What You Know about Regulation E

 

On November 12, 2009 The Federal Reserve Board announced the final rules amending Regulation E (Reg E) that prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer consents to opt-in, to the overdraft service for those types of transactions. Compliance with this regulation is effective July 1, 2010 for new consumer accounts and August 15, 2010 for existing consumer accounts.


ALERT! What does the Reg E Amendment Mean to You?

 

This amendment has numerous reputational, operational and system implications. For example, one of the largest components of the amendment will require banks to obtain “opt-in” in order to charge Overdraft fees for ATM and everyday debit card transactions that put an account into overdraft status.

 

Considering that use of ATM and debit cards have been on the rise, the impact of the amended regulation will be huge on the bank’s non-interest income. It is estimated that banks could lose, conservatively 1/3 of their overdraft income. During a recent Federal Reserve information session, a banker remarked in frustration “…the bottom line is that banks have to cut fee income.” Most banks have accepted and budgeted for this loss of income in 2010. While this may be partly the story, it doesn’t have to end there. At Lodestone we believe in taking proactive moves on earnings to mitigate the risk to the bottom line.

 

Lodestone offers Two Turn-Key Solutions to the Reg E Amendment

Lodestone has developed two programs to assist financial institutions in mitigating the many facets and implications of the amendment. 1, 2 & 3 takes you step-by-step through the compliance labyrinth and gives you effective strategies for customer account retention. Adding 4 optimizes your income.

 

Lodestone’s Compliance “turn-key” solution to Reg E provides:

  1. Compliance/Communication Tools including Opt-In notice, letter and Reg DD disclosure language to keep the bank in full compliance with the regulation.

  2. Strategies for Customer Account Retention to assist the bank in maintaining a solid customer fee base.

  3. Step-By-Step Implementation Guide including procedures and processes for ongoing compliance and education for affected staff.

Adding 4 will optimize your income:

Lodestone’s Overdraft Matrix Will Optimize Your Core Banking Systems to proactively mitigate the anticipated and budgeted losses to non-interest income.


Some important REG. E clarifications & points that YOU should know

Contrary to some recent articles and informational literature published by organizations (not related to FRB) regarding the amended Reg. E, you should
know that:

a. The amendment is applicable ONLY to consumer or personal accounts and NOT commercial accounts.

b. So be careful to not use broad language by using the term “customer” in your notices and disclosures when referring to the amended Reg. E.

c. The Opt-In Notice needs to be delivered PER CONSUMER ACCOUNT and not at the broader “customer” level.

Even if you do NOT authorize ATM and POS against negative balances (book), below are some rules that your bank still needs to educate its employees and
comply to:

a. Employees need to know that consumer accounts can still incur negative balances – for example, in situations where a merchant has an established floor limit and does not verify or receive authorization on transactions below the floor limit amount, when the charges hit the consumer’s account, such account(s) could fall into negative balance and that bank can NOT charge this account(s) a NSF fee.

b. Make sure your systems differentiate between one-time debit card transactions and pre-authorized or recurring debit card transactions.

c. When making decisions whether to charge NSF fees to a consumer account, your bank personnel need to know this difference and the fact that they can NOT charge the consumer account for the one-time debit card transactions if the consumer’s account balance is in negative status due to that transaction.

You need to keep in mind that the Reg. E amendment includes two non-discrimination provisions designed to ensure that consumers do not feel compelled to Opt-In, and therefore have a meaningful choice with respect to the overdraft service and they are:

a. Banks can NOT condition the Opt-In, and

b. Banks can NOT have a variation of account terms based on whether a consumer has Opted-In or not to the service.


For more information please contact Lodestone at 800-722-2566 MClark@LodestoneBanking.com