By Rose Oswald Poels
In two separate publications, FDIC has recently identified deposit-related activities which, depending upon how banks disclose charges for such activities, may result in a heightened risk of violations of Section 5 of the FTC Act — otherwise known as unfair, deceptive, or abusive acts or practices (UDAAP).
FDIC has identified the assessment of overdraft fees for “force pay” transactions and charging multiple NSF fees for same transactions presented multiple times against insufficient funds as the deposit-related activities of concern. I have outlined both scenarios below.
In a quarterly newsletter issued by its Dallas Region, FDIC outlined potential issues with assessing overdraft fees for “force pay” transactions in certain situations. There may be times when a bank authorizes an ATM or one-time POS debit card transaction based on sufficient funds in a consumer’s account at the time of authorization; however, at settlement, the account has insufficient funds to cover the transaction. Due to a bank’s contract with its payment network providers, the bank is required to pay these transactions even though the customer does not have sufficient funds in their account at settlement. FDIC refers to this type of transaction as a “force pay” transaction.
As outlined by FDIC, some banks have a policy and practice of declining to authorize and pay any ATM or one-time POS debit card transactions when a customer has insufficient funds available in the account to cover the transaction. FDIC refers to these banks as “no pay” banks. Other banks may offer an overdraft program, but some consumers do not qualify, have not yet met all eligibility requirements, or do not opt-in to participate.
FDIC has identified that some “no pay” banks solicit a consumer’s authorization or opt-in, using an overdraft opt-in form similar to the Regulation E model form A-9, to assess overdraft fees for ATM and one-time POS debit card transactions in “force pay” transactions.
FDIC stated it believes the use of the A-9 model form for this purpose may be considered deceptive, as a reasonable consumer may be misled into believing that the bank would generally pay all overdrafts caused by ATM and one-time POS debit card transactions. Additionally, the A-9 model form does not disclose that force pay transactions would be paid regardless of whether the consumer opts in. FDIC also identified how force pay transactions could lead to concerns at banks that offer overdraft programs, although those are more nuanced transactions and are not discussed here.
FDIC offered the following suggestions to mitigate risks:
Maintain policies and procedures to ensure compliance with applicable regulatory requirements under Regulation E;
Ensure that disclosures provided to consumers are clear and conspicuous, accurately reflect bank practices, and do not suggest that the bank offers an overdraft program when it does not;
Confirm a customer’s opt-in is deactivated in the deposit processing platform when he/she does not have access to the overdraft program;
Verify a customer’s opt-in is deactivated in the deposit processing platform when he/she revokes his/her opt-in election or when the bank terminates the customer’s access to the overdraft program; and
Notify customers as soon as possible if the bank independently terminates their access to the overdraft program.
In a separate publication, Consumer Compliance Supervisory Highlights, FDIC outlined potential issues with charging multiple NSF fees for re-presentment of unpaid transactions. FDIC found disclosing that one NSF fee would be charged “per item” or “per transaction” is not clearly defined and did not explain that the same transaction might result in multiple NSF fees if re-presented. FDIC stated it believes there is risk of unfairness if 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.
FDIC also addressed that re-presented transactions have been the subject of recent class action lawsuits involving banks, including FDIC-supervised institutions. The lawsuits typically allege breach of contract due to the omission of important information about when the fee would be assessed.
FDIC again offered suggestions to mitigate risks, including:
Eliminating NSF fees
Declining to charge more than one NSF fee for the same transaction, regardless of whether the item is represented
Disclosing the amount of NSF fees and how such fees will be imposed, including:
Information on whether multiple fees may be assessed in connection with a single transaction;
The frequency with which such fees can be assessed; and
The maximum number of fees that can be assessed in connection with a single transaction.
Reviewing customer notification practices related to NSF transactions and the timing of fees to provide the customer with an ability to avoid multiple fees for re-presented items
Conducting a comprehensive review of policies, practices, and disclosures related to re-presentments to ensure the manner in which NSF fees are charged is communicated clearly and consistently
Working with service providers to retain comprehensive records so that re-presented items can be identified
I would not recommend the use of Regulation E model form A-9 as a means to obtain a consumers’ authorization or opt-in for a force pay transaction. There is not a model form for such transactions and banks need to review how best to disclose their practice for force pay transactions with their counsel. For banks offering overdraft programs, banks need to be careful how it treats a consumer’s opt-in if the opt-in election was provided but access to the overdraft protection coverage has not yet begun and when the bank terminates access to the overdraft program.
I would also recommend banks review their deposit account disclosures, statement of fees, and account rules documents to further determine how to accurately disclose an NSF fee on a re-presented item, if applicable.
If using FIPCO forms, the WBA 384 Deposit Account Rules document was revised in March 2021 to further clarify that a financial institution may charge a fee each time the same check, transfer request, or withdrawal request is returned unpaid. Language was also added to state that the depositor should review the schedule of fees for a listing and amount of such fees. Additionally, the revised form instruction also set forth that if the user intends to charge a fee each time the same check, transfer request, or withdrawal request is returned unpaid, it is important that the schedule of fees explains the financial institution’s intent to charge a fee each time rather than one fee regardless of the number of times the check, transfer request, or withdrawal request is returned unpaid.
If scrutinized by a regulator for charging multiple NSF fees for a re-presented item, I recommend the bank explain to the regulator the actual presentment process and any inability to identify items resubmitted by a merchant for payment.