To Reg E or not to Reg E? That is the question you must ask your members

Since the 2010 Amendment to Regulation E (Reg E), credit unions that want to offer and charge for overdraft coverage on ATM or one-time debit card transactions have been required to obtain affirmative consent from members before charging an overdraft fee for extending overdraft coverage for these transactions. Many consumers have realized the benefits of opting in to overdraft coverage when using their debit card, including avoiding embarrassment at POS and obtaining goods and services, like gas and groceries, at the time they need them.

However, a large percentage of accountholders—as many as 80% according to the Consumer Financial Protection Bureau (CFPB)—have not opted in (and/or made a decision about opting in) to their institution’s overdraft coverage for debit card transactions. For safety and soundness purposes, most institutions do not provide an overdraft limit for card channel transactions on accounts without a Reg E opt in decision. This results in a denied transaction whenever a member attempts to access more than their available balance. It can be very frustrating for a consumer, especially a new member, to have a POS transaction denied when attempting to use a debit card. The consumer receives no immediate feedback informing them that the transaction was denied due to insufficient funds because they didn’t opt-in to Reg E. For all the member knows, the card is just not working. And when something doesn’t work, people usually do not use it. These repeatedly denied transactions can result in members using your credit union’s debit card less frequently, which diminishes their experience with your institution and prevents you from receiving any interchange and fee income for the overdraft services you could be providing.

Let’s face it, most institutions did a poor job of explaining Reg E decision consequences to existing accountholders in 2010, and subsequently to new accountholders during the account opening process. To ensure those who wish to access overdraft services on debit card transactions may do so, some credit unions are starting to use outreach efforts to inform members about the necessity of providing Reg E consent. The purpose of these communications is to provide a high level of service and education so members understand their debit payment and overdraft choices. As the debit card becomes the dominant form of payment, the need for this type of education becomes ever more important, but it must be done properly.

Reg E Outreach Techniques to AVOID:

• Do not use coercion, misrepresentation or quotas in obtaining Reg E decisions

The importance of employing compliant outreach techniques became all too clear in the 2016 CFPB decision to fine Boston-headquartered Santander Bank $10 million, claiming the regional bank deceptively marketed its overdraft program to members.

According to the CFPB consent order, Santander employed the services of a third-party telemarketing firm to call its customers in order to obtain additional opt-ins to Reg E.

The telemarketing vendor:

• Became aggressive in its marketing efforts, including incenting employees if certain sales targets were achieved and punishing employees if goals were not attained
• Misrepresented what it meant to opt in to Reg E, including the fees the customers would be charged and the types of transactions covered by the overdraft service
• Opted customers into the Reg E overdraft program without their consent
• Was deceptive in speaking with customers about the consequences of not opting in to overdraft services for ATM and one-time debit card transactions

Do not penalize consumers who do not choose to opt in

Credit unions must ensure their Reg E decision efforts do not penalize members who decide not to opt in.

According to Regulation E (§1005.17–Requirements for overdraft services), “A financial institution shall provide to consumers who do not affirmatively consent to the institution’s overdraft service for ATM and one-time debit card transactions the same account terms, conditions, and features that it provides to consumers who affirmatively consent, except for the overdraft service for ATM and one-time debit card transactions.”

It is important to keep this stipulation in mind, especially with regard to the types of debit cards your institution issues and the circumstances for de-activating them.

Specifically, institutions should not:

• Provide a PIN-only card to consumers who do not opt in, while providing a debit card with both PIN and signature-debit functionality to consumers who opt in
• Implement any practice that deactivates a consumer’s debit card solely based on force-post overdraft transactions that result from the consumer not opting in
• Activate a debit card contingent upon opting in

Institutions should not make opening a new account contingent upon opting in to Reg E, unless they provide the member another type of account with the same terms, conditions and benefits except for overdraft services for ATM and one-time debit card transactions.

Credit unions should embrace Reg E outreach as an ongoing exercise in education, communication and collection of members’ preferences regarding overdraft services. Review your credit union’s Reg E communications, including any call scripts, to ensure that they 1) explain your credit union’s overdraft program procedures and fees correctly; 2) confirm that the member has opted in (if applicable); and 3) do not offer incentives that would “steer” or “deceive” members in order to obtain Reg E opt-ins.

For more information about offering a modern, compliant overdraft program, download the article, “Data-Driven Overdraft Systems Reap Improved Service, Compliance.”