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ABA Update: Reining in a Regulator Gone Rogue

By Rob Nichols

In an American Banker op-ed earlier this year, I called out the CFPB under the leadership of Rohit Chopra as a “regulator gone rogue.” I’m not alone in my criticism: in September, 12 Republican lawmakers took the bureau to task over what they called a “radical and highly-politicized agenda unbounded by statutory limits.”

Unfortunately, the bureau has continued to push legal boundaries on several different fronts in recent months.

First, the bureau has waged an aggressive PR campaign against so-called “junk fees” — using a term it coined to demonize the legitimate fees, including overdraft fees, that banks charge consumers for the products and services they offer. Throwing these fees in with things like concert ticket processing fees, resort fees and other surprise fees charged by retailers and hospitality businesses was a deliberate move to confuse the public about the well-disclosed fees they currently pay. (For the record, banks don’t charge resort or ticket fees, nor does the CFPB have authority to regulate those types of fees.)

Another alarming step by the Chopra bureau was its decision to update the UDAAP section of its exam manual in a way that fundamentally upends the regulatory approach to fair lending supervision and enforcement, without providing industry stakeholders or the public the opportunity to provide feedback through the notice and comment process under the Administrative Procedure Act. Instead, the CFPB chose to take a backdoor route to expand its authority — giving itself the ability to examine for alleged disparate treatment or impact across all areas of bank operations using the authorities granted by the Dodd-Frank Act under its authority to prevent “unfair, deceptive, or abusive acts or practices.”

In reality, the CFPB’s authority to enforce anti-discrimination laws is limited to credit products. It’s clear that this move is an attempt by the bureau to set itself up as a “super-regulator” of financial practices using authority Congress did not give it.

To be clear: ABA fully supports the fair enforcement of the nation’s anti-discrimination laws. We simply believe these laws should be enforced by regulators within the boundaries set by Congress. This updated manual does not qualify.

Given that the bureau has not seen fit to rescind the manual — despite previous calls from ABA and other trade groups — we were left with no choice but to pursue legal action. ABA’s lawsuit, which was filed in late September jointly with the U.S. Chamber of Commerce, the Longview Chamber of Commerce, the Texas Bankers Association, the Independent Bankers Association of Texas, the Texas Association of Business, and the Consumer Bankers Association, alleges violations of the APA in three ways.

First, the bureau is exceeding its statutory authority outlined in Dodd-Frank, which is clear that “unfairness” under UDAAP and discrimination are distinct concepts that should not be conflated. Second, the updated manual is “arbitrary and capricious,” in violation of the APA. Finally, it violates the APA’s procedural requirements because it constitutes a legislative rule that failed to go through notice and comment.

It’s never our preference to take legal action against a regulator. And this lawsuit doesn’t mean we’ve given up on finding common ground with the bureau. In fact, on issues like the need to protect consumer data, or the need to make sure nonbanks face the same regulatory requirements as banks for similar activities, or the importance of relationship banking, our goals are very much aligned.

But when a regulator — any regulator — takes a step like this to dramatically expand its regulatory reach without authorization from Congress or any opportunity for the public to weigh in, ABA will respond on behalf of our members and the industry we represent.

Nichols is president and CEO of the American Bankers Association

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Executive Letter: Your Judicial Advocate

Rose Oswald PoelsBy Rose Oswald Poels

As I’ve discussed in past issues of the Executive Letter (view here, here, and here), several Wisconsin financial institutions are fighting class action lawsuits on the issue of represented items and fees. These lawsuits are occurring across the country against banks and credit unions and appear to be generated from a few class action law firms.

WBA does not normally get involved in bank litigation until it reaches an appellate level. In these cases, however, it is helpful for WBA to know whether your bank is involved in such litigation, so we can help share what we know about others facing the same class action suit. There is value in similarly situated banks, along with their legal counsel, talking with others so they can help each other respond in these cases. For example, WBA just became aware of a case in Dane County that was successfully dismissed, in favor of the bank, on a motion to dismiss. Due to lookback periods, WBA believes these representment class action suits will continue to be filed against banks for at least the next year and then will start to diminish. The goal, of course, is to force a settlement which is occurring in Wisconsin and around the country.

WBA will collect bank name and contact information, venue, issue at hand, and the name and contact information for bank’s counsel involved in the matter. WBA will share the collected information with member banks requesting the information; this information will not be published. My hope is to help connect banks, and their counsels, with each other to discuss experiences and help find resolutions.

In addition to serving as a central repository of these class action suits against banks, as mentioned above, WBA does get involved as a friend of the court in cases at an appellate level where a bank is involved as a party. WBA may get involved as a friend of the court in cases of widespread importance to Wisconsin banks generally and where the banking industry is in general agreement on the issues. If requested by a member to participate, the facts of the case are defensible, and WBA’s counsel believes a reasonable chance of being persuasive exists, a recommendation is made to the WBA Board of Directors for their approval of involvement. If approved, WBA will collaborate with its outside counsel to get involved as a friend of the court. WBA will not participate in cases involving two or more member banks as opposing parties.

If your bank is facing a suit, please assist WBA in assisting other Wisconsin banks facing similar cases by letting me or WBA’s VP – Legal Heather MacKinnon know.

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Executive Letter: Review and Act on Deposit-related Activities FDIC Has Identified as Potential UDAAP

Rose Oswald PoelsBy Rose Oswald Poels

In recent conversations with state bankers associations across the country, as well as bankers here in Wisconsin, it is clear that regulators, particularly the Federal Deposit Insurance Corporation (FDIC), are very focused on certain deposit-related activities citing them as violations in examinations, and also identifying them as potential unfair, deceptive, or abusive acts or practices (UDAAP) violations. As a result, I want to highlight these concerns again for the membership as a follow-up to my April 5 Executive Letter e-pub.

In that document, I shared information about how FDIC has identified (a) the assessment of overdraft fees for “force pay” transactions and (b) charging multiple non-sufficient funds fees (NSF fees) for the same transactions presented multiple times against insufficient funds as deposit-related activities which FDIC believes may result in a heightened risk of violations of UDAAP. In that same publication, I made recommendations to help banks take action.

In Wisconsin, as in other states, current FDIC compliance examinations include a review of disclosures and charges for these activities. FDIC examiners have been aggressive with their new interpretations, and time is of the essence for banks to act. In some cases, WBA understands that banks receiving these violations are told to go back at least 12 months to determine consumer harm.

With FDIC adopting a new interpretation that disclosing that one NSF fee would be charged “per item” or “per transaction” is not clearly defined and does not explain that the same transaction might result in multiple NSF fees if re-presented, banks should review disclosures to determine whether FDIC’s new interpretation affects the bank. If it does, banks should revise disclosure language accordingly and consider other risk-mitigating steps as outlined by FDIC in the recent publications included in the April 5 Executive Letter.

A bank needs to also understand its actual presentment process and whether it has any ability or inability to identify items resubmitted by a merchant for payment. Review should also include whether the bank can track or identify when a check — presented in physical form the first time — is represented as Automated Clearing House (ACH) the second time by the merchant. Banks should be prepared to explain to examiners their processes and any operational and system limitations in the ability to identify represented items or to trace items if an item was converted when represented.

With respect to the issue of assessing overdraft fees for “force pay” transactions, if a “no pay” bank used the Regulation E model Form A-9 to solicit a consumer’s authorization or opt-in to assess overdraft fees for ATM and one-time point-of-sale (POS) debit card transactions in “force pay” transactions, that model form should not be used in that manner. It was not intended for such transactions. In such situations, banks should review how best to disclose their practice for “force pay” transactions with their counsel.

Failure of a bank to take action will likely result in FDIC citing a UDAAP violation and potentially imposing consumer reimbursement of charges in connection with these deposit-related activities.

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Executive Letter: FDIC Identifies Charges in Connection with Deposit-Related Activities as Potential UDAAP

Rose Oswald PoelsBy 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.

Potential Issues with Assessing Overdraft Fees for “Force Pay” Transactions  

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.

Potential Issues with Re-Presentment of Unpaid Transactions 

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

Conclusion 

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.

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Some Banks Gauge Overdraft Fee Changes Amid Politics, Competition

Long accused by consumer advocates of using overdraft fees to cash in on people’s mistakes, banks are taking a look at ways to make the cost of an overdrawn account less onerous for customers. 

The move comes as overdraft fees could be headed for closer scrutiny by regulators, and as traditional financial institutions increasingly face competition from fintech firms and products like Walmart MoneyCard. 

James Johannes, a University of Wisconsin-Madison finance professor, said “banks are rethinking how to generate fees in a more politically acceptable manner.” 

“At first blush I don’t see how any bank can extend credit without generating some sort of fee or interest,” said Johannes, who is director of the Puelicher Center for Banking Education and Aschenbrener Chair in Finance at the Wisconsin School of Business. “Fees are a four-letter word to many on the left, though, so banks are looking for ways to say they aren’t charging fees. One way is to call the overdraft a line of credit and charge interest.” 

A recent American Banker article pointed out that since President Biden took office this year, several large banks have announced major changes that will reduce overdraft fee revenue, while others are reconsidering the fees. Among possibilities are eliminating overdraft fees altogether or introducing new products offering less-expensive options to financially hard-pressed customers. 

In Wisconsin, one program aimed at attracting the unbanked and under-banked to the traditional financial services system already eschews overdraft fees. 

The Bank On Greater Milwaukee initiative, which is part of a national effort to make the banking system more accommodating to more people, was launched in 2019 as a program of the Urban Economic Development Association of Wisconsin. 

Key features include accounts with low or no monthly costs, no overdraft or non-sufficient fund fees, and the ability to pay bills and make purchases. 

“We’re trying to get people away from the payday lending stores, the pawn shop – those types of things – and this was a way in trying on our part to do that,” said Tom Sattler, executive vice president at The Equitable Bank in Wauwatosa. 

Along with The Equitable, 12 other financial institutions have established accounts that are part of Bank On Greater Milwaukee: Bank Five Nine, BMO Harris Bank, Chase, CIBC, First Federal Bank, First Midwest Bank, Old National Bank, PNC Bank, U.S. Bank, Wells Fargo, and two credit unions – Self Help and Summit. 

“No overdraft fees. That’s one of the keys,” Sattler said. 

There is no doubt that pressure is increasing for financial institutions in the U.S. to ease the burden of overdraft fees, said G. Michael Moebs, economist and chief executive officer at the economic research and consulting firm Moebs Services Inc. in Lake Forest, Ill. 

The pressure is coming not only from politicians, but from fintechs like Chime and Walmart MoneyCard, he said. 

Chime, for instance, which can receive members’ direct-deposited payroll checks into “spending accounts,” lets members make debit card purchases that overdraw their account with no overdraft fees. Limits start at $20 and can be increased to $200. 

“At Chime, we’re not like most banks. We believe in having our member’s backs and will allow you to overdraft up to $200 without charging a fee,” Chime asserts on its website. 

The Walmart MoneyCard also accepts deposits and offers more-accommodating and less-expensive overdrafts than most banks. MoneyCard holders can opt into a program that gives them 24 hours to fix a negative balance before they’re charged a $15 fee for each  purchase transaction that overdraws the account. 

A 2021 survey conducted nationally by Moebs Services Inc. lists median fees for an overdraft of less than $100 are various types of financial institutions: payday lender, $18.25; community bank, $26; credit union, $30; and large bank, $35.  

Moebs is among those who think banks need to reduce overdraft fees and raise overdraw limits. It actually will benefit them by increasing the volume of overdrafts, he said. 

What does Moebs think an overdraft fee should be? 

“Definitely less than $20 if you’re going to do it on a price per transaction,” he said. 

Moebs contends overdrafts shouldn’t be considered a great offense in the scheme of financial mistakes, but bankers have been trained to view them that way. 

“They’re an error. The vast majority of people do not want to overdraw, and it’s done unintentionally,” he said. 

Interestingly, during a pandemic that temporarily shut down much of the economy last year, overdrafts didn’t increase. They actually dropped by about 10%, Moebs Services data shows. 

Nationally, there were 991,350,053 overdraft transactions totaling about $31.3 billion in 2020, according to Moebs Services. That compared with 1,096,928,674 overdraft transactions totaling $34.6 billion in 2019. 

Experts say many people who were home last year carefully minded their money with the help of digital apps, and at the same time, were bolstered financially by government stimulus and increased unemployment funds. 

But even though overdrafts decreased last year, there’s not likely to be any let-up by consumer advocates concerning fees. 

In a webinar this month (July) that celebrated the 10th anniversary of the creation of the federal Consumer Financial Protection Bureau, Massachusetts Sen. Elizabeth Warren said overdraft fees remain an issue that needs to be addressed. 

“There are so many areas still where the bureau can make a difference,” Warren told webinar participants from Americans for Financial Reform, the U.S. Public Interest Research Group, the Consumer Federation of America and other advocacy groups. 

“I think one of them is overdraft fees. This is an area where there's a lot of predatory behavior by giant banks that make billions of dollars in profits and squeeze every last penny out of customers who are struggling,” Warren said. “And I think getting some rules around that could help families a lot.” 

Moebs said banks and credit unions should lower the cost of overdrafts for their own sake. 

“If they wait they are going to be losing checking account portfolio, and they are going to be losing it not to bank competitors, but they are going to be losing it to the fintechs like Walmart and Chime,” he said. 

UW-Madison’s Johannes called overdraft fees “a tricky issue” that can hit smaller banks harder than large ones because the community banks don’t have as many ways to generate fee income. 

“It’s a hornets’ nest of politics and profit,” he said. 

Paul Gores is a journalist who covered business news for the Milwaukee Journal Sentinel for 20 years. Have a story idea? Contact him at paul.gores57@gmail.com. 

By, Cassie Krause

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Overdrafts – Compliance and Risk Management Expectations

Overdrafts are certainly an area we’ve heard a lot about lately. Even though there is no new regulatory guidance per se, we’re seeing many institutions eliminating overdraft fees (and NSF fee as well) entirely. Is this something every institution should consider? Not necessarily, but it is important to understand exactly what is at issue and how to manage your program.

In this session, we’ll discuss the various types of overdraft programs out there, as well as the many statements and guidance from regulatory agencies over the past few years. We’ll also talk about risk management, particularly around consumer protection and UDAP/UDAAP. We’ll discuss some best practices to ensure your program is doing exactly what you expect it to be doing, and how to handle the many risks that come with this timely topic.

What You’ll Learn

  • Should we eliminate overdraft (and/or NSF) fees?
  • Discussions in Congress and at the regulatory agencies
  • Overdraft reform from the OCC, CFPB, and others
  • Overdrafts as UDAP/UDAAP?
  • Differences between overdraft and NSF
  • Different types of overdraft programs and their risks
  • Compliance risks of overdrafts according to various regulations
  • Making the right decisions for your institution

Who Should Attend
The program is designed for Compliance professionals and Officers, Auditors, risk managers, and anyone else in the institution responsible for making important risk decisions for the institution around overdraft programs.

Instructor Bio
Carl Pry is a Certified Regulatory Compliance Manager (CRCM) and Certified Risk Professional (CRP) who is a Managing Director for Treliant Risk Advisors in Washington, D.C. Through his working career, as well as through his experience as a banking attorney and officer, he has provided a variety of regulatory compliance and financial performance services to financial institutions and other clients throughout the country. He has written extensively regarding consumer and commercial compliance, tax, audit, and financial institution legal issues, and is a frequent contributor to and currently serves on the Editorial Advisory Board for the ABA Bank Compliance magazine. He has spoken at scores of banking, compliance, and state bar associations, and has conducted training sessions for financial institutions across the country.

Registration Options

Live Access, 30 Days OnDemand Playback, Presenter Materials and Handouts $279

  • Available Upgrades:
    • 12 Months OnDemand Playback + $110
    • 12 Months OnDemand Playback + CD + $140
    • Additional Live Access + $75 per person
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Overdraft Programs – The Danger Zones

It’s 2021 and the examiners are expected next month. Will your financial institution pass the test?

This program is designed to provide an update and the steps needed to complete an overdraft service checkup on your program before examiners arrive. Whether your system is automated or ad hoc, there are some themes and specifics examiners will target this year. Join us for a look at litigation, federal laws, state law issues, and other overdraft “hotspots” in this regulatory environment. It continues to be shifting sand.

Covered Topics
Understanding the regulations, the guidance and the regulatory environment
Authorize Positive/Settle Negative
What are good funds?
Average Balance/ledge balance
Fee per item per time
Lawsuits–See, e.g., Lloyd v. Navy Fed. Credit Union,
Your ODP program and whether it will pass the test—checklist for exams
Regulation E, Reg DD and State Laws
Examination “hot spots” and how the rules are being interpreted
Law suits around the country and how financial institutions are being targeted for unfair trade
Your policy, procedures, fees in 2021
Fair or unfair trade? A look at the federal and potential state issues
Frequently asked questions about overdraft programs
Why fees have to be consistent
And much, much more…

Who Should Attend?
This informative session is designed for the compliance area, deposit operations and management who are responsible for implementing a fair and compliant Overdraft Program.

Presenter
Deborah Crawford is the President of Gettechnical Inc., a Virginia based training company. She specializes in the deposit side of the financial institution and is an instructor on IRAs, BSA, Deposit Regulations and opening account procedures. She was formerly with Hibernia National Bank (now Capital One) and has bachelor’s and master’s degrees from Louisiana State University. She has 30+ years of combined teaching and banking experience.

Registration Options
Live Plus Five (days) – $265
OnDemand Recording – $295
CD-ROM – $345
Live Plus Six (months) – $365
Premier Package – $395

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