Compliance Update

1. Compliance Update Sponsored by the FDIC Kansas City Region June 24, 2010

2. E-mail Questions to: kcconferencecall@FDIC.gov

3. Rules Regarding Overdraft Services Overview of July 2010 Regulation E Amendments

4. Overview • The final rule provides consumers a choice regarding their institution’s payment of overdrafts for ATM and one-time debit card transactions and assessing a fee when there is insufficient funds in the account. • Mandatory Compliance Date is July 1, 2010.

5. Overview (cont.) • Opt-In: The final rule requires consumers to opt in, or affirmatively consent, to the institution’s overdraft service for ATM and one-time debit card transactions, before overdraft fees may be assessed on the account. • The opt-in right applies to all consumers, including existing account holders. • The rule also provides consumers an ongoing right to revoke consent.

6. Overview (cont.) • Conditioning the Opt-In: The final rule prohibits financial institutions from tying the payment of overdrafts for checks and other transactions to the consumer opting into the overdraft service for ATM and one-time debit card transactions. • The final rule requires institutions to provide consumers who do not opt in with the same account terms, conditions, and features as provided to consumers who do opt in.

7. Overdraft Service (defined) • As described in §205.17(a) of Regulation E, the term overdraft service means a service under which a financial institution assesses a fee or charge on a consumer’s account held by the institution for paying a transaction when the consumer has insufficient or unavailable funds in the account.

8. Definition Includes: • Discretionary programs (non-automated ad-hoc accommodations) and • Automated programs.

9. Definition Does Not Include: • Consumer lines of credit (including credit cards, home equity lines of credit) • Unsecured overdraft lines-subject to Regulation Z • Transfers from another account; such as a savings account or other line of credit.

10. Applicable Transactions • The opt-in requirement applies to any ATM transaction • Any one-time debit card transaction • The opt-in requirement applies to all accounts governed by Regulation E, including payroll card accounts • The final rule does not apply to check transactions, recurring debits, or ACH transactions.

11. Recurring versus One-Time Debit Card Transactions • Comment 205.17(b).1 states that a financial institution complies with the rule if it adapts its systems to identify debit card transactions as either onetime or recurring. If it does so, the financial institution may rely on the transaction’s coding by merchants, other institutions, and other third parties as onetime or preauthorized or recurring debit card transactions.

12. What is the Opt-In Requirement?§205.17(b) • Opt-in occurs at the account level, not at the customer level. • Further, it can only occur for accounts that are open, not for accounts that may be opened in the future. • No fee on the account for paying an ATM or one-time debit card transaction pursuant to the institution's overdraft service unless the consumer has been given the opportunity to consent to the charge.

13. Opt-in Procedures • The consumer is provided with a notice in writing, (or if the consumer agrees, electronically or telephonically) segregated from all other information, explaining the institution’s overdraft service; • The consumer is given a reasonable opportunity to affirmatively consent; • The consumer affirmatively opts in to the service; and • The institution provides the consumer with a separate confirmation of the consumer’s consent in writing which includes a statement informing the consumer of the right to revoke such consent.

14. Timing • Mandatory compliance date: July 1, 2010. • Opt-in requirement applies to both new and existing accounts. • For accounts opened before July 1, 2010, an institution must not assess any fees or charges on or after August 15, 2010, for paying an ATM or one-time debit card transaction unless the consumer has affirmatively consented to the overdraft service for those transactions. • For accounts opened on or after July 1, 2010, institutions must obtain affirmative consent before assessing fees or charges on the consumer’s account for paying ATM or one-time debit card transactions.

15. Content and Format of the Notice§205.17(d) • The final rule provides a model notice in Appendix A-9http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20091112a3.pdf • The notice and consent must include: 1) Description of the institution’s overdraft services, including fees. 2) Fees for paying an ATM or one-time debit card transaction, including daily limits, if any. 3) Alternative plans to cover overdrafts. 4) The methods by which the consumer may opt in.

16. Permitted Modifications to the Notice • The fact that the payment of overdrafts is at the institution’s discretion. • If the institution does not authorize and pay an overdraft, the transaction may be declined.

17. Exception to Opt-In and Notice • The final rule allows only one exception to the notice and opt-in requirements. • Institutions that have the policy and practice of declining to authorize and pay ATM and/or one-time debit card transactions and do not charge overdraft fees for these transactions, even in situations when the institution is unable to avoid paying an item that overdraws the account (ie; intervening transactions) are not required to send notice and obtain affirmative consent from consumers.

18. Multiple Account Types • It is permitted for the institution to offer multiple types of accounts. • For example, accounts that do not allow ATM and one-time debit card transactions to overdraw the account, and others that do. • Opt-in requirements apply to the accounts that do allow ATM and one-time debit card transactions to overdraw the account, and the institution would assess a fee or charge.

19. Record Retention • Comment 205.13(b)-1 explains that a financial institution need not retain records that it has given disclosures to each consumer, it need only retain evidence demonstrating that its procedures reasonably ensure consumers’ receipt of required disclosures and documentation.

20. General Prohibitions §207.17(b)(2) • Institutions may not condition the payment of checks, ACH, and other types of transactions on the consumer’s consenting to the payment of ATM and one-time debit card transactions. • Institutions cannot decline to pay checks, ACH and other types of transactions that overdraw the account simply because the consumer did not consent to the overdraft service for ATM and one-time debit card transactions.

21. General Prohibitions (cont.) • Institutions are required to provide the same account terms, conditions, and features, including pricing, to those consumers who do not opt in that they provide to consumers who do opt in. This would also apply to offering special benefits to consumers who do opt in that consumers who do not opt in would not have access…for example: • Higher daily limits at ATM and POS terminals • Offering “Free Checking” to consumers who have opted-in versus charging a monthly maintenance fee to consumers who have not.

22. Related Overdraft Fees • Although not specifically addressed in the final rule, charging other fees relative to overdrawing the account for ATM and one-time debit card transactions also may not permitted (ie; fees for declining ATM and/or one-time debit card transactions, as these fees could raise significant concerns under the Fair Trade Commission Act) because the institution bears little, if any, risk or cost to decline authorization of an ATM or one-time debit card transaction.

23. Related Overdraft Fees (cont.) • The final rule prohibits the assessment of any fee or charge for paying an ATM or one-time debit card transaction, regardless of the name ascribed to the fee on a consumer’s account as part of the institution’s overdraft service (ie; nonsufficient funds (NSF) fee, daily fees, negative balance fees, or sustained overdraft fees) unless the consumer has been disclosed these fees, and affirmatively consented (Comment 17(d)2).

24. Transaction Posting Order • The final rule does not address the order in which transactions are posted. • It is recognized that additional consumer protections may be appropriate with respect to the rules addressing transaction posting order. • It is recommended that institutions continue to follow the 2005 Joint Agency Guidance on Overdraft Protection Programs (FIL-11-2005) that recommends that payment order not be manipulated to maximize fee income. • It is further recommended that institutions utilize a neutral processing system such as in sequential transactional order, or the order in which items are received. • Policies and practices that tend to maximize overdraft costs to the consumer may be examined with higher scrutiny.

25. Regulation DD-Disclosure of Total Fees on Periodic Statements • Section 230.11(a)(1)(i) requires institutions to provide a fee total on periodic statements that includes all overdraft fees, including any additional daily or sustained overdraft, negative balance, or similar fees or charges imposed by the institution. • Terminology other than “Total Overdraft Fees” may not capture the various fees associated with an overdraft service. • Permitting the use of any other terminology could be confusing for consumers and potentially undermine their ability to compare costs. • Effective date: October 1, 2010.

26. Regulation DD-Disclosure of Account Balances • Section 230.11(c) of the final rule states that institutions must disclose a balance that does not include additional amounts that the institution may provide to cover an item when there are insufficient or unavailable funds in the consumer’s account. • Retail Sweep Accounts are exempt from this requirement primarily since they are not initiated for the purpose of covering overdrafts.

27. Additional Best Practices FIL-11-2005 • Institutions should fairly represent overdraft protection programs and all alternatives. • Institutions should consider initiating a maximum or “cap” total overdraft fees a consumer can incur in a given time period; ie; daily, weekly, or per statement cycle and disclose that fact. • Overdraft programs must comply with all applicable federal laws and regulations. • Institutions must avoid engaging in deceptive, inaccurate, or unfair practices.

28. Best Practices FIL-11-2005 (continued) • Institutions should not encourage consumers to overdraw their accounts in a manner that potentially increases the institution’s credit exposure with little or no analysis of the consumer’s creditworthiness. Thus, institutions should avoid promoting poor account management. • Institutions should not lead consumers to believe that overdrafts will always be paid when the institution reserves the right not to pay some overdrafts.

29. Resources Reg E Final Rule http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20091112a1.pdf Joint Agency Guidance- FIL-11-2005 http://www.fdic.gov/news/news/financial/2005/fil1105.html Federal Reserve Consumer Compliance Outlook http://www.philadelphiafed.org/bank-resources/publications/consumer-compliance-outlook/2010/first-quarter/rules-regarding-overdraft-services.cfm Reg E- Disclosures at ATM Machines- FIL-66-2009 http://www.fdic.gov/news/news/financial/2009/fil09066.html Regs DD and E- 5/28/2010 clarifications http://www.federalreserve.gov/newsevents/press/bcreg/20100528a.htm

30. Questions??

31. Credit Reports and Disparate Treatment Married vs. Unmarried Co-applicants

32. Background • The Equal Credit Opportunity Act and Regulation B prohibit discrimination on a prohibited basis in any aspect of a credit transaction. • Marital status is a prohibited basis. • A difference in fees tied to marital status constitutes disparate treatment.

33. Background (continued) • Pulling separate credit reports on unmarried co-applicants vs. pulling joint credit reports on married co-applicants is a relatively common practice. • The cost of two separate credit reports often exceeds the cost of a single joint report. • Credit report costs are frequently passed on to the borrowers. • Joint reports are usually available for unmarried co-applicants

34. Other Fair Lending Concerns • Even if the same fee is assessed for unmarried and married co-applicants, a fair lending issue could still exist if there were differences in analyzing the credit reports. • Example: The scores for married co-applicants are averaged or the higher score is used, while the lower score is used for unmarried co-applicants with separate reports.

35. Consequences • If examiners identify differences in joint vs. separate credit report fees, and this difference is tied to marital status, this is considered disparate treatment on a prohibited basis. • We expect that affected customers will be reimbursed for the difference in fees.

36. Best Practices • Review your procedures for obtaining credit reports. • Modify procedures as needed to ensure unmarried and married co-applicants are treated consistently, both in the fees they pay and how credit reports are analyzed. • Reimburse affected customers identified through any internal review.

37. Age-based Deposit Accounts How Fair Lending Violations Can Occur

38. Background • The Equal Credit Opportunity Act and Regulation B prohibit discrimination on a prohibited basis in any aspect of a credit transaction. • A credit feature tied to a deposit account subjects the account to Reg B coverage. • Age is a prohibited basis. • Reg B allows for favorable treatment of the elderly, defined as age 62 or older. • Favorable treatment set at an age under 62 creates a fair lending issue.

39. Types of Issues • Difference in treatment related solely to a deposit account feature is not a violation • Two types of violations: • Difference in treatment tied directly to a credit feature • Difference in treatment tied to a general fee

40. Example – Deposit Feature • A deposit account is open to customers 55 years of age and older. This account includes waived check printing fees and waived origination fees on loans. • A similar, non-age based account offers the waived origination fee, but the customer must still pay check printing fees. • Difference in treatment not related to a credit feature – no fair lending concern.

41. Example – Credit Feature • A deposit account is open to customers 55 years of age and older. This account includes reduced interest rates for consumer loans. • Reduced interest rates for consumer loans are not available on any other deposit account. • The difference in treatment is related solely to a credit feature.

42. Example – General Fee • A no-fee deposit account is open to customers 55 years of age and older. This account includes several non-credit benefits and waived origination fees on loans. • A similar, non-age based account offers the same features, but the customer must pay a monthly maintenance fee. • The difference in treatment relates to a fee that is general in nature. • Because fee is attributable in part to credit features, this is deemed to be disparate treatment.

43. Reducing Your Fair Lending Risk • Review deposit accounts with credit features – is there an age requirement? • For age-based deposit accounts with a credit feature, set the minimum age at 62 or above for favorable treatment. • Make the credit features available on the same terms for non-age based accounts. • Include your compliance officer on new product and service development teams.

44. Questions?