So, now that we know there is a clear distiction between an overdraft line of credit and an ODP.  What we don't know is whether it is possible for an OD program to be re-classifled into a line of credit based on the terms of the OD program. To answer this, we need to loook at the definition of a line of credit within Reg Z.  Reg. Z indicates that an Open-end credit means a consumer credit extended by a creditor under a plan in which:

(i) The creditor reasonably contemplates repeated transactions;

(ii) The creditor may impose a finance charge from time to time on an outstanding unpaid balance; and

(iii) The amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.

 

Now that we have some background, lets look at the grey areas in the rules and guidance and while we can not turn them into black and white, we will point out a few points of interest….

 

1.     An automated overdraft credit product that does not have clear limitation on how often the product can be used, appears to “reasonably contemplate repeated transactions.”  The FDIC OD Guidance suggests to place limitations on the fees a bank can assess on the repeat transaction; however, they do not suggest to be limit the number of repeat transactions.  

 

a.     It is interesting that the OCC guidance suggests that banks should set firm limitations as to what is excessive usage of which would cause the bank to shut down the automated overdraft (credit) product after excessive use.   It is particularly interesting that the OCC states that account reviews should be performed and that after the account review  and making appropriate changes to account limitations, the account continues to demonstrate “excessive overdrafts – overdraft privileges should be terminated and, and if appropriate, the account should be close.”    The OCC guidance is curious as it assists bank's in preventing the account from the “reasonably contemplate repeat transactions” portion of the definition of a line of credit which appears to be key in differentiating your OD program from being reclassified as a line of credit is this is the only one of the three parts of the definition of open end credit that does NOT include the word “may”.  In other words, it is the only one of the three components of the definition that is not optional.  If the creditor reviews and shuts down an automated overdraft product after excessive usage, the product would arguably NOT reasonably contemplate repeat transactions.   

 

b.    The FDIC guidance appears to not address shutting down excessive users; as it indicates that Bank’s should  “Monitor accounts and take meaningful and effective action to limit use by customers as a form of short-term, high-cost credit, including, for example, giving customers who overdraw their accounts on more than six occasions where a fee is charged in a rolling twelve-month period a reasonable opportunity to choose a less costly alternative and decide whether to continue with fee-based overdraft coverage; Institute appropriate daily limits on overdraft fees; and consider eliminating overdraft fees for transactions that overdraw an account by a de minimis amount; and Not process transactions in a manner designed to maximize the cost to consumers.  The FDIC’s discusses limited fees, but never does not specifically suggests closing the account down for excessive use and does not describe what will happen if the Bank chooses not choose to discontinue fee-based overdraft coverage if the use is excessive.  

 

2.     The second component of the definition of a line of credit is, the creditor may impose finance charges from time to time on an outstanding unpaid balance.   The word, "may" is key as its use implies that this item is not required for a product to be an open end line of credit; however, could happen on a line of credit.  One item which needs  a closer look is could overdraft fees be defined as finance charges?  To answer that we need to look at the definition of a finance charge per Regulation Z.  A finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. It does not include any charge of a type payable in a comparable cash transaction.  There are several examples of what is a finance charge, and the items detailed in the definition which related to overdraft fees are listed below:

 

a.      Examples of finance charges. The finance charge includes the following types of charges, except for charges specifically excluded by paragraphs (c) through (e) of this section:

1) Service, transaction, activity, and carrying charges, including any charge imposed on a checking or other transaction account to the extent that the charge exceeds the charge for a similar account without a credit feature.

b. Paragraph c – d of Regulation Z details a list of charges excluded from the finance charge. The following items were taken from the list of what are not finance charges:  Charges imposed by a financial institution for paying items that overdraw an account, unless the payment of such items and the imposition of the charge were previously agreed upon in writing.   It is interesting that the OCC guidance suggests that “Customers should be provided clear and conspicuous disclosures prior to enrollment, consistent with applicable law, about program costs, terms, and material limitations before they are provided a deposit-related credit product”?  In addition, the 2010 Regulation E Opt in rule required that the Bank provide the terms and conditions of the EFT service.  It appears that if terms and conditions are provided for and the customer who “opts in” to the ODP program, the overdraft fees may be considered to be finance charges.

 

3. The last of the three components of the open end line of credit definition is, the amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding alance is repaid.   The section appears to apply if the terms and conditions of the Bank’s ODP program provide to the customer at Opt in include a descriptions such as, “ the service is generally limited to a $400 overdraft (negative) balance for “Free Checking”, or  a $700 overdraft balance for other eligible accounts.”  which essentially imposes a credit limit.