Free & Clear Checking: Advertising Claims, Overdraft Opt-In, and Fee Changes
Riverbend Community Bank ($860 million in assets) launched 'Free & Clear Checking' six weeks ago. The website headline reads 'Free & Clear Checking - $0 monthly fee,' and lobby posters carry the same line. In practice, the $8 monthly fee is waived only if the customer completes ten signature-based debit card transactions each statement cycle; otherwise the fee posts on the last day of the cycle. No conditions are disclosed in the ads. Separately, a customer calls: 15 days ago she used her debit card at a grocery store, the transaction settled $70 beyond her available balance, and a $35 overdraft fee posted. The bank's opt-in records show she never consented to overdraft coverage on one-time debit card transactions. She has not yet disputed the fee but says she never signed up for that.
1. Evaluate the 'Free & Clear Checking' advertising against Regulation DD. What must change, and what is the remediation exposure for the six weeks the ads have run?
Read the worked answer
Rule. 12 CFR 1030.8(a) prohibits using 'free' or 'no cost' if a maintenance or activity fee may be imposed on the account. The narrow exception is for fees tied to an optional, non-essential service (for example a stop payment), not to a condition on ordinary account use.
Application. The ten-signature-transaction condition is an activity requirement built into the account. Because the $8 fee can be imposed, the exception does not apply and both the website headline and the lobby poster are non-compliant. Note this is not a footnote problem: the ads contain no qualifying language at all, so the headline takeaway is flatly wrong for every customer who does not hit ten signature transactions.
Required changes.
- Stop using 'free' or '$0 monthly fee' in every channel while the waiver is conditional.
- Restate with equal prominence: 'No monthly fee when you make 10 signature debit purchases each cycle; otherwise $8.'
- If any APY is stated, add the Reg DD advertising content - APY, variable-rate characteristics, minimum balance to obtain the APY, and time/balance conditions - kept clear and conspicuous and not contradicted by the headline.
- Apply the same review to statements, emails, branch signage, and any partner or affiliate placement.
Remediation. Preserve archived ads and dates. Assess UDAAP exposure for customers who opened during the six weeks on the strength of the 'free' claim - fee refunds for those who paid the $8 are usually cheaper than an examiner-directed restitution program. Log the issue, assign root cause (no marketing pre-review), and report to the compliance committee.
2. Can the bank keep the $35 overdraft fee on the grocery-store debit card transaction? Explain the analysis and describe the containment steps.
Read the worked answer
Rule. 12 CFR 1005.17 bars a financial institution from assessing an overdraft fee on an ATM or one-time debit card transaction unless the consumer affirmatively consented (opted in) and received the required notice, and the institution retains evidence of that consent.
Application. The bank's own records show no opt-in. The transaction was a one-time debit card purchase, squarely inside 1005.17. The fee was assessed in violation.
Conclusion. Refund the $35 and reverse any consequential fees (sustained overdraft, transfer fees, or a second fee cycle the item triggered). Do not condition the refund on the customer filing a formal dispute - the bank identified the error itself.
Containment.
- Confirm the settlement detail (item type, authorization, amount) and document the file.
- Send a written explanation with the refund.
- Remediate the population, not the complaint: query all accounts charged overdraft fees on one-time debit card or ATM items with no opt-in flag; quantify and refund; report the count and dollars to the committee.
- Fix the root cause in the authorization/fee logic - the fee engine must gate on the opt-in flag. A manual monthly cleanup is not a control.
- If a vendor operates the opt-in flow, treat the gap as a third-party oversight issue. A pattern of unconsented fees is also a UDAAP exposure independent of Reg E.
3. The bank now wants to add a $3 monthly paper statement fee and tighten the waiver to twelve debit transactions. What notice is required, and what sequencing issues does the recent marketing create?
Read the worked answer
Rule. 12 CFR 1030.5(b) requires 30 days' advance written notice of an adverse change to a term required to be disclosed under 1030.4(b), which includes fees that may be imposed on the account. Exceptions exist for variable rates and certain fees outside the disclosure requirement; a flat paper statement fee does not fall in an exception.
Application. Both changes are adverse: a new fee and a harder condition to avoid an existing fee. Each triggers the 30-day advance written notice, clear and conspicuous, stating the change and its effective date.
Sequencing problem. The bank is layering new fees onto an account it has just marketed as free. That combination materially increases UDAAP risk and will read badly to an examiner regardless of whether the notices are technically perfect. Sequence the work:
- Issue the 30-day notices and confirm delivery method satisfies the regulation for the account type.
- Retire every 'free' advertisement before the notice mails, so no customer can open the account under a claim the bank is about to contradict.
- Update the account agreement, fee schedule, and onboarding disclosures in the same release.
- Brief front-line staff and the call center with an approved script, and add a complaint code so the volume is visible weekly.
- Consider grandfathering the ten-transaction threshold for existing customers for one or two cycles; the cost is small relative to a restitution order.