Taking a harder look at overdraft practices
Overdraft and NSF fees have long been a point of contention for regulators and lawmakers with financial institutions. The Consumer Financial Protection Bureau stated its intention last December to increase scrutiny of overdraft practices on behalf of consumers. Meanwhile, Senators Elizabeth Warren (D-Mass) and Cory Booker (D-NJ) introduced the Stop Overdraft Profiteering Act of 2021 last fall.
According to consumer advocates, banking fees hurt low-income consumers and persons of color at a higher rate. Since overdraft fees can have fair lending implications, it may be a good time to review your program and procedures.
NSF-related lawsuits
In addition to this renewed attention on overdraft practices, several class-action lawsuits related to nonsufficient funds (NSF) practices have been filed over the past few years. And the outcomes don’t favor the banking industry.
Back in September 2018, a Bank of America customer filed a class action lawsuit alleging the bank was earning billions of dollars a year by deceptively charging repeat NSF fees. The lawsuit alleged the customer was charged two $35 NSF fees for the same item, and on the third presentment, the bank paid the item, causing her account to be overdrawn and incurring an additional $35 overdraft fee.
The customer also alleges that on one occasion, she attempted to make a $20 credit card payment and ended up incurring $115 in fees. The lawsuit claimed that while consumers would expect to pay a fee for an item that was returned as an NSF item, they would not expect to pay multiple fees on the same item because most disclosures state the NSF fee is charged “per item.” The bank ended up settling the lawsuit for $75 million.
Navy Federal Credit Union settled a similar lawsuit back in 2020 that resulted in reimbursements of $16 million to an estimated 700,000 current and former members who were charged NSF fees. That case was filed over a $96 insurance payment. The member paid the premium with a check that was returned for non-sufficient funds. When the insurance company resubmitted the check, the member was charged another $29 NSF fee. While the initial judgement was in favor of the credit union, an appeal was filed, resulting in the settlement.
Other lawsuits have been filed against Capital One, TD Bank, Digital Federal Credit Union, First Interstate Bank and Zions. In its settlement late last year Capital One committed to ending overdraft fees.
Participating in one of these class-action lawsuits is straightforward. Consumers who believe they’ve been unfairly charged NSF fees can visit websites like topclassactions.com. After answering some questions and submitting contact information, an attorney should contact them to discuss potential next steps.
At your financial institution, now may be a good time to assess processes and procedures.
First, look at your fee schedule. Consider enhancing it to more clearly state that the NSF fee could be charged for each presentment of an item. While your terms and conditions may state this, the consumer is less likely to read those, so make sure the fee schedule is also clear.
If you allow a consumer to opt in for the one-time payment of ATM or debit card transactions, review your program. How is it being presented, and who is deciding to opt in? Studies have shown that 75% of consumers don’t realize they have the option to have these transactions declined.
Check your systems
Look at your system parameters and ensure the programs are working the way they’re intended. We see many issues with continuous overdraft programs being set up incorrectly on the core system. The fees either are charged too soon or are a result of an overdraft that resulted from bank fees that were not disclosed as a condition of an overdraft charge.
Review your overdraft data to see who is being charged and what fees they are incurring. Determine how reliant you are on overdraft fee income; the more reliant you are on this type of income, the more likely the regulators will look at your program carefully.
Compare your practices with regulatory guidance on overdraft protection programs and determine whether you’ve put the recommended controls in place. You can compare returned items with paid items to see whether there are any fair lending issues. You may consider offering counseling to chronic users of your overdraft services.
How Wipfli can help
Wipfli advisors can assist you in reviewing your overdraft and NSF programs, looking for areas of weakness and offering solutions. How clear are your procedures for your customers? Do the fees you charge comply with your written policies?
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