On Sept. 8, 2022, the Consumer Financial Protection Bureau (CFPB) issued a consent order requiring a bank to pay a $50 million penalty and to refund at least $141 million to consumers allegedly harmed by the bank’s overdraft practices. The bank’s overdraft fees, referred to by the CFPB as “authorized-positive” fees, were charged on transactions that were authorized with a positive balance in the account but settled without sufficient funds to cover the transaction, resulting in an overdraft. Weeks later, on Oct. 26, 2022, the CFPB issued a circular to the other federal banking regulators, making the case that such “authorized-positive” fees constitute an unfair act or practice. The CFPB seems to be announcing that such fees are illegal, regardless of the extent to which the practice is disclosed in deposit account agreements. The CFPB’s actions follow the market trend of increased regulatory scrutiny of overdraft and non-sufficient fund (NSF) fees charged by financial institutions to their deposit customers.
The CFPB’s order and circular follow both the CFPB’s running series of blogs and studies of banks’ overdraft and NSF fee practices and the FDIC’s recently updated guidance regarding multiple non-sufficient funds (NSF) charges on re-presentment transactions. The CFPB reports that revenue from overdraft and NSF fees remains an important element of overall bank revenue for both small and large banks, and that there is a concentration of charging such fees to a low percentage of bank customers. The blogs have highlighted the fact that small banks, to a greater extent than mid-sized to large banks, are recovering such fee revenue to pre-pandemic levels after a decline during the pandemic. The CFPB stated that its bank examination priorities are impacted by the extent to which financial institutions are charging such fees. The CFPB indicates that it will review settlement and funds availability procedures, the amount of such fees in comparison to costs incurred in overdraft and NSF scenarios, and whether the financial institution is implementing policies to limit such fees. In sum, the CFPB is reviewing not only disclosure practices but also substantive policies on such fees. Its recent circular suggests that “authorized-positive” overdraft fees are generally illegal. In other recent publications, the CFPB is also generally referring to certain kinds of fees in the consumer financial market as “junk” fees.
As noted above, the FDIC recently issued guidance on NSF fees specifically. The FDIC found that many financial institutions charge NSF fees on each attempt by a merchant or other payee to obtain payment pursuant to an authorization from the payor. In the guidance, the FDIC warned financial institutions that charging such fees raises consumer compliance risks, third-party risks, and litigation risk. The FDIC suggested various risk mitigation practices, including changes to both disclosures and substantive policies in regard to such fees, and stated that financial institutions may face regulatory penalties for failure to “fully correct” such practices. The FDIC’s guidance was issued with respect to both consumer and business depositors. Building on the FDIC’s approach, at least one state regulator has issued guidance that NSF fees on re-presentments should be phased out entirely.
Previous Federal Regulatory Guidance on Overdraft and NSF Fees
In the early 2000s, the federal banking regulatory agencies released the “Joint Guidance on Overdraft Protection Programs.” This guidance outlined a number of regulatory concerns and best practices. For example, the guidance noted that institutions should consider concerns relating to unfair or deceptive acts or practices (UDAP) when advertising and implementing overdraft protection services, and also reminded financial institutions of the need to comply with the requirements of the Truth in Savings Act and the Electronic Fund Transfer Act regarding overdraft and NSF fees.
In 2010, the FDIC issued further guidance on risks associated with overdraft payment programs and compliance with consumer protection laws. For the assessment of multiple fees, this guidance focused on implementation of limitations on such fees on particular transactions, over daily time periods, and annually. Specifically, the FDIC recommended that financial institutions undertake meaningful follow-up communication if a customer overdraws on his or her account on more than six occasions in a rolling twelve-month period. Both issuances of guidance showed the heightened attention of regulators at the time to protecting depositors in regard to overdraft and NSF fee practices and disclosures.
As noted above, in recent months, the CFPB has taken up the issue of overdraft fees, specifically “authorized-positive” fees. This fee is charged when a debit card transaction is authorized with sufficient funds in the deposit account, then another transaction settles against the account, after which the debit card transaction settles when there are insufficient funds in the account. The CFPB appears to take the position that charging a fee in this manner cannot be cured with disclosure. Rather, the CFPB says that consumers reasonably may not expect to incur an overdraft in this scenario because when they view their available balance on their phone or online, it would show sufficient available funds in the account at the time the transaction is authorized. The circular gave no discussion of the fact that consumers have the ability to know all their pending transactions because they authorized them.
What Constitutes Unfair and Deceptive Practices
The banking regulators are analyzing such fees under their UDAP/UDAAP authority. Section 5 of the Federal Trade Commission (FTC) Act, which is enforceable by the FDIC, OCC, and Federal Reserve Board, generally prohibits unfair or deceptive acts or practices (UDAP). The Dodd-Frank Act also gave the CFPB authority to the take action against unfair, deceptive or abusive acts or practices (UDAAP).
In relation to multiple NSF charges, recent guidance from the FDIC indicates that the issue of a deceptive practice often turns on the related deposit account disclosures. If a financial institution charges multiple NSF fees, but fails to clearly and conspicuously disclose the scenario in which such fees will be charged to customers, the omission of this information may be considered a deceptive practice under Section 5.
In addition to adequate disclosures, the FDIC will also measure the fairness of the transaction by examining whether customers are given transparent notice of the multiple fees. This appears to also include an opportunity for customers to ensure their accounts can cover subsequent attempts by merchants to obtain payment on the transaction prior to being charged additional fees.
Given the CFPB’s recent actions involving “authorized-positive” overdraft fees, the regulators also appear poised to take action regarding certain fees as being substantively unfair, regardless of the extent to which they are disclosed.
Many financial institutions rely upon third parties, including core processors, for a myriad of transaction elements, including processing customer payments and providing systems that determine when NSF fees and overdraft fees are assessed. Many financial institutions also rely on third parties to provide “form” deposit account disclosures. In its most recent guidance, the FDIC has reiterated the need to maintain oversight over these third-party activities. For instance, financial institutions are responsible for regulating risks to customers through these third-party transactions to the same extent as if these transactions were handled in-house. Failure to properly manage and mitigate risks to customers when using third-party services could result in regulatory issues for the financial institution.
To avoid the growing risk of litigation and regulatory issues, at a minimum, financial institutions should conduct a thorough review of their internal and third-party NSF and overdraft programs and customer-facing disclosures to gauge compliance with the current regulatory climate. The focus of such a review should ensure disclosures are sufficient, including regarding multiple fees, frequency, and maximum number of fees charged. Further, these revised disclosures must be timely provided to customers.
Another compliance element is the transparency necessary for notifying customers of when to expect that such a fee will be charged. Financial institutions also should consider how to provide their customers with the opportunity to restore their account to a positive balance to avoid such fees.
Financial institutions also may need to self-identify and correct certain practices before their next examination. This may include looking back at payment- and fee-related data and making a decision on the best course of action going forward. Financial institutions also should examine their policies and practices regarding such fees to see if any changes can be made. This does not appear to be a litigation and regulatory issue that will subside any time soon.