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Consumer Banking and Payments Law: 2.5.2.2 Interest Rate Disclosures

For any checking or savings account that pays interest, the TISA and Regulation DD require that the rate of interest offered and paid on deposit accounts be displayed as an “annual percentage yield” (APY).39 Regulation DD sets forth the manner of calculating the APY,40 and also requires disclosures about:

Consumer Banking and Payments Law: 2.5.5 Calculation of Interest to Be Paid

TISA and Regulation DD govern the method of calculating the interest that is payable on an interest bearing account. The regulations detail the permissible methods of calculating interest, how the minimum balance to earn interest is determined, compounding and crediting policies, and when interest begins to accrue.75

Institutions need not pay interest on timed accounts after the account matures, but must pay interest on dormant or inactive accounts.76

Consumer Banking and Payments Law: 2.5.6 Enforceability

The TISA’s private right of action was removed in 2001.77 Consumers may be able to use TISA violations as a basis for an action under the state’s UDAP statute,78 although some courts have found that Congress intended to bar state law claims based on TISA violations.79

Consumer Banking and Payments Law: 2.6 Other Disclosure Laws

The Electronic Fund Transfer Act requires certain initial disclosures at the time a consumer contracts for an electronic fund transfer service or before the first electronic fund transfer, as well as other subsequent disclosures under certain circumstances.

Consumer Banking and Payments Law: 2.7.1 This Section’s Scope

When a consumer has insufficient funds to cover a check or a debit card, ATM, or other electronic transfer (typically an automated clearing house (ACH) transaction), the financial institution can either deny payment or cover the amount of the transaction. This subsection considers fees assessed in situations in which the bank pays the item, and makes an overdraft loan,85 despite the fact that the account does not contain sufficient funds and the account has not been linked to another account that provides a source of funds or credit.

Consumer Banking and Payments Law: 2.7.2 Overdraft Loan Fees Described

This subsection covers fee-based overdraft programs under which the bank pays certain items, and charges an overdraft fee, despite the account having insufficient funds. Fee-based overdraft programs, sometimes euphemistically called “courtesy” overdraft services or “bounce protection,” extend short-term credit at triple-digit rates88 but exploit legal loopholes to avoid compliance with credit laws.89

Consumer Banking and Payments Law: 2.7.4 Regulation E Overdraft Fee Rules

In 2010, Regulation E, which implements the Electronic Fund Transfer Act, was amended to impose opt-in consent and disclosure requirements applicable to overdraft fees charged on non-recurring debit card and ATM transactions. Regulation E does not require banks to obtain consent from the customer before extending fee-based overdraft loans to cover check payments, ACH transactions, or recurring debit card transactions.

Consumer Banking and Payments Law: 2.7.5.1 2005 Joint Guidance

In 2005, the federal banking regulators issued a joint guidance concerning overdraft loans.124 The joint guidance reviews legal risks for institutions offering overdraft loans under several of the statutes in the federal Consumer Credit Protection Act but ultimately does not conclude that these loans violate any of the laws.125 The joint guidance also sets forth “best practices” for institutions offering overdraft loans, including limiting overdraft coverage to checks alone (that is, excluding d

Consumer Banking and Payments Law: 2.7.7 Do State Credit Statutes Apply to Overdraft Loan Charges?

It is a complicated question as to whether state credit statutes apply to overdraft loan charges. Those laws may be preempted, and even if they are not, overdraft loans may not fit cleanly within their terms.

When a national bank, federal savings association or federal credit union is involved, any state credit statutes will likely be preempted by federal banking laws, so the scope of the state statute is moot.191

Consumer Banking and Payments Law: 2.7.8 Other State Laws Governing Overdraft Fees

The UCC generally permits banks to charge any fee agreed to in the contract with the consumer.207 However, the UCC requires banks to act in good faith,208 and some state versions of the UCC hold that actions that maximize fees are not in good faith.209 The application of these UCC laws to the process of reordering transactions to increase overdraft fees is discussed in

Consumer Banking and Payments Law: 2.7.9.1 Nature of the Problem

The order in which a financial institution processes a drawer’s checks and other transactions can determine the number of overdraft and not sufficient funds (NSF) fees assessed to the drawer.219 Financial institutions have an incentive to process the largest transactions first, as this will maximize the number of checks that bounce or transactions that are paid as overdrafts.220 Because overdraft and NSF fees are assessed per transaction, this also maximizes bank fees.

Consumer Banking and Payments Law: 2.7.9.2.2 The UCC and other state laws

Article 4 of the UCC provides that items “may be accepted, paid, certified, or charged to the indicated account of the customer in any order.”233 A number of courts have interpreted this provision to permit the financial institution to pay larger checks first, thus depleting the account sooner and charging overdraft or NSF fees on the smaller checks.234

Consumer Banking and Payments Law: 2.7.9.2.3 Federal regulator guidance

Older regulator opinions on the subject of payment reordering have only dealt with check processing. For example, in 2001 and 2002, the OCC issued interpretive letters permitting banks to post checks in a high-to-low order.268 The letters do not discuss electronic transactions. The banking regulators’ joint 2005 guidance urges banks not to approve overdrawn debit card transactions at all,269 although that guidance has been widely ignored.