On April 26, 2023, both the Federal Deposit Insurance Corporation (“FDIC”)[1] and the Office of the Comptroller of the Currency (“OCC”)[2] issued additional guidance regarding overdraft and non-sufficient funds (“NSF”) transactions and fees. Both publications included a discussion of unfair, deceptive, or abusive acts and practices (“UDAAP”)[3] risks associated with “Authorize Positive, Settle Negative” (“APSN”) transactions. In addition, the OCC guidance covered UDAAP risk related to representment NSF fees, which the FDIC addressed in FIL-40-2022.[4] The OCC Bulletin also discussed sound practices to manage risks associated with overdraft protection programs.

APSN Transactions

An APSN transaction occurs when a debit transaction is authorized against a positive balance, but settles against a negative account balance. In some cases, the bank also may assess fees against other transactions made between the authorization and settlement that resulted in the negative balance. Both the FDIC and the OCC characterized certain overdraft practices related to APSN as “unfair,” and both agencies stated that compliance risks related to APSN fees may exist whether banks assess the fees based on ledger balance or available balance. The OCC also noted that some account materials related to programs that assess overdraft fees on APSN transactions were “deceptive.”

Representment Fee Practices

Echoing the FDIC’s position in its Financial Institution Letter on representment fee practices, the OCC highlighted the risks in charging additional fees when a check or ACH transaction is returned unpaid multiple times. In some cases, disclosures may not clearly and completely explain fee assessment practices. Even when disclosures are clear, charging multiple fees on represented transactions may be unfair, since consumers typically have no control over when a returned transaction will be presented and, therefore, lack knowledge of whether intervening deposits will be sufficient to cover the returned transaction and any related fees.

Other Practices Presenting Heightened Risk

The OCC noted other practices related to overdraft and NSF fees can pose heightened risks. First, the OCC observed some institutions do not limit the number of overdraft or NSF fees that will be assessed in a single day, and other institutions have high daily limits on such fees. In the OCC’s supervisory experience, institutions with high or no limits on daily overdraft and NSF fees may have overdraft programs that are deemed unfair under UDAAP due to the difficulty consumers face in bringing accounts positive and the high consumer costs. Second, the OCC stated charging a fixed periodic fee for sustained or extended overdraft contributes to unfair or deceptive overdraft programs, particularly when disclosures do not accurately or adequately inform consumers when such fees will be charged.

Risk Management

In their respective publications, both the OCC and the FDIC discussed mitigating the risks associated with overdraft and NSF practices, highlighting the role of robust third-party risk management, appropriate policies and procedures related to fee assessment, board and management oversight, and periodic review of disclosures and account agreements.

In addition, the OCC emphasized the importance of employing several risk management steps/processes related to overdraft programs:

• Product Design: Do overdraft limits, program terms and conditions, eligibility, and underwriting support fair access and treatment? Are product structures consistent with successful repayment and consumer affordability?
• Opt-In Processes: Are opt-in policies and procedures fully compliant?
• Disclosures: Are disclosures accurate, transparent, timely, and complete?
• Product Review: Does the institution periodically review overdraft program revenues for consistency with risk and costs at the portfolio, account, and transaction levels?
• Account Analysis: Does the institution periodically review accounts of overdraft customers to ensure that the customers are not overly reliant on overdraft credit; incurring costs that are disproportionate to the amounts of items honored, regular deposits, and average account balances?
• Eligibility Monitoring: Are overdraft users’ accounts periodically monitored for continued eligibility, appropriate overdraft limits, and eligibility for less costly forms of credit? When monitoring results in changes to eligibility or limits, are those changes promptly and clearly communicated to consumers?
• Grace Periods: Has the institution adopted grace periods before the assessment of fees? If so, is the grace period sufficient for consumers to address account balances before fees are incurred?
• Fee practices: Has the bank adopted customer friendly fee practices, such as:
  • Excluding de minimis transactions from overdraft fees;
  • Implementing a single daily fee reasonably related to the costs of providing overdraft protection or processing NSF items; or
  • Collecting fees related to overdraft and NSF services from the next deposit only after other presented items have posted or cleared?
• Account Management Tools: Are customers provided with tools and information to manage their accounts? Does the bank offer consumers the ability to access current information via online banking, mobile apps, and electronic alerts, such as text messages or emails that notify of low balances, to avoid negative balances and fees?
• Complaints Management: Does the bank analyze, report, and resolve overdraft and NSF complaints in a manner consistent with its size, complexity, and risk profile? Does the bank use complaint data to detect and remediate potential UDAAPs?
• Self-Correction: Does the institution have processes in place to identify and correct risk management weaknesses and remediate harmed consumers?

Conclusion

The latest guidance issued by both the FDIC and OCC continues the pressure on banks to adopt transparent, consumer-friendly fee practices. The Consumer Financial Protection Bureau (“CFPB”) has also published research and guidance in this area, including:

• Consumer Financial Protection Circular 2022-06 on unanticipated overdraft fee assessment practices
• Bulletin 2022-06: Unfair Returned Deposited Item Fee Assessment Practices;
• Advisory Opinion on “Pay to Pay” fees;
• Supervisory Highlights Junk Fees Special Edition; and
• A research report on Credit Card Late Fees.

In addition, the CFPB has proposed a rule to reduce the safe harbor for “reasonable and proportional” credit card late fees under the CARD Act and eliminate the annual inflation adjustment to the safe harbor fee amount.

Taken together, this series of formal and informal guidance and rulemaking puts financial institutions on notice that fees, especially back-end fees, will be heavily scrutinized. Institutions should take steps now to review their fee structures on consumer accounts to ensure that fees are fair, transparent, fully disclosed, and proportionate to the cost of the product or service being provided.

[1] FIL-19-2023, https://www.fdic.gov/news/financial-institution-letters/2023/fil23019a.pdf

[2] OCC Bulletin 2023-12, https://occ.gov/news-issuances/bulletins/2023/bulletin-2023-12.html

[3] This blog will refer to both UDAAP and Unfair or Deceptive Acts and Practices (“UDAP”) as UDAAPs.

[4] https://www.fdic.gov/news/financial-institution-letters/2022/fil22040a.pdf