We have been talking about unfair and deceptive overdraft fees for months but last week a line was drawn in the sand!
Here at Compliance Resource, we have made suggestions for reviewing programs, provided information from the Federal Deposit Insurance Company (FDIC), the New York State Department of Financial Services (DFS), and the Consumer Financial Protection Bureau (CFPB) hoping to bring awareness to the ever-increasing risk of overdraft fees and the potential for regulatory violations and enforcement action danger.
Last week, after much discussion, The CFPB issued an order requiring Regions Bank to pay $191 million for the mishandling of their overdraft practices. In addition, they were banned from charging any fees that are tied to authorized-positive overdrafts. In this order the bank is required to pay 50 million into the CFPB’s victims relief fund and to refund at least $141 million to customers harmed by its illegal “surprise” overdraft fees. The order indicates that from August 2018 through July 2021, Regions charged customers “surprise” overdraft fees on certain ATM withdrawals and debit card purchases.
Regions Bank is shown to have charged overdraft fees even after telling consumers they had sufficient funds at the time of the transactions. In addition, The CFPB also found that Region’s leadership knew about and could have discontinued its “surprise” overdraft fee practices years earlier, but they chose to wait while Regions pursued changes that would generate new fee revenue to make up for ending the illegal fees.
The 32-page consent order noted that Regions Bank collected millions of dollars in what the CFPB called “surprise” overdraft fees and that compliance staff discussed with management that the practices were illegal.
The “surprise” overdraft fee documented by the CFPB centered around authorized positive pay, which also happened to be one of the three issues identified by the DFS in the State of New York’s regulatory notice. In essence, this practice is considered deceptive and unfair because consumers have no control over presentment and at the time of authorization, they had the funds in their account.
Consumers assumed that the funds are reserved for the payment to merchant and not sitting in their account to cover other debits. What complicated the issue for Regions Bank is that they employed “complex and counter-intuitive overdraft practices and manipulations in a way that its customers could not avoid the fees. Even Regions Bank’s own employees could not explain to customers why they incurred the overdraft fees.” In the order, the CFPB states that, In a 2016, survey of employees, nearly seven hundred associates identified overdraft/non-sufficient funds fees as the hardest problem to resolve with consumers because: “At times customers will have issues with overdraft because they check their [online/mobile bank balance] before making a purchase and the funds are available, but once everything posts they are charged an overdraft fee. . . Explaining to a customer why they received the fee is hard because the customer knows they checked their balance before making their purchase and it showed the funds available.”
The consent order also discusses the complaints received by the CFPB in relation to this issue and clearly demonstrates a confused consumer. “They have online and mobile banking which to them means we should have timely and accurate information. But, ultimately resulted in fees they have no control over.”
Two of the interesting challenges with this consent order is that the Compliance Program was working, and the bank had been put on notice for this in 2015. The Compliance team forewarned management of what risks the overdraft practices presented but nothing was done until management could determine another way to make up fee income.
In the order, the CFPB outlined guidance, supervisory opinions, and supervisory highlights (from multiple agencies) going back until 2015 that management should have been aware of and using to change the processes in place at the Bank.
The sad thing is the bank had the processes in place to identify the issues and a process for reporting the problem but chose not to take action to proactively remediate or change the way they were managing compliance and risk.
This is a great example of why we have risk management systems in place and why financial institutions need to work together to ensure we have risk-based processes to mitigate and comply.
If your FI hasn’t looked closely into to the overdraft practices issue, this enforcement action is a good tool to give insight.
As always, all of us at Compliance Resource are here to help.
We have developed several sessions to help with conducting this review and implementing an Overdraft program that serves both your bank and your community. Consider looking at these courses to help you manage your program.