Cards, Plus: Regulators Also Tackle Overdrafts: Billing, Rate-Setting, Allocation Practices All Would Be Limited

By Sloan, Steven | American Banker, May 2, 2008 | Go to article overview

Cards, Plus: Regulators Also Tackle Overdrafts: Billing, Rate-Setting, Allocation Practices All Would Be Limited


Sloan, Steven, American Banker


WASHINGTON -- Bankers have spent months awaiting a proposal that would change the credit card business by eliminating activities such as double-cycle billing and instituting new rules on how payments could be applied.

On Thursday they got what they were waiting for and more.

The Office of Thrift Supervision released the outline of a proposal that would define unfair and deceptive practices under the Federal Trade Commission Act. It would implement an array of requirements governing card practices, including restricting interest rate increases on balances and dictating payment allocation guidelines.

But it also would reach beyond the card industry to crack down on overdraft practices.

The OTS, the Federal Reserve Board, and the National Credit Union Administration are expected to release the full proposal today, and observers are calling it sweeping.

Certain provisions would "change open-end credit as we know it," said L. Richard Fischer, a partner with Morrison & Foerster LLP. "In essence, what the regulators are saying is that existing law in states like Delaware and South Dakota is unfair business practice."

According to the OTS summary, institutions could not charge a fee for paying an overdraft unless the customer has had the chance to opt out of overdraft programs. The provision would apply to all transactions, regardless of whether they are conducted by check, debit card, or other methods.

An institution would be required to notify consumers of their right to opt out of overdraft payments in two ways. First, it would have to send a notice giving consumers the option to opt out. If a consumer who did not opt out later incurred an overdraft fee, the bank would have to send another notice providing the opportunity to opt out during the billing cycle in which the fee was assessed.

Regulators are also seeking to prohibit banks from collecting overdraft fees if the overdraft was caused by a hold placed by the bank on the customer's funds. Fees could still be charged if the purchase would have sent the consumer into overdraft anyway.

Montrice Yakimov, the managing director of compliance and consumer protection at the OTS, said regulators are proposing rules on overdraft protection because consumers need to have more control over products from financial institutions.

"In the case with an institution that automatically enrolls the consumer in an overdraft program without the benefit of allowing the consumer to choose whether or not they want to be included, we found that troubling," she said, "in part because there are significant fees that can be associated with these programs, and consumers may with that knowledge want to make a different choice."

Ms. Yakimov also said consumers increasingly are giving up their checkbooks in favor of debit cards and may be sent into overdraft by small purchases.

"If you have someone that goes to a coffeehouse and buys that $3 cup of coffee, and that $3 cup of coffee overdraws their account, if they were given an opportunity to opt out of payment of that overdraft, they may decide, 'I don't want the coffee that much to pay a $30 fee in connection with the $3. …

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