On July 12, 2022, The New York State Department of Financial Services (DFS) issued an Industry Letter providing guidance on overdraft and non-sufficient funds (NSF) fees to depository institutions that it supervises.
The DFS indicated that, through the supervisory process, it identified several unfair or deceptive acts or practices regarding the imposition of overdraft and NSF fees. The Industry Letter intended to alert New York institutions that the DFS “will evaluate whether Institutions are engaged in deceptive or unfair practices with respect to overdraft and NSF fees in future Consumer Compliance and Fair Lending examinations.” The DFS did identify three key areas where fees were unfair:
- Overdraft Fees Relating to Authorize Positive, Settle Negative (“APSN”) Transactions
The DFS found some Institutions are charging consumers an overdraft fee even though they had a sufficient positive balance at the time that the transaction was authorized by the Institution. The charging of fees in such situations (referred to as “Authorize Positive, Settle Negative” or “APSN” transactions) is unfair, because it causes injury to consumers that they cannot avoid. Account holders have no control over the settlement and presentment of debit card transactions, which typically takes place some days after the consumer conducts the transaction. When an Institution authorizes a debit card transaction on an account with sufficient funds to cover the transaction, the consumer expects that they will not incur an overdraft charge on that transaction.
- Double Fees Arising from Futile Overdraft Protection Transfers
FIs consistently offer consumers an overdraft protection service for a fee. This service automatically transfers funds from another account held by the consumer at the same institution, such as a savings account, to cover what would have otherwise been an overdraft transaction, thereby preventing the imposition of an overdraft fee. The DFS found that some Institutions charge a fee for overdraft protection transfers even where the transfer amount is insufficient to prevent the actual overdraft. In those cases, the transfer fails to prevent the occurrence of an overdraft and the imposition of an accompanying overdraft fee.
The practice of charging a consumer both an overdraft protection fee and a fee for the overdraft that the “protection” failed to prevent (a “Double Fee”) constitutes an unfair practice.
- NSF Fees Relating to Representments
FIs often charge an NSF fee in cases where a transaction, including an Automated Clearing House (“ACH”) transaction, is presented for payment but is declined because the consumer has insufficient funds in their account to cover the transaction. ACH rules authorize the merchant to “reinitiate” or “re-present” the entry a maximum of two times to collect funds. The DFS found that some FIs charge a separate NSF fee for each presentment, or representment, of the same item, resulting in multiple NSF fees for a single transaction (“Multiple NSF Fees”).
The practice of charging a consumer Multiple NSF Fees is deceptive where the Institution’s disclosures fail to disclose expressly that multiple fees may be charged “per item” or “per transaction.” Further, it is deceptive when the Institution represents that only one NSF fee will be charged “per item” or “per transaction” without disclosing that the same processed item may trigger Multiple NSF Fees.
To put the DFS’s focus into perspective, if a financial institution (FI) were to have charged more than one NSF (non-sufficient funds) fee for a transaction, you might wonder how many NSF fees a FI is allowed to charge.
While it’s not necessarily illegal for FIs to charge an NSF fee, consumers are crying foul when more than one NSF fee is charged on a single transaction.
It is important to note that not only are the States taking notice of the potential unfair practices of NSF and OD (overdraft) fees, but it is also a hot button for the federal regulators.
As we have seen with the Consumer Financial Protection Bureau (CFPB) and The Federal Deposit Insurance Company (FDIC) overdraft practices are under a microscope. Both Regulators have issued guidance to Banks and continue to investigate the effects the practices have on consumers.
CFPB research has shown that overdrafts present a serious risk to consumers, with under 9% of consumer accounts paying 10 or more overdrafts per year, accounting for close to 80% of all overdraft revenue. The FDIC released data revealing that insured banks earned $69.5 billion in the third quarter of 2021, up 36% from the prior year. Banks are on pace to surpass their pre-pandemic profitability.
The challenge with overdrafts is widespread. Let us think about it this way, if a customer had the same electronic bill payment attempted and rejected by a FI multiple times, they could be incurring more than one NSF fee for that single transaction. At $30 or more per fee, a FI could be helping to dig a consumer into a deeper financial hole each time the transaction is attempted. Especially, if there’s not enough money in their account, which causes the FI to keep rejecting the transaction and then charging a fee.
This practice has lead banks and credit unions to be defendants in lawsuits over allegations that they charge exorbitant fees for a single transaction.
For example, in a class action lawsuit against Digital Federal Credit Union, the FI was accused of having a “routine practice of charging two or three non-sufficient funds fees on a single transaction.”
Digital Federal Credit Union’s own disclosures allegedly indicate only one NSF fee would be charged no matter how many times the request for repayment was processed. If each request for repayment is considered a new, unique item, then the single NSF fee ends up equaling multiple fees for what is truly a single transaction.
In another lawsuit, USAA Federal Savings Bank was accused of breaching its contract to only charge one NSF fee for a single transaction. A woman alleged USAA charged her $29 three different times as a credit card payment was attempted multiple times. Consumer complaints are vast and frequent.
These complaints allege FIs are making extraordinary amounts of money by sometimes charging more for NSF fees than the initial amount of the transaction being processed.
For example, one Bank of America customer said she was charged two NSF fees of $35 each before a transaction was covered, which cost her an additional $35 overdraft fee. She complained that one $20 payment towards a credit card cost her $115 total in NSF fees.
On top of the risk of being unnecessarily penalized by getting charged with more than one NSF fee for the same transaction, these kinds of fees also impact the poorest Americans the hardest.
In December of 2021, Compliance Resource blogged on the handling of overdrafts and how traditional programs exasperate the cycle overdrafts have on the poor. At that time Acting Comptroller of the Currency, Michael J. Hsu, provided ideas that set a base line standard for safe, affordable, and appropriate standards to meet the need of low-income consumers. Since then, multiple FIs have reevaluated their practices and posted new fees to combat the growing concern overdraft practices have for being unfair and deceptive.
Recognizing that federal agencies have been attacking FI practices for the last year, it was only a matter of time before the state regulators joined the cause to eliminate fees that are seen as both unfair and deceptive. When financial institutions mismanage or overuse NSF fee programs, customers are harmed. Poorly managed or overly aggressive NSF programs also perpetuate a legacy of debt that adversely impact lower income customers.
It is our opinion, here at Compliance Resource, that New York is just the first to issue their opinion and guidance to their FIs to foster change. The others will not be far behind.
As compliance professionals, our tendency is to focus on the regulatory requirements. Make sure your institution has reviewed your Overdraft fee programs under the lens of fairness. If you have not yet completed a review of your Overdraft Fee program, you should make it a priority.
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.