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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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Events

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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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