The FDIC has issued new supervisory guidance (FIL-40-2022) on multiple non-sufficient funds (NSF) fees arising from the re-presentment of the same unpaid transaction.  The guidance directly applies only to state-chartered banks and thrifts that are not members of the Federal Reserve System.  National banks and federal thrifts are supervised by the Office of the Comptroller of the Currency (OCC) and state-chartered banks that are members of the Federal Reserve System are supervised by the Federal Reserve Board (FRB).  The CFPB has supervisory authority for compliance with Federal consumer financial laws (which includes the Dodd-Frank UDAAP prohibition) over all banks and thrifts with $10 billion or more in total assets.

The guidance follows the FDIC’s identification during consumer compliance examinations of UDAP violations in connection with banks’ re-presentment practices (as discussed in the March 2022 edition of its Consumer Compliance Supervisory Highlights).  In the guidance, the FDIC addresses potential risks arising from multiple re-presentment NSF fees, risk mitigation practices, and the FDIC’s supervisory approach. 

Potential risks.  The FDIC discusses the following three categories of risk:

  • Consumer compliance risk.  The failure of a financial institution to clearly and conspicuously provide information that adequately advises customers that it assesses multiple NSF fees arising from the same transaction is considered to be deceptive pursuant to Section 5 of the FTC Act.  In certain circumstances, a risk of unfairness may also be present if multiple NSF fees are charged for the same transaction in a short period of time without giving customers sufficient notice or opportunity to bring their accounts to a positive balance in order to avoid the assessment of additional NSF fees.  The FDIC warns that “while revising disclosures may address the risk of deception, doing so may not fully address the unfairness risks.”
  • Third-party risk.  The FDIC highlights the potential risks that  can arise from arrangements with third parties, including core processors, that play significant roles in processing payments, identifying and tracking re-presented items, and providing systems that determine when NSF fees are assessed.  Institutions (1) are expected to maintain adequate oversight of third-party activities and appropriate quality control over products and services provided through third-party arrangements, and (2) are responsible for identifying and controlling risks arising from third-party relationships to the same extent as if the third-party activity was handled within the institution.  The FDIC encourages institutions “to review and understand the risks presented from their core processing systems related to multiple NSF fees, as well as understand the capabilities of their core processing system(s), such as identifying and tracking re-presented items and maintaining data on such transactions.”  We understand that many core processors do not have the capability to identify when a presentment is a multiple presentment.  While that limitation does not relieve a bank from compliance with the guidance, the FDIC does recognize that software changes require time for implementation and, accordingly, will show some leniency to banks and thrifts that have self-reported a problem and provided a remedial plan to the FDIC before their next compliance examination.
  • Litigation risk.  The FDIC notes that financial institutions have faced class action lawsuits alleging breach of contract and other claims, some of which have resulted in substantial settlements, based on the failure to adequately disclose re-presentment NSF fee practices.  We have handled and are presently defending several of these types of class actions.  Banks and thrifts that are subject to FDIC supervision (and lack a binding arbitration provision with a class action waiver in their deposit account agreements) and are named a defendant in a class action involving re-presentment NSF fee practices need to ensure that any settlement will address both the concerns of the FDIC and the plaintiffs’ attorneys bringing the class action.

Risk mitigation practices.  The FDIC lists risk-mitigating activities that financial institutions can take to reduce the risk of consumer harm and avoid potential violations arising from multiple re-presentment NSF fee practices.  In addition to eliminating NSF fees or not charging more than one NSF fee for the same transaction, such activities consist of: (1) conducting a comprehensive review of policies, practices, and monitoring activities related to re-presentments and making appropriate changes and clarifications, (2) clearly and conspicuously disclosing the amount of NSF fees and when and how such fees will be imposed, and (3) reviewing customer notification or alert practices related to NSF transactions and the timing of fees to ensure customers have the ability to avoid multiple fees for re-presented items.  We are currently assisting several clients in conducting these reviews.  

The FDIC expects institutions that self-identify re-presentment NSF fee issues to: (1) take full corrective action, including providing full restitution consistent with the guidance; (2) promptly correct NSF fee disclosures and account agreements for both existing and new customers, including providing revised disclosures and agreements to all customers, (3) consider whether additional risk mitigation practices are needed to reduce potential unfairness risk, and (4) monitor ongoing activities and customers feedback to endure full and lasting corrective action.  These activities should be conducted carefully with consideration given to how they will impact any class actions in which the bank is a defendant.

FDIC’s supervisory approach.   The FDIC advises that it “will recognize an institution’s proactive efforts to self-identify and correct violations.”  More specifically, its examiners will generally not cite UDAP violations that have been identified and fully corrected before the start of a consumer compliance examination.  In determining the scope of restitution, the FDIC will consider an institution’s record-keeping practices and any challenges it may have in retrieving, reviewing, and analyzing re-presentment data, on a case-by-case basis, when evaluating the time period used for customer remediation.  The FDIC notes that it has accepted a two-year lookback period for restitution in cases where an institution was unable to reasonably access accurate ACH data for re-presented transactions beyond two years.  It  advises that if an institution with challenges in readily accessing accurate ACH data self-corrects this issue and provides restitution to harmed customers for transactions occurring two years before the date of the guidance (August 18, 2022), the institution will generally be considered to have made full corrective action.  The FDIC warns, however, that (1) it will not consider full corrective action to have been taken if an institution fails to provide restitution for harmed customers when data on re-presentment is reasonably available, and (2) if examiners identify violations arising from re-presentment NSF fee practices that have not been self-identified and fully corrected prior to an examination, the FDIC will evaluate appropriate supervisory or enforcement actions, including civil money penalties and restitution.

Neither the OCC, the FRB, nor the CFPB have taken a formal public position on the issue of re-presentment NSF fees.  However, the federal prudential regulators and the CFPB generally take consistent positions with respect to consumer compliance issues (and Acting Comptroller Hsu and CFPB Director Chopra are current members of the FDIC Board of Directors), and the OCC, FRB, and CFPB have already made overdraft practices a focus of concern.  Accordingly, we expect these agencies will soon take a similar position on re-presentment NSF fees in guidance or otherwise.  

Overdraft and NSF fees also continue to be a focus of state regulators.  In July 2022, the New York State Department of Financial Services issued an Industry Letter providing guidance on overdraft and NSF fees to depository institutions that it supervises.  In March 2021, the Division of Banks of the Massachusetts Office of Consumer Affairs and Business Regulation issued a supervisory alert to warn financial institutions of the potential legal and regulatory risks arising from NSF fees charged on the re-presentment of unpaid transactions.