On September 17, the CFPB issued a circular highlighting the expectation that banks retain evidence of consumers’ election to participate in overdraft services, and more specifically, overdraft fees, covered by Regulation E.
Under Regulation E, a financial institution must obtain the consumer’s consent, i.e., opt-in, before charging an overdraft fee on an ATM or one-time debit card transaction. In other words, Reg E requires the consumer’s affirmative consent to impose overdraft fees and does not allow passive consent or enrollment by default that would require the consumer to affirmatively opt-out.
The CFPB Circular adds to this requirement by stating that the burden is on the bank to demonstrate that the consumer has opted in. In other words, if the bank does not have evidence of the consumer’s election, the consumer may not be charged overdraft fees. The circular lists three types of evidence that would be considered adequate:
- A signed or initialed paper form
- A recording of a phone call in which the consumer opts into overdraft services
- A secure, unalterable, and dated electronic signature
One item notably absent from this list is a record maintained by bank staff during the normal course of business. In some instances, communications with consumers may be documented in the form of call notes; where an institution has a robust procedure for audit and review to ensure that call notes are reliable and accurate, they may suffice to demonstrate the content of a telephone conversation. It appears, however, that these types of records would not be sufficient to demonstrate consumer opt-in to overdrafts, based on the CFPB’s Circular at least. Banks that do not keep call recordings indefinitely or may not have them adequately linked to the appropriate file will therefore want to obtain wet ink or electronic signatures for overdraft consent.
The circular also mentions the CFPB’s concern regarding UDAAPs in overdraft disclosures. Citing their recent action against TD Bank, the Bureau indicated that inaccurate descriptions of overdraft services may raise UDAAP concerns. The TD Bank settlement focused on whether the consumer was sufficiently informed that overdraft services were optional and that there was a cost associated with the services.
Because regulators have focused heavily on overdraft issues in recent years, banks may want to take a close look at both their overdraft opt-in forms and any scripts or training given to staff that offer overdraft services to consumers, with a focus on confirming that consumers are informed that there is a cost for overdraft services and also that participation in overdrafts is optional. Banks looking to avoid Reg E issues will therefore want to ensure that they are retaining evidence of both the disclosures provided to the consumer regarding Reg E overdraft services as well as the consumer’s affirmation election for the services.
As always, the advisors on the Compliance Hotline are available to answer any questions you have about these requirements. You may also submit your Reg E disclosures to our Review Team for specific feedback on potential concerns.