By Alex Wade
Recently, both the FDIC and OCC issued regulatory guidance regarding fees related to overdraft practices, which is worth discussing since “junk” fees have been a point of emphasis for regulators lately.
FDIC Guidance on APSN Fees
The FDIC issued its “Supervisory Guidance on Charging Overdraft Fees for Authorize Positive, Settle Negative Transactions” on April 26, 2023 (“2023 Supervisory Guidance”), with the stated goal of ensuring that supervised institutions are aware of the consumer compliance risks associated with charging an overdraft fee on a transaction that was authorized against a positive balance but settled against a negative balance, a practice commonly referred to as “Authorize Positive, Settle Negative” (APSN).
Notably, in its recent 2023 Supervisory Guidance, the FDIC expanded on its 2019 Supervisory Highlights related to overdraft programs and discussed the heightened risks under Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices (“UDAP”), and Section 1036 of the Consumer Financial Protection Act of 2010, which prohibits unfair, deceptive, or abusive acts or practices (“UDAAP”) when assessing overdraft-related fees on APSN transactions. In the earlier supervisory highlight published by the FDIC in June 2019 (“2019 Supervisory Highlight”), the FDIC issued guidance regarding APSN fees and gave examples of steps institutions had taken to mitigate overdraft risk, which included “when using an available balance method, ensuring that any transaction authorized against a positive available balance does not incur an overdraft fee, even if the transaction later settles against a negative available balance” – or in other words, refraining from charging APSN overdraft fees.
Now, in its 2023 Supervisory Guidance, the FDIC confirmed that it has determined that certain overdraft practices related to APSN transactions were unfair. Specifically, the FDIC stated that unanticipated and unavoidable overdraft fees can cause substantial injury to consumers. In this regard, the FDIC appeared to rely on the reasoning that consumers cannot reasonably avoid the injury associated with APSN transactions because the consumer does not have the ability to effectively control payment systems and overdraft processing systems practices, which can be very complex. Additionally, in some cases, the FDIC noted that an institution’s methodology for assessing overdraft fees on APSN transactions also resulted in unanticipated and unavoidable overdraft fees.
The FDIC also pointed out that in addition to assessing overdraft fees on APSN transactions, some institutions also assess overdraft fees on intervening transactions that exceed the customer’s account balance. In this regard, the FDIC noted that while not all overdraft fees may be attributable to APSN transactions, the likely presence of intervening transactions may cause additional injury, which appears to muddy the waters even more with regard to permissible overdraft fees. Having said that, the FDIC’s issues with overdraft fees seem to stem from APSN overdraft fees, which the FDIC has stated do result in a heightened risk of violations of UDAP and UDAAP since they can be unavoidable and unanticipated.
Interestingly, the FDIC also stated that the UDAAP and UDAP risks exist in both available balance and ledger balance methods of assessing overdraft fees, appearing to expand on its 2019 Supervisory Highlight, which addressed the available balance method as discussed above. Having said that, the FDIC specifically stated the risks of charging overdraft fees are more pronounced with the available balance method. For example, the FDIC pointed out that the use of available balance to assess overdraft fees may exacerbate the injury, as temporary holds may lead to consumers being assessed multiple overdraft fees when they may have reasonably expected only one.
Based on the potential risks with assessing overdraft fees as discussed above, the FDIC provided some risk mitigation practices as follows:
- The FDIC encouraged institutions to review their practices regarding the charging of overdraft fees on APSN transactions to ensure customers are not charged overdraft fees for transactions consumers may not anticipate or avoid. Having said that, the FDIC has basically stated that APSN overdraft fees are unavoidable and unanticipated based partly on the complexities of overdraft processing systems, thus seemingly banning APSN overdraft fees (which has been the general regulatory sentiment of late). The FDIC also appeared to open the door to issues with other overdraft fee practices – not just APSN overdraft fees – by generally stating that overdraft fee practices that are unavoidable and unanticipated are unfair practices.
- The FDIC noted that institutions should ensure overdraft programs provided by third parties are compliant with all applicable laws and regulations, including, maintaining adequate oversight of third-party activities and appropriate quality control over products and services provided through third-party arrangements.
- The FDIC encouraged institutions to review and understand the risks presented from third-party system settings for overdraft-related fees, as well as understand the capabilities of their core processing system(s), such as identifying and tracking APSN transactions and maintaining data on such transactions.
- The FDIC specifically noted that some third parties offer data processing system enhancements aimed at preventing overdraft-related fees from being charged in relation to APSN transactions – thereby seemingly promoting such third-party services and enhancements.
- Importantly, the FDIC noted that institutions are also generally encouraged to review disclosures and account agreements to ensure the financial institution’s practices for charging any fees on deposit accounts are communicated accurately, clearly, and consistently. However, the FDIC made it clear that such disclosures generally do not fully address the UDAAP and UDAP risks associated with APSN transactions and related overdraft fees. In other words, merely reviewing disclosures and account agreements to ensure that they accurately and clearly describe overdraft practices will not be sufficient to mitigate the risks described herein, which is a clear difference in philosophy from the FDIC’s prior regulatory guidance.
OCC Guidance on APSN Fees and Additional Overdraft Fees
On April 26, 2023, the same day the FDIC issued its 2023 Supervisory Guidance, the OCC issued a bulletin titled “Overdraft Protection Programs: Risk Management Practices” – showing a unified front with the FDIC regarding overdraft fees. Specifically, the OCC also addressed certain practices that may result in heightened risk exposure under UDAP and UDAAP, which included APSN overdraft fees but also, included the following, which the FDIC did not expressly address: 1) assessing additional fees each time a third party resubmits the same transaction for payment after a bank returns the transaction for non-sufficient funds (NSF) (referred to as “representment fees”); 2) charging overdraft or NSF fees with a high limit (or without limit) for multiple transactions in a single day; and 3) charging a fixed, periodic fee for failure to cure a previous overdrawn balance.
Notably, and similar to the FDIC, the OCC also pointed out that even when disclosures described the circumstances under which consumers may incur overdraft fees, the OCC still found that overdraft fees charged for APSN transactions were unfair in certain instances in violation of UDAP since consumers were still unlikely to be able to reasonably avoid injury.
The OCC also specifically identified concerns with a bank’s assessment of additional fees on a representment transaction, resulting in OCC findings in some instances that this practice was unfair and deceptive. Importantly, the OCC stated that even when customer disclosures explain that a single check or ACH transaction may result in more than one fee, a bank’s practice of assessing fees on each representment may also be unfair under UDAP. Part of the OCC’s reasoning in this regard was that consumers typically have no control over when a returned ACH transaction or check will be presented again and lack knowledge of whether an intervening deposit will be sufficient to cover the transaction and related fees. This thought process is similar to the FDIC’s reasoning as discussed above in that it seeks to curtail overdraft fee practices that are unavoidable and unanticipated by the consumer, no matter if the institution’s disclosures were clear.
With that, in addition to discussing activities that were a heightened risk of violating UDAP and UDAAP, the OCC also provided practices that may help to manage the risks associated with overdraft protection programs, including:
- Assisting consumers in avoiding unduly high costs in relation to the face value of the item being presented, the amount of their regular deposits, and their average account balances.
- Implementing fees and practices that bear a reasonable relationship to the risks and costs of providing overdraft protection program services.
Given the risk posed by the recent regulatory guidance regarding overdraft fees, here are SWM’s suggested steps, in addition to the steps noted by the FDIC and OCC:
- Review your practices and procedures related to the charging of APSN overdraft fees, representment fees, and any other overdraft fees that may be unanticipated and unavoidable. Where such fees are charged, you should consider eliminating these fees as they have specifically been given a heightened risk of violating UDAP and UDAAP by the FDIC and OCC, even if clear disclosures are provided. Although the FDIC and OCC may not be your primary regulators, regulators are known to piggyback off one another.
- You should also alert your software vendors and other third parties that provide overdraft services about the recent regulatory guidance. You should monitor these vendors and ensure that they are complying with applicable laws and regulations, in addition to your overdraft policies and procedures.
- Review your account agreement and all related disclosures regarding the charging of overdraft fees (including website, debit card agreement and periodic statements) as soon as possible, and consult with legal counsel regarding these practices.
- Determine whether your institution has an enforceable arbitration agreement and class action waiver in place that would apply to the relevant products where overdraft fees are charged. Although the arbitration agreement and class action waiver would not protect you from regulatory scrutiny, it is an effective tool for discouraging plaintiff’s attorneys from filing class action lawsuits.
- Ensure that your website, account agreement, and any other related agreements are consistent throughout regarding your overdraft policies and procedures and that there are no discrepancies amongst the agreements, as a whole.
Of course, the experts at SW&M will continue to monitor the changing landscape regarding “junk” fees and are always happy to assist financial institutions in navigating through the uncertainty of charging potentially problematic fees.