On March 8, 2023, the Consumer Financial Protection Bureau (CFPB) issued a special edition of its Supervisory Highlights that focuses on violations of law in connection with so-called “junk fees.” The Bureau provides examples of the violations across multiple lines of business including deposits, auto financing, mortgage servicing, payday and small-dollar lending, and student loan servicing. This article focuses on the deposit examples.
On the deposit side, the CFPB once again calls into question a couple of practices related to certain overdraft and nonsufficient funds (NSF) fees. Specifically, the bureau identifies violations related to the practice of charging an overdraft fee on a so-called “authorized positive, settled negative” (APSN) transaction, as well as on violations related to charging multiple NSF fees on the same transaction.
In an APSN transaction, a financial institution charges an overdraft fee for a debit card or ATM transaction where the consumer had a sufficient available balance at the time the transaction was authorized, but had an insufficient balance at the time of settlement. As the CFPB points out, this can be caused by a number of factors including intervening transactions, timing of settlement, order of transaction processing, and other complicating factors.
The other scenario raised by the CFPB, charging multiple NSF fees on the same transaction, occurs when a consumer’s check or other payment is presented for payment but there is not a sufficient balance in the account to cover the transaction at that time. After declining the payment, the consumer’s financial institution returns the item to the payee’s depository institution and charges the consumer an NSF fee. The payee may then present the same transaction again for payment. If there are still insufficient funds, a second NSF fee may also be charged.
CFPB labels both APSN and multiple NSF fee practices as “unfair”
The news here is not that the CFPB is once again calling these two practices into question. The Bureau, along with other regulators, has been warning about these practices for years, and both practices have led to numerous classaction lawsuits. Instead, what is new is that the CFPB is positioning both of these violations — not just APSN — as “unfair” practices under the Consumer Financial Protection Act of 2010. The critical statement in the CFPB’s analysis is as follows [emphasis added]:
Supervision found that institutions engaged in unfair acts or practices by charging consumers multiple NSF fees when the same transaction was presented multiple times for payment against an insufficient balance in the consumer’s accounts, potentially as soon as the next day.
The significance of labeling a practice as unfair, rather than deceptive, is that disclosure alone, without modifying the act or practice itself, does not suddenly make an unfair act or practice fair. A deceptive practice could arguably be cured by adequate disclosure. Notably, the CFPB’s comments do not address whether the practice is also viewed as deceptive, a position several regulators have previously taken. Instead, the Bureau’s criticism is limited only to when it is viewed as an unfair practice.
Several regulators now view multiple NSF fee assessments as “unfair”
While APSN transactions have been designated as “unfair” for some years by a number of regulators, with this issue of its current Supervisory Highlights, the CFPB joins other agencies in indicating that the practice of charging multiple NSF fees on the same transaction could be unfair at least in some circumstances.
In July of 2022, the New York State Department of Financial Services (NYDFS) issued an Industry Letter calling the practice of charging Multiple NSF Fees on a single transaction deceptive (where the disclosure did not expressly describe the practice) and potentially unfair. As part of their analysis, they noted that consumers have no control over a transaction being re-presented, and cannot avoid re-presentments. The NYDFS also made it clear that ultimately they expected financial institutions would not charge more than one NSF fee per transaction, and offered a number of steps institutions could take to mitigate the risk that consumers would be charged multiple NSF fees on the same transaction,
A month later, the Federal Deposit Insurance Corporation (FDIC) issued its own guidance on the charging of multiple NSF fees on a single transaction. Like the NYDFS, the FDIC viewed this practice as deceptive when the disclosures do not adequately describe the practice. The FDIC also viewed this practice as unfair under certain circumstances, particularly when the customer did not have sufficient notice or opportunity to bring their account balance positive and thereby avoid further NSF fees. Like the NYDFS, the FDIC provided potential mitigation practices, to be discussed below.
The CFPB references both the FDIC guidance and the NYDFS’ letter in support of its position.
CFPB’s position on multiple NSF fee assessments
The CFPB’s guidance does not clearly state whether the practice of charging multiple NSF fees on the same transaction is patently unfair or whether the practice could be unfair if the consumer is not provided adequate time to bring his or her account balance current. But, given their emphasis on timing in the Bureau’s quote further above, the implication is the latter.
As a practical matter, however, the answer may be irrelevant for an institution that cannot identify whether a prior NSF fee was charged on a specific transaction. If the institution cannot control when a payment will be re-presented, it would have no way of preventing multiple NSF fees from being charged too close in time to avoid the practice being labeled unfair.
The Supervisory Highlights also covers other noteworthy information. Specifically, the CFPB notes that some institutions that had previously reported engaging in APSN now report that they will stop doing so. Similarly, the Bureau reports that virtually all the institutions it engaged with on the topic of NSF fees reported plan to stop charging NSF fees altogether — presumably due to the limitations involved in assessing those fees. The Bureau also reiterates its stance on self-assessment, self-reporting, remediation, and cooperation — with the benefit being the ability to resolve violations through a non-public supervisory process. Finally, the CFPB states that it “anticipates engaging in further follow-up work on both multiple NSF fee and APSN overdraft fee issues.”
Summary and action steps
In summary, the practices of charging fees in an APSN or multiple NSF re-presentment situation carry compliance, supervisory, and litigation risks for a financial institution. Given these agencies’ united position that APSN overdraft fees are unfair, financial institutions should discontinue this practice as soon as possible, and provide redress to any customers that have been adversely affected.
In addressing the practice of multiple NSF fees on the same transaction, the agencies have not uniformly insisted that institutions end this practice (although many institutions have done so voluntarily). Instead, they have offered a variety of steps that institutions can take to avoid such a practice being identified as a UDAAP violation:
- First, financial institutions should ensure that their disclosures adequately describe the practice, including that multiple NSF fees may be charged on the “same item” or “same transaction.” The NYDFS recommends that this type of disclosure be made in regular communications (i.e., with each account statement) along with other direct points of contact for affected consumers. The FDIC also recommends disclosing how frequently NSF fees can be assessed on a given transaction, and the maximum number of fees a single transaction may incur.
- Second, financial institutions should work with their processors and software providers in order to identify when a transaction is being re-presented. Once identified, they can then avoid charging multiple NSF fees on a re-presented transaction. If this is not possible, they should take additional steps, which may include limiting NSF fees that can be imposed during a certain period, or manually reviewing for re-presented transactions that have incurred multiple NSF fees. The FDIC further recommends that institutions should review their customer notification or alert practices to ensure that customers have the knowledge and ability to avoid multiple NSF fees and restore their account balance to a sufficient amount.
- Finally, financial institutions that have been charging NSF fees should engage legal counsel to identify past violations, opportunities for reimbursement of affected customers, and the process for self-reporting to the appropriate supervisory agency. Since the CFPB has promised additional engagement with the industry, this last step should be taken as soon as possible.
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