The Division of Banks of the Massachusetts Office of Consumer Affairs and Business Regulation has issued a supervisory alert to warn financial institutions of the potential legal and regulatory risks arising from NSF fees charged on the representment of unpaid transactions.

The alert addresses the common scenario in which a financial institution charges an NSF fee when an ACH item is presented for payment from a consumer’s account and is declined due to insufficient funds in the account to cover the item.  If the same item is subsequently represented for payment and declined again, some financial institutions will charge an additional NSF fee for each declined representment, thereby resulting in multiple NSF fees for the same underlying transaction.

The alert observes that recent class action lawsuits have alleged breach of contract claims based on the omission of terms in the deposit account agreement regarding the assessment of NSF fees for represented items.  It also observes that standard deposit account agreements and fee schedules supplied to financial institutions by vendors may not adequately explain a bank’s actual NSF fee practices.  Specifically, although some disclosures may indicate that one NSF fee will be charged “per item” or “per transaction,” such language may not adequately explain that a single underlying  transaction can trigger multiple NSF fees.  The alert suggests that, in the absence of such explanation, charging multiple NSF fees could be viewed as inconsistent with what was disclosed to the customer.

The alert also reminds financial institutions that their deposit account disclosure and agreement practices are reviewed by state and federal regulators for UDAP compliance.  It warns that UDAP violations can result in the payment of restitution and/or civil money penalties.  It strongly encourages financial institutions to review their disclosures and processes to ensure they are in compliance with applicable laws and regulations, clearly disclose how NSF fees are charged, and are consistent with a customer’s reasonable expectations.

The alert concludes by advising financial institutions that ongoing and future examinations by the Division of Banks could require corrective measures based on examination findings.

In our latest podcast, “Still In The Crosshairs: An Update On Bank Overdraft Practices,” we discuss representment claims as well as other theories currently used by plaintiffs’ attorneys to challenge overdraft practices.  Click here to listen.