Can My Bank Require Opt-In to Overdraft as a Condition of Receiving a Debit Card?

By Leslie Callaway, CRCM, CAFP; Mark Kruhm, CRCM, CAFP; and Rhonda Castaneda, CRCM

Q My bank has an ad hoc overdraft program and does not offer an opt-in for payment of debit card overdrafts. Generally, the bank declines any one-time debit card transactions that would overdraw a consumer’s account, but, on occasion, there are the debit card charges that the bank must pay. The bank pays the merchant amount, does not notify the consumer and does not charge the consumer any overdraft fees. These types of transactions seem to be increasing, and it is becoming costly for the bank. The bank has been considering implementing the Regulation E opt-in process, but this seems to involve a lot of work, and we are a small bank. To make this worthwhile, management has asked if the bank may require our customers to opt-in to in order to receive a debit card. Can the bank do this?

A Your question is whether the bank may make agreeing to debit card overdraft services and fees a condition for obtaining a debit card. The answer is no. Section 1005.17(b)(3) of Regulation E provides that banks must “provide to consumers who do not affirmatively consent to the institution’s overdraft service for ATM and one-time debit cards 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.” The “same features” would include a debit card. (Response provided April 2020.)

Q During my review of the Homeowners Protection Act, I found that the bank is not providing the annual private mortgage insurance disclosure for loans where the PMI is not paid through an escrow account. Is this procedure correct?

A No. When PMI is required in connection with a residential mortgage transaction, lenders and servicers must provide borrowers an annual written statement disclosing the borrower’s right to PMI cancellation or termination and an address and telephone number that they may use to contact the servicer to determine whether they may cancel PMI. (12 USC §4903(a)(3)). This requirement applies whether or not the bank escrows the premiums, because whether premium payments are paid from an escrow account has no bearing on the application of the PMI requirements.

It may be that your bank is not escrowing for PMI because the borrower paid the full annual premium up-front. However, even if the borrower pays in advance, that borrower still has the right to request cancellation (or to automatic cancellation) and obtain a refund of the unused premium. The annual notice is intended to remind borrowers that even if they paid in advance, they may still be entitled to cancel. (Response provided April 2020.)

Q May business credit cards that are issued to nonprofit organizations be reported under the Community Reinvestment Act as small business loans? If not, may they be reported as community development loans?

A It is possible that business credit cards may be reported as small business loans. Section §_.12(v)-4 in the July 2016 updates to CRA questions and answers provides: “Credit cards issued to a small business or to individuals to be used … as business accounts are small business loans if they meet the definitional requirements in the Call Report instructions.”

To be reported as community development loans, they generally must not have been reported as small business loans and have a primary purpose of community development. For example, §_.12(h)-1 of the same guidance above provides as an example of a community development loan, one to “not-for-profit organizations serving primarily low- and moderate-income housing or other community development needs.” (Response provided April 2020.)

Answers are provided by Leslie Callaway, CRCM, CAFP, director of compliance outreach and development; Mark Kruhm, CRCM, CAFP, senior compliance analyst; and Rhonda Castaneda, CRCM, senior compliance analyst, ABA Regulatory Policy and Compliance. Answers do not provide, nor are they intended to substitute for, professional legal advice. Answers were current as of the response date shown at the end of each item.