On August 3, 2022, our very own Kimberly Boatwright brought to your attention the increasing risk of overdraft programs to financial institutions. Discussing the New York State Department of Financial Services (DFS) and their stance on overdraft fees. In that Blog she discussed the DFS position on:
- Overdraft Fees Relating to Authorize Positive, Settle Negative (“APSN”) Transactions
- Double Fees Arising from Futile Overdraft Protection Transfers
- Double Fees Arising from Futile Overdraft Protection Transfers
It was pointed out that in addition to the DFS and their stance on the unfairness and deception with these fees, that both the Consumer Financial Protection Bureau (CFPB) and The Federal Deposit Insurance Company (FDIC) were putting overdraft practices under a microscope. Both Regulators have issued guidance to Banks and continue to investigate the effects the practices have on consumers.
Our team wanted to make all FDIC regulated institutions aware that on August 18, 2022 the FDIC released Supervisory Guidance on Multiple Re-Presentment NSF Fees. In this notice, the FDIC shared its supervisory approach where a violation of law is identified, and full corrective action is expected. The FDIC highlighted expectations around re-presentment.
The main points to understand and address are:
- Financial institutions that charge NSF fees when checks or Automated Clearinghouse (ACH) transactions are presented for payment but cannot be covered by the balance in a customer’s transaction account. After being declined, merchants may subsequently resubmit the transaction for payment.
- Financial institutions that are charging additional NSF fees for the same transaction when a merchant re-presents a check or ACH transaction on more than one occasion after the initial unpaid transaction was declined. In these situations, there is an elevated risk of violations of law and harm to consumers.
- The FDIC has identified violations of law when financial institutions charged multiple NSF fees for the re-presentment of unpaid transactions because disclosures did not fully or clearly describe the financial institution’s re-presentment practice, including not explaining that the same unpaid transaction might result in multiple NSF fees if an item was presented more than once.
- Practices that involve the charging of multiple NSF fees arising from the same unpaid transaction results in heightened risks of violations of Section 5 of the Federal Trade Commission (FTC) Act, which prohibits unfair or deceptive acts or practices (UDAP). Third parties, including core processors, often play significant roles in processing payments, identifying, and tracking re-presented items, and providing systems that determine when NSF fees are assessed. Such third-party arrangements may also present risks if not properly managed. There may also be heightened litigation risk. Numerous financial institutions, including some FDIC-supervised institutions, have faced class action lawsuits alleging breach of contract and other claims because of the failure to adequately disclose re-presentment NSF fee practices in their account disclosures.
- Financial institutions are encouraged to review their practices and disclosures regarding the charging of NSF fees for re-presented transactions. The FDIC has observed some risk-mitigation practices financial institutions implemented to reduce the risk of consumer harm and potential violations.
- The FDIC will take appropriate action to address consumer harm and violations of law when exercising its supervisory and enforcement responsibilities regarding re-presentment NSF fee practices.
With the FDIC taking steps to clarify that re-presentment is deceptive if not clearly disclosed and unfair to customers with the amount of fees one transaction can cause, it is prudent for all FDIC institutions to review and update disclosures. As well as work with vendors to understand how the represented items can be flagged so that fees can be kept to a minimum. Otherwise, banks could be faced UDAP violations in addition to regulatory scrutiny and reputation risk.
Now is the time to be reviewing practices whether you are an FDIC bank or not.
As always, all of us here 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.
Overdraft Risks, Requirements, and Best Practices Webinar Recording
10 Overdraft Privilege Hotspots Including Regulations, Lawsuits & Guidance Webinar Recording
2022 Deposit Regulation & Operations Update Webinar Recording