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Maximum overdraft: NSF edition

Jul 21, 2022

Overdraft and NSF fees continue to be an area regulators and the courts fixate on. As such, Wipfli has published a series of articles — such as this one — focused on how financial institutions can identify and mitigate the risks posed by overdraft and NSF programs. Below is more information on not only what you need to know about NSF fees and overdraft program risks but also potential solutions.  

NSF fees continue to be a legal and regulatory risk

Wipfli has been keeping a close eye on lawsuits, of which there have now been dozens, related to NSF fees being charged when an item is re-presented. The underlying issue is the NSF fee being disclosed as charged “per item” or “per transaction,” without a further explanation that the same “item” or “transaction” might result in multiple NSF fees if re-presented.

Lawsuits and regulators successfully have been making the case that there is a UDAAP risk if multiple fees are assessed for the same item or transaction without sufficient notice or opportunity for the consumer to bring the account positive. This most often occurs when a merchant re-presents an automated clearing house (ACH) payment or check, which results in a second charge on that item after the transaction was declined.

Courts have required consumer restitution and modified language on Truth in Savings disclosures. Federal and state regulators, specifically the Federal Deposit Insurance Corporation (FDIC), have determined that restitution did not fully redress the harm and have required further restitution.

Automated overdraft programs

Another area in which overdraft programs have come under regulatory scrutiny involves automated overdraft programs that have been converted from a static limit to a dynamic limit. The identified risk relates to a financial institution not providing sufficient information to consumers about the change, resulting in consumer harm. 

A static limit is a fixed amount for the overdraft program that rarely changes. The consumer may be provided with this limit at account opening or in other subsequent disclosures. A dynamic limit is one that may change periodically, such as daily or monthly, as the consumer’s account usage changes. The dynamic limit is not always communicated to the consumer as it changes; however, the consumer would be aware that this limitation may change with their usage.

The issue raised by regulators relates to instances when a financial institution converts its overdraft program from a static limit to a dynamic limit without sufficient notice. When consumers are not provided material information to understand the program and how to avoid fees associated with the changing limitations, there is a risk of a violation of Section 5 of the FTC Act due to the consumer not being able to make an informed decision about how the program operates and how to avoid fees.

Model forms and force-pay transactions

In a recent quarterly, regional publication, the FDIC discussed its view of the elevated risk for consumer harm when a financial institution has a practice of assessing overdraft fees for “force pay” or “required pay” transactions. The FDIC also provided some guidance on how this risk may be proactively mitigated.

The transactions referenced include those in which a financial institution authorizes an ATM or one-time point-of-sale (POS) transaction based on sufficient funds being in the consumer’s account at the time of authorization but, at settlement, the account has insufficient funds. These transactions are considered “force pay” or “required pay” transactions because the financial institution is required to pay them due to contracts with the payment network provider, even when the consumer does not have sufficient funds at settlement. A financial institution may see this type of transaction when a consumer uses their debit card to authorize a payment at a gas station pump or similar situations in which the actual amount of the purchase is not known at the time the transaction is authorized.

The compliance issue arises when an institution has a policy of declining to authorize and pay all ATM or one-time POS transactions when the customer has insufficient funds available. The FDIC noted that some of these financial institutions use Model Form A-9 from Regulation E, or a substantially similar form, to allow them to solicit a consumer’s authorization to be charged an overdraft fee on force-pay transactions. The model form states, “An overdraft occurs when you do not have enough money in your account to cover a transaction, but we pay it anyways.” The position of the regulatory agency is that this practice may be considered deceptive — a phrase no financial institution wants to hear. The rationale for this possibly being deceptive is that the reasonably prudent consumer may believe this means the financial institution will generally pay all overdrafts resulting from ATM and one-time POS transactions, when this might not be true. 

To support this reading of the regulation, regulators point out that financial institutions must pay force-pay transactions regardless of whether the consumer has opted into any overdraft program, and the model form does not disclose that these types of transactions would be paid. Therefore, the consumer would not be opting in to any service they don’t already have and instead would be providing authorization to be charged a fee for transactions the financial institution is obligated to pay.

A related issue arises for those financial institutions that have an overdraft program. For consumers at those institutions not yet having access to the program, there is a potential violation of Regulation E or Section 5 of the FTC Act should they be charged a fee for force-pay transactions. This applies to those consumers who have opted in but do not yet have access to the program or those who have revoked or otherwise had their opt-in terminated. Like the justification for those financial institutions without an overdraft program, the regulatory position is that the consumer is paying for an overdraft program but not actually receiving any benefit because the financial institution is contractually obligated to pay the transaction.

How to mitigate your risk

For each of the areas above, it’s important to take the time to ensure your overdraft program and the charging of overdraft and NSF fees are properly aligned with legal and regulatory requirements — and the expectations that come with those requirements. Consider the following and reach out to Wipfli to assist you in reviewing your programs and solutions.

Here are some potential solutions to consider:

  • Develop or maintain written policies and procedures to ensure compliance with applicable regulatory requirements under Regulation E, Regulation DD and Section 5 of the FTC Act.
  • Ensure disclosures provided to consumers are clear and conspicuous, accurately reflect practices and do not suggest that you offer an overdraft program when you do not.
  • Confirm that a consumer’s opt-in is not activated in the deposit processing platform when they do not have access to the overdraft program.
  • Verify that a consumer’s opt-in is deactivated in the deposit processing platform when they revoke their opt-in election or when your institution terminates access to the overdraft program.
  • Notify customers as soon as possible if the institution independently terminates their access to the overdraft program.
  • Review your system reporting abilities for the identification of NSF fees for the same transaction.
  • Review how you disclose 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 (item).
    • The frequency with which such fees can be assessed.
    • The maximum number of fees that can be assessed in connection with a single transaction.
  • Review customer notification practices related to NSF transactions and the timing for assessment of fees to determine whether practices provide the customer with an ability to avoid multiple fees for re-presented items.
  • Disclose changes to overdraft limits in real time to consumers as they change, allowing consumers the opportunity to adjust their behavior.
  • Train consumer service and complaint handling staff to explain the features of the automated overdraft program’s dynamic features.

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Wipfli Editorial Team