2022 and regulatory scrutiny of overdraft fees

Overdraft fees, nonsufficient funds (NSF) fees, and similar fees are under increased regulatory scrutiny

2022 has been a year in which overdraft fees, nonsufficient funds (NSF) fees, and similar fees are under increased regulatory scrutiny. In October alone, the Consumer Financial Protection Bureau (CFPB) issued a circular on unanticipated fees, a compliance bulletin on unfair returned deposit item fees, and a brief on the impact of overdraft fees on economically insecure older adults. The year has also seen the Federal Deposit Insurance Corporation (FDIC) twice issue guidance on overdraft fees, several states have issued overdraft guidance, and financial institutions have been scrambling to respond. This article will summarize the CFPB and FDIC fee guidance, as well as guidance from the state of New York, and provide financial institutions with resources and action steps.

CFPB Circular 2022-06: Unanticipated Overdraft Fee Assessment Practices

Issued on October 26, 2022, the bottom line of this Circular is that the CFPB says charging a consumer a fee that the consumer may not reasonably anticipate could be an unfair act or practice and, as such, violates Section 1036 of the Consumer Financial Protection Act (CFPA). Specifically, the Circular considers the charging of an overdraft fee on a transaction that authorized positive—but settled negative (also known as an APSN transaction)—to be unfair. While the example in the circular focuses on APSN transactions, the overriding message is that financial institutions should review their fees and ask themselves, “what might a consumer reasonably anticipate?”

CFPB Compliance Bulletin 2022-06: Unfair Returned Deposited Item Fee Assessment Practices

In this Bulletin, the CFPB states that a blanket policy of charging a so-called returned deposited item fee to a consumer is likely an unfair act or practice under the CFPA. The CFPB defines a "returned deposit item" as "a check that a consumer deposits into their checking account that is returned to the consumer because the check could not be processed against the check originator’s account." By "blanket policy," the CFPB means a policy of charging such a fee for all returned transactions irrespective of the circumstances or patterns of behavior on the account. The CFPB is labeling these fees as "unanticipated" and "unfair" even though an institution may have disclosed the fee and the practice to the consumer. The CFPB takes a different view where such a fee is charged more narrowly, such as where a consumer repeatedly deposits bad checks from the same originator.

FDIC August 2022 Supervisory Guidance

On August 18, 2022, the FDIC issued Supervisory Guidance on the topic of re-presented items. The guidance closely paralleled the Spring Supervisory Highlights discussed below, with some additional important information. Specifically, the FDIC provides guidance for financial institutions that self-identify and fully correct violations, including the potential of limiting the restitution lookback period to two years from the date of the letter. [For more detailed information see Summary of Recent FDIC Guidance on Multiple Re-Presentment NSF Fees.]

New York Department of Financial Services Issues Notice Addressing Overdrafts

On July 12, 2022, the New York Department of Financial Services (NYDFS) issued a notice addressing overdraft practices. Specifically, the NYDFS addressed the practices of charging an overdraft fee on a transaction that authorized positive but settled negative (APSN), charging “double fees” on so-called “futile” overdraft protection transfers, and charging multiple NSF fees on the “same” transaction. Importantly, the NYDFS labeled both APSN and the charging of "double fees" as unfair acts or practices — meaning they are practices to be avoided. Consistent with the FDIC Supervisory Highlights below, the NYDFS also noted that charging multiple NSF fees on the same transaction could be an unfair act or practice in some circumstances and that the long-term expectation is that New York institutions eventually discontinue the practice.

FDIC Spring 2022 Supervisory Highlights Addresses NSF Fees

The FDIC Spring 2022 Supervisory Highlights discussed, among other things, the practice of an institution charging multiple NSF fees on a re-presented item. The concern the FDIC identified is "multiple fees are assessed for the same transaction in a short period of time without sufficient notice or opportunity for consumers to bring their account to a positive balance." Based on these materials, the key to compliance appears to be:

1. Providing notice in the account opening materials that re-presentment can occur,
2. Providing the notice again at the time the NSF fee is charged, and
3. Providing "sufficient time" for the depositor to bring their balance current.

Summary and Action Steps

As regulators continue to press financial institutions regarding overdraft and similar fees, institutions should review their overdraft disclosures, policies, and practices and work with their document provider, compliance professionals, and payment processors to determine solutions that can satisfy the various concerns discussed above. Importantly, if an act or practice is considered deceptive, disclosing the act or practice in a clear and conspicuous manner can help reduce, and maybe even alleviate, the deception. However, for an act or practice that is considered unfair or abusive, disclosure will generally not suffice and the institution will need to modify or, more likely, eliminate the act or practice altogether.

Financial institutions may also want to look to their industry association for additional guidance to help address these issues. For example, Wolters Kluwer identified an article titled Measuring Your Bank's Fee Risk written by the Iowa Bankers Association and published in the October 2022 Disclosure, Volume 39, Issue 10. The article provides a nice step-by-step process for analyzing an institution's fee risk.

Further Discussion on Overdraft Trends

For further discussion of legal and regulatory trends affecting overdraft and NSF fees, please see our article, “Overdrafts: Litigation, Regulatory Trends, and Action Steps,” by Wolters Kluwer’s Karl Leslie and Therese Kieffer (September 30, 2022).