Pub. 5 2014 Issue 3

fall 2014 29 West Virginia Banker DD. The official commentary to Reg DD provides: (5) Fees for overdrawing an account. Under §1030.4(b)(4) of this part, banks must disclose the conditions under which a fee may be imposed. In satisfying this requirement, banks must specify the categories of trans- actions for which an overdraft fee may be imposed. An exhaustive list of transactions is not required. It is sufficient for an institution to state that the fee applies to overdrafts “cre- ated by check, in-person withdrawal, ATM withdrawal or other electronic means”, as applicable. Disclosing a fee “for overdraft items” would not be sufficient. Any interest accrued by virtue of adding the amount to the principal of a loan, would likely be considered a “fee” for the overdraft that must be disclosed at account opening. Unless the bank disclosed the fact that an overdraft may incur interest charges, you would be in violation of Reg DD. Even if the possibility were disclosed on Reg DD, the program would then be a de facto overdraft line of credit. As such, you would likely need to provide Reg Z disclosures for open- end lines of credit. 4. There is also a significant UDAAP concern with the practice of adding an overdraft balance to the remaining principal of an existing loan convert- ing the overdraft balance to a loan that accrues interest. Under Dodd-Frank, an act or practice is unfair when:  It causes or is likely to cause substan- tial injury to consumers;  The injury is not reasonably avoidable by consumers; and  The injury is not outweighed by coun- tervailing benefits to consumers or to competition First, while there is no specific definition of “substantial injury,” it typically means that monetary harm has been sustained. In this case, the customer is being charged interest on a loan whereas before they were not. Second, the bank may say that the injury is “avoidable,” but regulators will not likely see it that way. In any case, it may not be “reasonably” avoidable, especially if the customer does not have the means of paying it off. Finally, the third test of the unfair anal- ysis is to prove this is beneficial for the consumer. It would be difficult to think of any situation where a consumer is better off for having to pay interest. Even if it is not “unfair,” a regulator may still find a UDAAP violation, as the practice can be abusive or even decep- tive depending on how the program is administered. In any case, the bank is opening itself up for increased scrutiny for UDAAP. While there is no conclusive guidance on the practice of capitalizing an overdraft balance into an existing loan, the prac- tice presents many issues that need to be addressed. During regulatory panels, regulators have said this is a practice that would cause “great concern” and we are aware of at least one bank that has had issues with regulators suggesting that this practice violates UDAAP. Even though this practice may have been going on for some time, banks need to re-evaluate the program in light of the tighter regulatory environment Dodd-Frank has created. n Reach your target audience a ordably. advertise get results KRIS MONTIONE Advertising Sales 727.475.9827 or 855.747.4003 kris@thenewslinkgroup.com  Minefield of Issues — continued from page 27