The OCC has issued a new bulletin and the FDIC has issued new supervisory guidance directed to their supervised institutions to address “authorize positive, settle negative” (APSN) overdraft fee practices. The OCC bulletin also addresses non-sufficient funds (NSF) fee practices. Based on the bulletin and guidance, it would appear that the OCC and FDIC share the CFPB’s apparent view that APSN fees are unfair regardless of how clearly and conspicuously they are disclosed to consumers. The bulletin and guidance, as well as previous FDIC guidance on NSF fee practices noted below, make clear that both categories of fees carry substantial regulatory and private litigation risk.
OCC Bulletin. The APSN overdraft fees discussed by the OCC (and FDIC) are those that occur when a bank assesses overdraft fees for transactions where the consumer had a sufficient available balance at the time the bank authorized the transaction, but the account is insufficient at the time of settlement. The OCC (and FDIC) indicates that in addition to assessing an overdraft fee on the APSN transaction, some banks also assess an overdraft fee on intervening transactions that exceed the customer’s available balance (which was reduced by an amount that is more than, equal to, or less than the initial authorized debit card transaction.) The OCC states that in reviewing overdraft programs that assess APSN overdraft fees, it has found, in some instances, that account materials were deceptive for purposes of Section 5 of the FTC Act with respect to the banks’ overdraft practices. The misleading disclosures contributed to OCC findings that the APSN overdraft fees were also unfair practices for purposes of Section 5.
Notably, the OCC also states that even when disclosures described the circumstances under which consumers could incur overdraft fees, the OCC found that APSN overdraft fees were unfair for purposes of Section 5 because consumers were still unlikely to be able to reasonably avoid injury and the facts met other factors for establishing unfairness (i.e. the practice causes substantial consumer injury and the injury is not outweighed by benefits to the consumer or to competition.)
With respect to NSF fees or overdraft fees charged on the representment of unpaid transactions, the scenario described by the OCC is one in which a bank charges an NSF fee when a check or ACH transaction is presented for payment from a consumer’s deposit account and is declined due to insufficient funds in the account to cover the check or transaction. If the same check or ACH transaction is subsequently presented for payment and declined again, some banks will either again return the check or transaction unpaid and charge an additional NSF fee or pay the check or transaction and charge an overdraft fee. The OCC states that through ongoing supervision, it has identified concerns with a bank’s assessment of an additional fee on a representment transaction, resulting in findings in some instances that the practice was unfair and deceptive. The OCC indicates that disclosures can be deceptive under Section 5 if they do not clearly explain that multiple or additional NSF or overdraft fees may result from multiple presentments of the same transaction.
As it does for APSN overdraft fees, the OCC suggests that disclosure of NSF fees or overdraft fees charged on the representment of unpaid transactions may not remove the risk that the such fees will be deemed unfair. The OCC states that even when disclosures explain that a single check or ACH transaction can result in more than one fee, a bank’s practice of assessing fees on each representment can also be unfair under Section 5 if consumers cannot reasonably avoid the harm and the other factors for unfairness are met. The OCC comments that consumers typically have no control over when a returned check or ACH transaction may be represented and lack knowledge of whether an intervening deposit will be sufficient to cover the transaction and related fees.
The OCC also lists the following additional practices that can create heightened risk of a finding that a bank has engaged in an unfair or deceptive act or practice under Section 5:
- charging multiple overdraft or NSF fees in a single day with a high limit (or no limit) of the number of fees that may be assessed per day; and
- charging a fixed, periodic fee for failure to cure a previous overdrawn balance (i.e. sustained overdraft fees)
The bulletin includes a discussion of sound risk management practices in connection with overdraft protection programs. It describes the practices that are generally necessary for effective board and management oversight and issues banks should be considering in order for their new activity development processes to be effective. The OCC indicates that such processes are needed to manage the risks associated with offering new, modified, or expanded products and services, including new overdraft protection programs or changes to existing programs. The OCC also notes the need for an effective risk management program to be in place if banks use third-party relationships as part of their overdraft protection protections.
The OCC provides a non-exhaustive list of examples of potential appropriate risk management practices that banks may consider adopting in connection with their overdraft protection programs. Such examples include the adoption of:
- overdraft limits and account terms that “are aligned with eligibility and underwriting criteria that promote fair treatment and fair access,” such as short-term single payment structures that support consumer affordability and successful repayment of negative account balances in a reasonable time frame instead of reliance on repeated reborrowing;
- a process for reviewing data and analyzing whether overall overdraft protection program revenues are reasonably related to the product risks and costs, as appropriate, at the portfolio, account, and transaction levels;
- processes to periodically review accounts of customers who regularly use overdraft programs;
- periodic account monitoring that result in appropriate changes to overdraft limits, eligibility for continued use, or recommendations to consumers for other appropriate deposit account services when overreliance, excessive costs, or options for more cost-effective credit usage are detected;
- grace negative balance amounts or de minimus transaction amounts for which no fees would not be assessed;
- grace periods before assessment of fees;
- online access and timely automated alerts;
- single daily fee assessments that are reasonably related to the costs of providing either overdraft protection or returned item for NSF services;
- policies to process overdraft and NSF fees at the end of the posting order; and
- analyzing complaints to detect and remediate any complaints related to overdraft protection programs and UDAAPs.
FDIC Supervisory Guidance. The new FDIC guidance only addresses APSN overdraft fees. The FDIC previously addressed APSN overdraft fees in supervisory guidance issued in June 2019. The FDIC indicates that during examinations, it has determined that certain overdraft practices related to APSN transactions were unfair. In addition to the risk of Section 5 violations, the FDIC highlights the risk that charging APSN overdraft fees can result in violations of the Dodd-Frank UDAAP prohibition. The FDIC states that consumers cannot reasonably avoid the injury of APSN overdraft fees because consumers do not have the ability to effectively control payment systems and overdraft processing systems practices.
In its discussion of risk mitigation practices, the FDIC encourages institutions to review their practices when charging APSN overdraft fees “to ensure customers are not charged overdraft fees for transactions consumers may not anticipate or avoid.” The FDIC discusses the use of third parties in connection with overdraft programs and describes steps institutions should take to understand and address the risks arising from such arrangements. It comments that some third parties offer data processing system enhancements aimed at preventing APSN overdraft fees and notes that these enhancements may be offered on an optional basis or require an institution to take action to implement them.
Most significantly, while it encourages institutions to review their disclosures and account agreements to ensure deposit account fee practices “are communicated accurately clearly and consistently,” the FDIC comments that “disclosures generally do not fully address Dodd-Frank UDAAP and FTC UDAP risks associated with APSN transactions and related overdraft fees.”
Although the FDIC’s new supervisory guidance does not address NSF fee practices, the FDIC previously addressed such practices in supervisory guidance issued in August 2022. The guidance followed the FDIC’s identification during consumer compliance examinations of UDAP violations in connection with banks’ representment practices. In the guidance, the FDIC addressed potential risks arising from multiple representment NSF fees, risk mitigation practices, and the FDIC’s supervisory approach.
In its August 2022 supervisory guidance on NSF fees practices, the FDIC identified litigation risk as one of the risks arising from multiple representment NSF fees. The FDIC noted 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 representment NSF fee practices. APSN overdraft fees are also a source of litigation risk.
We are representing clients in the review of overdraft and NSF disclosures and practices and the defense of class actions involving both APSN overdraft fees and NSF fee practices. Courts have frequently refused to dismiss such class actions where disclosures fail to unambiguously disclose APSN overdraft and NSF fee practices. Plaintiffs have been much less successful in prosecuting claims premised upon alleged violations of state UDAP statutes where such statutes require proof of reliance and/or causation. Even where a court may refuse to dismiss such a class action, the burden of demonstrating the existence of an identifiable class may result in an individual resolution.
APSN overdraft fees have also been the subject of CFPB scrutiny. In its March 2023 “Junk Fees Special Edition” of Supervisory Highlights, the CFPB indicated that its examiners cited institutions for unfair acts or practices based on APSN overdraft fees charged to consumers. Such fees were also the subject of a 2022 circular issued by the Bureau. In the circular, the CFPB stated that such fees are unfair because they cannot be reasonably anticipated by consumers, are likely to impose substantial injury that cannot be avoided, and are not outweighed by countervailing benefits to consumers or competition. The CFPB’s policy statement strongly suggested that the CFPB would view APSN overdraft fees as unfair even if a bank were to clearly disclose to consumers that an overdraft fee applies to APSN transactions.
Although the CFPB has not yet formally weighed in on the issue of representment NSF fees, 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.) The CFPB has published the top 20 bank’s NSF practices since February 2022 to discourage banks from charging NSF fees. In the its February 2023 report titled “Banks’ overdraft/NSF fee revenue declines significantly compared to pre-pandemic levels,” the CFPB reported a substantial reduction in overdraft and NSF fee revenues.
The CFPB continues to blog about the trend of banks eliminating NSF fees and has indicated that it is “closely scrutinizing whether and when charging these fees may be unlawful.” In its April 13, 2022 blog post, the CFPB stated that as of April 1, 2022, twelve banks have not publicly announced elimination of NSF fees. NSF and overdraft fees were included in the CFPB’s Fall 2022 rulemaking agenda despite the data showing a significant decline in fee revenue and a trend of wide-spread changes in overdraft and NSF fee practices in the banking industry.
As to the Federal Reserve Board, APSN overdraft fees have been criticized as unfair and deceptive in examinations of state banks that are member banks in the Federal Reserve System.