A complaint filed on July 20, 2023 in Minnesota federal court seeks declaratory and injunctive relief under the Administrative Procedures Act (APA) against defendants Federal Deposit Insurance Corporation (FDIC) and Chairman Martin J. Gruenberg for the FDIC’s issuance of supervisory guidance to banks under its supervision (i.e., state-chartered banks that are not members of the Federal Reserve System) prohibiting them from charging multiple non-sufficient funds (NSF) fees for the same item.

Last August, the FDIC-issued Financial Institutions Letter 40-2022: Supervisory Guidance on Multiple Re-Presentment NSF Fees (“FIL 40”) on multiple NSF fees arising from the re-presentment of the same unpaid transaction.  The guidance directly applies only to state-chartered banks and thrifts with assets of less than $10 billion 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) on NSF fees if their assets are less than $10 billion.  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 discussed consumer compliance risk, third-party risk and litigation risk.

For risk mitigation, the FDIC suggested supervised institutions eliminate fees or not charge more than one NSF fee per transaction.  The guidance further stated that 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 ensure full and lasting corrective action.  We recommend that these activities should be conducted carefully with consideration given to how they will impact any class actions in which the bank is a defendant.

The 40-page complaint alleges that FIL 40 is a legislative rule promulgated without adherence to the APA’s notice and comment rulemaking process, resulting in an arbitrary and capricious agency action and the FDIC exceeding its statutory authority.  The complaint also addressed the FDIC-issued Financial Institutions Letter 32-2023: FDIC Clarifying Supervisory Approach Regarding Supervisory Guidance on Multiple Re-Presentment NSF Fees (“FIL 32”) in which the supervisory approach was clarified to “to not request an institution to conduct a lookback review absent the likelihood of substantial consumer harm.”  The clarification, however, did not change the FDIC’s mandate to take corrective action.

The complaint further alleges that the Federal Trade Commission, not the FDIC, has the exclusive authority to define unfair and deceptive acts and practices under 15 U.S.C. § 57a(a)(1)(B) and the FDIC exceeded its statutory authority under 5 U.S.C.§ 706(2)(C) since “[n]o provision of federal law imbues the FDIC with authority to promulgate rules identifying specific UDAP violations or rules governing disclosure requirements for consumer deposit accounts and ACH transactions.”  The FTC has UDAP authority under Section 5 of the FTC Act and the CFPB has UDAAP authority to define UDAAP under the Consumer Financial Protection Act (CFPA).  The complaint further states that “the FDIC’s use and enforcement of FIL 40 is contrary to the FDIC’s own binding regulations that prohibit enforcement actions based on supervisory guidance.”

The complaint concludes that “FIL 40, even as revised by FIL 32, is a legislative rule that imposes new legal obligations on regulated financial institutions and commits the FDIC to take enforcement actions under specific circumstances related to the new obligations.”  The relief sought includes vacating FIL 40 and a permanent injunction to prevent its application or enforcement.  We will continue to monitor the case for the FDIC’s answer and court rulings.

While not addressed in the complaint, the ruling in this matter could impact the enforceability of the FDIC’s Financial Institutions Letter 19-2023: Supervisory Guidance on Charging Overdraft Fees for Authorize Positive, Settle Negative Transactions (“FIL 19”).  As we previously blogged, this April guidance determined that certain overdraft practices related to authorize positive settle negative (APSN) transactions were unfair as Section 5 violations and that charging APSN overdraft fees can result in violations of the Dodd-Frank UDAAP prohibition.  The FDIC encouraged institutions to review their account disclosures 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.”

The litigation may also impact the OCC’s NSF guidance as well.  In the same blog post, we covered the OCC Bulletin 2023-12: Overdraft Protection Programs: Risk Management Practices, which addressed multiple NSF fees arising from representment.  The OCC listed 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:  (1) 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 (2) charging a fixed, periodic fee for failure to cure a previous overdrawn balance (i.e. sustained overdraft fees).

The CFPB has weighed in on NSF fees through its blog posts, reports about reductions in overdraft and NSF fee revenue, and a recent enforcement action against a bank for its unfair practice of charging of such fees.