Reactivation Fee on DC for 2nd Overdraft

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Question:

We are a small community bank that does not offer an overdraft program. We elected to opt out of the Reg E amendment effective July 1, 2010 and are paying one time debit card transactions that overdraw accounts without charging an NSF fee. Obviously we are losing income because of this. We are wondering if we could charge a reactivation fee on the debit cards that have overdrawn for the second time. Example: customer overdraws account with one time debit card transaction. We suspend the card. The customer deposits and we unsuspend. The customer does it again, we suspend, they deposit and we charge a reactivation fee to reactivate the card the second time. Is this ok? If not, can we charge an annual fee on debit cards?

Answer:

Answer by Brian Crow: If you are choosing to reactivate the card yourself and not in response to a cardholder request, I don't see how you could consider charging a fee for something they did not request. Suppose the cardholder wanted to keep the card deactivated and go to another bank because they are tired of their card not working but are charged a reactivation fee simply because they made a deposit to cover an overdraft. This has UDAAP written all over it. Charging a properly disclosed annual fee is permissable, but considering the PR fallout that Bank of America suffered when they tried this, is it worth it? You may find that in addition to lost overdraft fees, you will also begin losing interchange fees because no one wants to use your card.

Answer:

Answer by John Burnett: The other concern is that you seem to have a practice of denying access to the card simply because your bank has been forced to pay an overdraft item for which it could not impose a fee. That could be interpreted as a violation of the prohibition on providing different account terms under Section 1005.17(b)(3).

Rather than suspending card access for initiating a transaction overdrafting an account without payment of an OD fee, consider establishing a practice/policy of suspending or canceling card use for excessive overdrafts regardless of how originated, using some combination of frequency and overdraft amounts. That would get around any allegation of violating 17(b)(3), and still get across the message to customers that the bank frowns on account mishandling.

First published on BankersOnline.com 4/1/13