment, which became effective on January 19, 2010, but has a mandatory compliance date of July 1, 2010, new section 205.17 of Regulation E prohibits a financial institution from assessing any fee or charge on a consumer's account for paying an ATM or one-time debit card transaction when the consumer has insufficient or unavailable funds in the account unless the consumer opts into such overdraft service. The amendment requires that the financial institution provide the consumer with a written notice describing the institution's overdraft service and related fees, provides a reasonable opportunity to affirmatively consent to the service for ATM and one-time debit card transactions, obtains the consumer's affirmative consent, and confirms the consumer's consent in writing.

While the new rule will expressly establish whether a customer wants the overdraft protection and is willing to pay the associated fees, financial institutions would be wise to establish procedures as to the order in which debits are posted to their customers' accounts (e.g. in the order in which they come in), whether debits are processed before credits, as well as the timing of debiting overdraft fees to the account. Bank agreements with customers should also be reviewed to determine what rights the bank has in processing debits and overdrafts and should be revised to reflect the bank's actual practices. Any manipulation of the processing of debits and credits or the timing of the imposition of overdraft fees in order to increase bank income should be avoided.

If you have any questions regarding this Consumer Financial Services Alert or the final rule issued by the federal reserve board, you may contact Richard Gottlieb, Leader of the Firm's Financial Industry Group, at 312-627-2196, or Arthur Axelson, the author of this alert and Leader of Dykema's Financial Services Regulatory practice, at 202-906-8607.


As part of our service to you, we regularly compile short reports on new and interesting developments in consumer financial services and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Readers should seek specific legal advice before acting with regard to the subjects mentioned here. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments on this newsletter, or any Dykema publication, are always welcome. © 2010 Dykema Gossett PLLC. 

As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2018 Dykema Gossett PLLC.