On May 28, the Federal Reserve Board released a final rule designed to "clarify" certain aspects of its final overdraft rule, adopted in November 2009 and effective July 1, 2010. The November rule, which Ballard Spahr summarized in an earlier legal alert, imposed a series of requirements that would apply to many, if not most, banks charging overdraft fees in connection with ATM and one-time debit card transactions (Covered Items).

The notice, opt-in, and confirmation requirements of the November rule would not have applied to banks (Previously Exempt Banks) that have a policy and practice of declining to authorize and pay Covered Items when the customer has insufficient available funds on deposit at the time of an authorization request for a Covered Item. Although it claims to merely clarify the November rule, the new rule eliminates the authority of a Previously Exempt Bank to charge an overdraft fee if the account balance exceeds the amount of a Covered Item at the time the Covered Item is authorized but not when the Covered Item is processed for payment. This situation could arise, for example, when a Previously Exempt Bank honors a check, ACH transaction, or other item that is not a Covered Item (Exempt Item) after it authorizes a Covered Item but before the Covered Item is presented for payment.

This change in the rule will affect how Previously Exempt Banks treat Exempt Items when they are presented for payment against an account balance that is insufficient to pay both the Exempt Items and any previously authorized but unpaid Covered Items. In practice, a Previously Exempt Bank will now have three choices:

  • It can reject the Exempt Item because the bank will not be entitled to a fee when the previously authorized Covered Items are subsequently presented for payment.
  • It can provide in its account agreement that an Exempt Item will trigger an overdraft fee if the account balance, net of authorized but unpaid Covered Items, is less than the amount of the Exempt Item.
  • It can pay the Exempt Item, without compensation, even though it will need to pay into overdraft the previously authorized Covered Item(s).

As a result of the new rule, we expect that many banks will be more restrictive in honoring Exempt Items in these circumstances.

The new rule does have some positive features from an industry perspective. For example, it clarifies that a bank can charge an overdraft fee if an overdraft is attributable in part to an Exempt Item and in part to a Covered Item, even if the consumer has not opted-in to overdraft protection. It also contains useful examples showing the order of posting that a bank may use in processing Covered and Exempt Items and allocating payments between Covered and Exempt Items.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). The group is defending a number of banks in putative class actions challenging their overdraft practices and is advising a number of banks concerning overdraft practices. For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com; Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com; or Mark J. Furletti, 215.864.8138 or furlettim@ballardspahr.com.

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.