Implementation of Reg E Doesn’t Have to Mean an End to Non-Interest Income

John M. Floyd, Chairman and CEO, John M. Floyd & Associates
June 22, 2010 | COMMENTS

When the Federal Reserve took steps to implement the opt-in ruling of Reg E in late 2009, consumer advocates hailed the agency's efforts to strengthen consumer protection by giving account holders the opportunity to make informed decisions about how their electronic transactions are handled. However, financial institutions that relied on overdraft fees for a major portion of their non-interest income worried how the regulation would ultimately affect their bottom line.

With the implementation of the opt-in requirement on July 1 (for new accounts) and August 15 (for existing accounts), credit unions will be prohibited from charging overdraft fees for ATM withdrawals and one-time debit card transactions, unless the member has “opted in” to the service. According to the ruling, this restriction applies to all credit unions that charge any fees for these transactions, whether or not they have formal overdraft programs.

By taking the necessary steps now to educate your members about the opt-in requirement, along with the details and fees associated with your overdraft protection programs, you can actually improve the odds that members who periodically need a financial safety net will opt-in to this coverage. To maintain a compliant opt-in education strategy, member notifications must include the following:

• a brief overdraft program description, that includes the types of transactions for which a fee may be imposed for paying an overdraft;
• the dollar amount of any fees to be assessed, including any daily or other fees, and, if the amount of the fee is determined on the basis of any variables, as well as the maximum fee that may be imposed;
• the maximum number of fees that may be assessed per day, or, if applicable, that there is no such limit;
• an explanation of the member's right to affirmatively consent to the payment of overdrafts for ATM and one-time debit card transactions, including methods that may be used to opt in or opt out at any time; and
• a statement that your institution offers alternative methods of covering overdrafts, such as lines of credit or account transfer services, if applicable.

Also, make sure your member statements correctly reflect the aggregate dollar amount totals for “overdraft fees” and for “returned item fees,” both for the statement period and the calendar year-to-date, per Regulation DD imposed by the Federal Reserve, beginning January 1, 2010.

While credit unions can't expect all members to need or want overdraft protection on an on-going basis, everyone is capable of making a mistake when reconciling his or her electronic transactions. For most account holders, paying a reasonable fee for the peace of mind of knowing that they won't overdraw their account or face the possible embarrassment of having an electronic transaction denied is well worth it.

Don't Risk Having Your Members Caught Unaware

It is interesting to note that the timing of the Sunday, August 15, implementation deadline could have a significant impact on members who, for whatever reason, did not opt in to overdraft coverage. With mid-month paychecks not being credited until Monday morning, they could be inconvenienced if their weekend spending results in ATM and POS transactions being denied.

If you inform your members now about the consequences of not having overdraft protection on electronic transaction overdrafts, you could save them from a long weekend of frustration. Plus, by explaining the benefits of overdraft protection and simplifying the opt-in process to a fully disclosed overdraft solution, you are giving your members the tools they need to make more responsible financial decisions.

While there is, no doubt, wide-spread concern about Reg E having a negative impact on overdraft program participation, some industry experts speculate that as more and more consumers experience the inconvenience of having essential purchase transactions denied, it may actually motivate more interest in this financial safety net. If that is the case, implementation of new requirements could actually mean an eventual increase in non-interest income for credit unions.

Unfortunately, credit unions that don't act now could see an end to much-needed income when members look to competitors to provide them with the safety net they need to maintain financial stability.

One thing we know for sure, the landscape for overdraft programs covering ATM and one-time debit card transactions will change – no matter what type of overdraft solution your institution has implemented. In fact, even if you don't currently offer a formal overdraft program, you will still be affected by the new Reg E guidelines for Force Post or Pre-Authorized debit transactions. And while there are myriad versions of overdraft solutions, regulators will be looking at all of them through the same compliance lens.

In addition, going forward, regulators will have a sharpened focus on making sure there are no preferential treatments or special conditions regarding services provided or denied to account holders who do not opt in to overdraft coverage for electronic transactions. For example, opt in cannot be “required” to have checks, ACH and other types of transactions paid and credit unions cannot decline to pay checks and other transactions just because a member did not opt in for electronic transactions.

To make sure your credit union is compliant with the new regulations, as well as established rules, Interagency Guidance and best practices, it is important to have a business partner who can steer you through the regulatory maze and provide solutions that help to minimize the staff resources you need to implement and manage a compliant overdraft program. When looking for the right solution, make sure the product offers the following:

• a complete Reg E opt-in strategy that is non-discriminatory and guaranteed 100% compliant with all state and federal regulations;
• a simple, straightforward system to monitor overdraft accounts;
• employee training on how to present and discuss the overdraft privilege program with members;
• assistance with all compliance issues, as well as all overdraft privilege policies and procedures;
• a structured process for communicating with overdraft privilege users that ensures program transparency and keeps charge-offs to a minimum;
• an automated collection system which interfaces with the institution's core processing system; and
• a performance-based fee structure.

In today's changing environment, regulations don't lessen the value of a disclosed overdraft program. However, consumers who have never been introduced to the benefits of an overdraft safety net may be hesitant to sign up for something they don't understand.

By taking the time now to educate your members that your overdraft program is a convenient, reasonably priced service that helps them avoid the embarrassment of having an electronic transaction denied; a tool that helps them make informed decisions about their finances; and a service they only pay for when used, you can increase the odds that they will see its value and opt in. When all is said and done, this is a win-win for your members and your credit union.

John M. Floyd & Associates (JMFA) is a profitability and performance improvement consulting firm, serving more than 2,000 financial institutions in all 50 states. To learn more, visit www.jmfa.com or call (800) 809-2307.