A financial institution’s deposit terms and conditions is arguably the most critical contract that exists between the institution and its depositor. Unlike most federally required deposit disclosures, the content of the terms and conditions is primarily driven by contract law and is scrutinized heavily by both courts and regulators. Given the scrutiny, which often leads to costly lawsuits or enforcement actions, monitoring the regulatory, legal, and market environment for any impact to your terms and conditions is considered a best practice. In addition, periodically rolling out these updates to all your depositors can help limit the scope of potential class action lawsuits, which have been an expensive risk for financial institutions in recent decades.
Wolters Kluwer’s compliance team focuses almost exclusively on this type of monitoring, and compiles recommended changes into a Terms and Conditions update event every couple of years. Over the past few years, however, the regulatory and litigation environment has been so active that not only did we conduct a more extensive update in 2022 on our regular schedule, but in 2023 and in 2024, we felt customers would benefit from an immediate update to certain targeted sections, rather than waiting for the next larger update.
At a high level, our updates from 2022-2024 have been driven by three primary sources: regulatory scrutiny, lawsuits, and legislation. This article will review each area's highlights and discuss their impact on those updates.
Regulatory scrutiny
In recent years, banking regulators have taken a tougher enforcement stance regarding consumer protection. In May of 2022, for example, the CFPB released a consent order addressing garnishment practices and communications surrounding those garnishment practices. The CFPB took particular issue with the bank’s terms and conditions, which, per the CFPB, deceived customers by suggesting they were waiving certain legal rights related to garnishment proceedings. While our content was not at issue in this order, we view these types of regulatory pronouncements as an opportunity to analyze our content from the regulator’s lens and make any changes that we believe would better protect our financial institution customers from negative interpretations.
Scrutiny combined with lawsuits
Overdrafts and nonsufficient funds (NSF) fee disclosures continue to be targeted by regulators and plaintiffs’ attorneys. For several years now, the practice of “Authorized Positive/Settle Negative” (or APSN) has been labeled as “unfair” to the consumer who assumes an authorization means their account has a sufficient balance to cover settlement, even a couple of days later. Regulators continue to issue enforcement orders, fining financial institutions for APSN transactions. In these cases, the regulators generally do not view “disclosure” of the practice as adequate and want to see financial institutions avoid the practice altogether. In response, we have removed support for APSN transactions from our content. Institutions that continue the practice may provide their own customized disclosures.
In addition to APSN, regulators have also focused on the practice of charging multiple NSF fees on the same transaction. In this scenario, multiple NSF fees are charged because the transaction is represented by the merchant, and an NSF fee may be charged a second or even a third time.
Originally, lawsuits and regulator guidance targeted disclosures as “deceptive” when they described fees as being charged “per item” without explaining that each time a transaction was presented, it was considered another “item.” With the outcomes of those lawsuits in mind, we revised our overdraft and NSF fee disclosure section to clarify the circumstances under which a fee may be charged. However, regulators have continued to issue additional guidance and enforcement actions indicating they expect further change in the practices surrounding the charging of multiple NSF fees. The FDIC, for example, recently stated that even if disclosures clearly disclose that multiple NSF fees can be incurred for a given transaction, the practice may still be considered “unfair” if the consumer does not have the time or opportunity to avoid the subsequent fees (e.g. if an item gets re-presented the next day). Financial institutions that continue to charge NSF fees will want to review their regulator’s guidance, make any necessary policy and practice changes, and ensure that their disclosures are clear and complete.
Lawsuits & state regulation
Class action overdraft and NSF lawsuits have also been driving many financial institutions to adopt arbitration clauses. To make a clause effective with an existing depositor, the institutions must send a change in terms notice. In response, many lawsuits have now been arguing that financial institutions do not have the ability to unilaterally change their terms. Courts have taken various approaches but generally look first to the language of the terms and conditions to determine whether a unilateral change in terms is permitted. The courts have also been considering which terms may be changed under the contract, whether notice to the customer of a change was adequate, whether the customer’s consent is needed, and what constitutes that consent.
Indiana’s supreme court recently weighed in on these issues in two decisions that were not favorable to financial institutions seeking to add an arbitration clause to their terms. In 2023, the Indiana legislature countered one of those decisions by passing legislation intended to clarify that a customer’s silence and continued use of an account constitutes prima facie evidence of consent to the change. Additional legislation limited the look-back period for class action lawsuits, thus helping to minimize the potential damage to financial institutions in that state.
While Indiana has been recently quite active at a court and legislative level, other jurisdictions have also invalidated the addition of arbitration clauses on various grounds, as described above, with many criticizing the specifics of the change notice process by which an arbitration clause was added. We recently revised both our terms and conditions as well as our change notice language, and associated guidance, with these types of cases and Indiana’s legislation in mind. Financial institutions who wish to add an arbitration agreement to their content may want to consult local counsel regarding best practices in their jurisdiction.
Conclusion
Financial institutions have been feeling the pinch from current very active regulators and litigators. Our compliance team monitors regulatory guidance, consent orders, regulation, court decisions, market developments, and customer feedback, to determine necessary terms and conditions updates. A few examples of some recent changes are described above, but for more information on the recent changes visit our deposit content resource.
