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On April 26, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) released, respectively, supervisory guidance and a bulletin warning banking organizations that it may be an unfair and deceptive act or practice to impose overdraft or non-sufficient fund (NSF) fees related to “authorize positive, settle negative” (APSN) transactions and re-presentment of such items on consumers who would not reasonably anticipate the fees. The guidance expands on interagency guidance issued in 2005 by the FDIC, OCC, the Board of Governors of the Federal Reserve System, and the National Credit Union Administration that set out safety and soundness considerations, legal risks, and best practices for overdraft protection programs. While the new guidance focuses primarily on APSN and re-presentment fees, the OCC also provides that charging unlimited or periodic fees may be unfair to consumers and therefore present heightened risks to banks.

This client Advisory provides an overview of the new guidance, describes the regulatory context surrounding the actions by the FDIC and OCC, and outlines key takeaways for financial institutions.

Background

The issuance of the new guidance by the FDIC and OCC demonstrates the continued interest by both federal and state regulatory authorities in bank overdraft protection programs. This guidance comes as the Bureau of Consumer Financial Protection (CFPB) continues its initiative, launched in January 2022, to combat what it calls “junk fees,” and after the CFPB issued its own supervisory guidance on overdraft and depositor fees in October 2022 — which were discussed in a previous Arnold & Porter client Advisory available here. Only a few weeks ago, the CFPB clarified through proposed guidance the standard underlying the prohibition on “abusive” acts or practices. Further, in 2021, the State of New York enacted legislation requiring banks to adopt check processing practices intended to minimize NSF charges, which was followed by guidance issued by the New York State Department of Financial Services in 2022 on avoiding improper practices related to overdraft and NSF fees.

In the new guidance, the FDIC and OCC indicate that the failure to take adequate steps to avoid assessing overdraft fees presents heightened risk of violating prohibitions against unfair or deceptive acts or practices under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) and the Federal Trade Commission Act (FTC Act). Section 1036(a)(1)(B) of the Dodd-Frank Act prohibits any covered person or service provider from engaging in any unfair, deceptive, or abusive acts or practices in connection with a consumer financial product or service.1 Section 5 of the FTC Act prohibits unfair or deceptive acts or practices.2 According to the FDIC and OCC, an act or practice is unfair when it (1) causes or is likely to cause substantial injury to consumers, (2) cannot be reasonably avoided by consumers, and (3) is not outweighed by countervailing benefits to consumers or to competition.

Understanding the Guidance on Authorize Positive, Settle Negative Fees

APSN transactions have long been a target of supervisory scrutiny by regulatory agencies.3 An APSN transaction occurs when a consumer’s deposit account has sufficient available funds to cover a transaction when it is authorized but, due to one or more intervening transactions, has an insufficient available balance to cover the transaction at the time it settles. According to the guidance, 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.

The FDIC and OCC provide that the practice of charging overdraft fees on APSN transactions may potentially violate Section 1036(a)(1)(B) of the Dodd-Frank Act and Section 5 of the FTC Act. The OCC stated that customer disclosures may be deceptive if they do not describe the circumstances under which consumers may incur overdraft fees, and that even when disclosures describe the circumstances, charging overdraft fees for APSN transactions may be unfair because consumers are still unlikely to be able to reasonably avoid injury. According to the guidance, the discrepancy between a consumer’s account balance at the time of a transaction and his or her balance at the time a transaction settles often is the result of a complicated payment system that is outside the consumer’s control. As such, the FDIC and OCC state that unanticipated and unavoidable overdraft fees resulting from APSN transactions impose substantial injuries to consumers that are not outweighed by a countervailing benefit to consumers or competition.

Understanding the Guidance on Re-Presentment Fees

The FDIC previously issued supervisory guidance on multiple re-presentment fees in August 2022. Re-presentment fees are additional NSF or overdraft fees that a bank charges each time a check or automated clearing house (ACH) transaction is re-presented for payment from a customer’s deposit account after the bank had already returned the transaction as unpaid. As stated by the OCC, consumers typically have no control over when a returned transaction will be presented again and lack knowledge of whether an intervening deposit will be sufficient to cover the transaction and related fees.

According to the FDIC and OCC, the practice of charging multiple re-presentment fees may be unfair and deceptive in violation of Section 5 of the FTC Act. The OCC stated that customer disclosures may be deceptive if they do not clearly explain that multiple or additional fees may result from multiple presentments of the same transaction. And, even when customer disclosures explain that a single transaction may result in more than one fee, a bank’s practice of assessing fees on each re-presentment may be unfair if consumers cannot reasonably avoid the harm and the other factors for establishing unfairness under Section 5 are met.

Takeaways for Financial Institutions

The guidance highlights that the concerns of the FDIC and OCC are more than theoretical, with both agencies noting that they have found unfair or deceptive acts or practices related to APSN fees during their compliance examinations of banks, and the OCC noting that it has found unfair or deceptive acts or practices related to re-presentment fees during its compliance examinations.

Further, to limit the potential risk for violating Section 5 of the FTC Act and other applicable laws and regulations, the guidance provides suggestions of appropriate risk-management practices to be taken by banks. Among the non-exhaustive list of suggested practices, the OCC said banks might consider running periodic systems tests to make sure their transaction posting is consistent with what is described in their customer disclosures, as well as offering automated balance alerts, instituting grace periods before overdraft fees are charged, or conducting regular analysis of fee structure and pricing. The FDIC, meanwhile, stressed the importance of adequately managing third-party providers of overdraft protection programs.

The guidance also suggests that using an “available balance” method on customer deposit accounts, rather than a “ledger balance” method, may involve heightened risks for banks. A ledger balance is the actual amount of funds in a customer’s deposit account after accounting for all items that have settled and posted, while an available balance is the ledger balance minus holds for recently deposited funds that have not yet cleared and for authorized but pending debit transactions. The FDIC and OCC agreed that, while consumer compliance risks exist in both ledger balance and available balance methods, the risks may be more pronounced in situations where banks use available balance methods. According to the FDIC, the use of available balance to assess overdraft fees may exacerbate the injury, as temporary holds may lead to consumers being assessed multiple overdraft fees when they may have reasonably expected only one.

The guidance from the FDIC and OCC is arguably more helpful than the guidance issued by the CFPB at the end of last year. Both the FDIC and OCC have directed compliance examiners to focus their attention on operational areas that present the greatest potential risk of consumer harm, including consideration of overdraft programs.4 While the FDIC and OCC guidance is informal, the guidance provides insight into how the agencies are thinking about overdraft fees and the types of actions the agencies think banks should take to avoid injury to consumers from overdraft fees. The guidance suggests that the FDIC and OCC are prepared to pursue appropriate corrective action to remedy violations related to overdraft protection programs. Typically, the agencies would seek such actions through the examination process, but the guidance certainly sets the stage for the agencies to also pursue enforcement actions for overdraft-related violations. Because a dissatisfactory consumer compliance examination rating can have negative supervisory consequences for a bank, consideration of overdraft fees and the impact on consumers are important things to be mindful of when heading into an examination.

Financial institutions interested in how the FDIC and OCC’s recent actions may impact their businesses may contact any of the authors of this Advisory or their usual Arnold & Porter contact. The firm’s Financial Services team would be pleased to assist with any questions about banking supervision or consumer finance more broadly.

© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.