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New expectations for APSN fees and overdraft programs

May 29, 2023

Overdraft protection (ODP) programs present a range of risks, including compliance, operational, reputation and credit risks. Updated guidance from the CFPB, FDIC and OCC makes it important to review regulatory guidance against your financial institution’s internal controls once again.

The CFPB published a circular providing their thoughts on whether the assessment of overdraft fees may constitute an unfair act or practice, even if an institution complies with the Truth in Lending Act

(TILA) and Regulation Z, and the Electronic Fund Transfer Act (EFTA) and Regulation E. Their response stated that even when there is full compliance with regulatory requirement, overdraft fees assessed on transactions that a consumer would not reasonably anticipate are likely unfair.

The FDIC issued guidance to ensure supervised institutions are aware of the consumer compliance risks associated with charging authorize positive, settle negative (APSN) fees. And the OCC issued a bulletin speaking to risk management practices in ODP programs, which also expanded on previous guidance issued.

It's important for all financial institutions, even those not supervised by these regulators, to read the guidance to understand the potential risks and consider the mitigation practices discussed.

Authorize positive, settle negative fee practices

Overdraft fees related to APSN transactions have received regulatory attention for many years and both the FDIC and OCC issuances speak to the compliance risks.

An APSN transaction occurs when a consumer conducts a debit card transaction that is authorized on positive funds, but due to intervening transactions being paid, settles on negative funds and an overdraft fee is charged. According to regulators, these unanticipated overdraft fees are likely to impose substantial injury on consumers that they cannot reasonably avoid and that is not outweighed by countervailing benefits to consumers or competition.

In addition to the initial APSN transaction, institutions may also assess overdraft fees on any intervening transactions posted to the consumer’s account that cause the account balance to become overdrawn.

For example, a consumer could start with $100 in their checking account and make five $10 purchases with their debit card. The next day, a $130 check that the consumer wrote could post to their account, bringing the consumer’s account negative and incurring an overdraft fee.

On day three, the five debit card purchases could settle. And all five of them would also incur overdraft fees, even though the consumer had sufficient funds when they made the debit card purchases, but did not know and could not control when they would settle.

Financial institutions typically have a ledger balance and an available balance and will use one or the other for the assessment of fees, including overdraft fees. The available balance is generally the account balance less holds for recently deposited funds that have yet to clear and authorized but pending debit card transactions. The ledger balance refers to the actual amount of funds in the account after accounting for all items settled and posted.

In 2019, the FDIC issued an article titled “Overdraft Programs: Debit Card Holds and Transaction Processing” as part of their consumer compliance supervisory highlights. That guidance spoke to the potential for unfair and/or deceptive acts or practices where institutions use an available balance method to determine when overdraft fees could be accessed for APSN transactions. The updated guidance from the FDIC and OCC, issued in April 2023, states that regulatory violations may occur when using both the available or the ledger balance method to determine whether an overdraft occurred and a fee will be assessed.

Financial institutions supervised by the FDIC and OCC are being encouraged to:

  • Review practices regarding the charging of overdraft fees on APSN transactions.
  • Work with third-party vendors to ensure their systems are fully compliant with applicable laws and regulations.
  • Review deposit disclosures and account agreements to ensure practices related to fees are clearly and accurately stated. (While disclosures will not fully address their concerns with APSN transactions and related overdraft fees, all language must be accurate and reflective of institutional practice.)

As noted by the CFPB, compliance with disclosure requirements alone may not be enough to address the potential unfair, deceptive and abusive acts or practices (UDAAP). “Even when disclosures described the circumstances under which consumers may incur overdraft fees, the OCC has found that overdraft fees charged for APSN transactions are unfair for purposes of Section 5 (of the Federal Trade Commission Act) because consumers were still unlikely to be able to reasonably avoid injury and the facts met the other factors for establishing unfairness.”

Representment fee practices

The issue of representment fee practices has been another focus of legal and compliance risk over the past few years.

The main concern surrounds instances of multiple ACH transactions in an account with insufficient funds. In scenarios where the same check or ACH transaction is presented again, the institution will either again return the transaction unpaid and assess an additional NSF fee or pay the transaction and assess an overdraft fee without the consumer being aware of the practice.

The lack of control that consumers have over when a returned ACH transaction or check will be presented again, along with disclosure language that does not clearly state institutional practices related to charging multiple NSF fees for each presentment of an item, presents the legal and regulatory risk for consumer harm.

The April 2023 OCC bulletin outlines the OCC expectations relating to this issue. It states that revisions to disclosures may not satisfy regulatory worries, even when they explain that a single check or ACH transaction may result in more than one fee. A practice of assessing fees on each representment may also be unfair if consumers cannot avoid the harm and the other factors for establishing unfairness under Section 5 of the Federal Trade Commission (FTC) Act are present.

Risk mitigation

In the guidance from the CFPB, FDIC and OCC, it was noted that disclosures alone may not be sufficient to mitigate the regulatory concerns related to consumer harm. This is due to the complicated nature of overdraft processing systems and payment system complexities outside the consumer’s control that may leave consumers unable to avoid injury.

The OCC-listed ODP program practices that may increase the risk of UDAAP violations include:

  • High limits or lack of daily limits on the number of fees assessed: In the OCC’s supervisory experience, charging overdraft or NSF fees with a high limit (or without limit) for multiple transactions in a single day is considered a violation. The practice has contributed to determinations that banks’ ODP programs as a whole were unfair for purposes of Section 5 because the lack of limits results in high costs for consumers and difficulty in bringing accounts positive.
  • Sustained overdraft fees: In the OCC’s supervisory experience, charging a fixed, periodic fee for failure to cure a previous overdrawn balance has contributed to findings of unfairness and deception. This especially applies when the bank does not accurately disclose the circumstances under which the customer could incur these fees. These practices make it more difficult for customers facing liquidity challenges to avoid these fees by bringing their account balances positive.

To further mitigate your risk, it is important to work with your board and senior management to review the oversight of your ODP programs. You also need to have a process in place to identify and correct risk management weaknesses and violations.

Your financial institution should ensure that:

  • Your audit and monitoring schedules routinely compare account disclosures to core system parameters to ensure the service is working exactly as intended.
  • Disclosures clearly and accurately describe the service and related fees.
  • The assessment of fees is fair to consumers.

In addition, review third-party relationships to confirm regulatory compliance and alignment with your institution’s risk appetite.

How Wipfli can help

Wipfli’s specialists are here to support your financial institution in effectively maintaining compliance. We can assist you in reviewing your programs, implementing solutions and staying current with regulations. Contact us to learn more about how we can help you protect consumers and your institution.

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Nick Bonnema, JD, CRCM
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