The Federal Deposit Insurance Corporation has issued Final Overdraft Payment Supervisory Guidance through Financial Institution Letter FIL-81-2010. The Final Guidance is substantially similar to proposed guidance issued in August (FIL-47-2010), reported in an earlier Ballard Spahr legal alert. Although the guidance applies to state non-member banks, we expect that regulators of other financial institutions will be influenced to varying degrees by the FDIC's views.

In its Final Guidance, the FDIC explicitly articulates its previously unstated assumption that overdraft programs are (or should be) intended to protect customers against occasional errors or funds shortfall. Thus, the FDIC admonishes that management "should be especially vigilant with respect to product over-use that may harm consumers," and it states that banks must monitor accounts and take meaningful and effective action to limit use by customers as a form of short-term, high-cost credit. For example, the FDIC states that banks should give customers who overdraw their accounts on more than six occasions where a fee is charged in a rolling 12-month period a reasonable opportunity to choose a less costly alternative and decide whether to continue with fee-based overdraft coverage.

In tackling excessive use of overdraft services, the FDIC does not address the trade-off between underwriting risk and bank charges, nor does it specify what a bank should do when a customer who repeatedly uses overdraft services does not qualify for low-cost credit or wish to discontinue taking advantage of overdraft services. Banks may wish to consider risk-based pricing of overdraft lines of credit or other loans, with high charges for risky customers. However, we caution that at least some banking regulators seem to assume as a matter of faith – without any explicit supporting evidence or consideration of the consequences of a denial or suspension of credit – that repeat or long-term use of high-cost credit is injurious to consumers. Hence, they assume that making such credit available is an "unfair" practice that violates Section 5 of the Federal Trade Commission Act.

Other highlights of the Final Guidance include the following:

  • The FDIC states that banks should limit the number and/or dollar amount of overdraft fees on any day. Further, institutions should consider eliminating fees on de minimis overdrafts and, where fees are imposed, should charge fees that are "reasonable and proportional" to the transaction amount.
  • The FDIC states that banks should not clear checks in order to maximize overdrafts and related fees. This does not explicitly criticize the processing of items in high-to-low order and does not explicitly address other items, such as ATM and debit card transactions. However, we expect that the FDIC will apply the guidance expansively to prohibit high-to-low posting on checks and other items.
  • The FDIC expects banks to promptly honor customer requests to opt out of coverage of non-electronic overdrafts (which fall outside Regulation E's new opt-in requirements).
  • The FDIC advises that banks should consider employing cost-effective, existing technology, as appropriate (e.g., text message, e-mail, telephone, or cell phone), to alert customers when their account balance is at risk of generating a fee for insufficient funds.
  • The FDIC instructs bank boards of directors to conduct an annual review of the key terms of overdraft programs. It warns that overdraft protection programs will be reviewed at each examination, and that programs found to pose unacceptable safety and soundness risk or compliance risk will be factored into examination ratings. It suggests that banks should review existing guidance regarding unfair or deceptive acts, and it warns that it enforces compliance with Section 5 of the FTC Act under Section 8 of the Federal Deposit Insurance Act (a statute that gives the FDIC powerful enforcement authority).

In light of the FDIC's Final Guidance and in light of class action litigation and other regulatory developments reported in earlier legal alerts, all banks should carefully review with counsel and, where necessary, modify their overdraft practices, procedures, and disclosures. Banks without pre-dispute arbitration programs should consider implementing such programs. Banks also should seriously consider and attempt to promptly resolve any customer complaints about overdraft practices.

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). For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or; John L. Culhane, Jr., 215.864.8535 or; Barbara S. Mishkin, 215.864.8528 or; or Mark J. Furletti, 215.864.8138 or

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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.