Michael Krebs
Fresh attention from financial regulators and the public towards multiple non-sufficient funds (NSF) fees for re-presented transactions has prompted financial institutions to reassess compliance measures and the relative benefits of continuing this practice.
When a bank customer writes a check or uses a debit card to make a purchase, the merchant will present the transaction to the customer’s financial institution for payment. If the account does not have enough funds to pay for the transaction, the financial institution may decline the transaction and in either case it may assess the customer an NSF fee.
The merchant may, upon learning that the transaction was declined, “re-present” the same transaction, and if again declined then the financial institution may charge an additional NSF fee for the same payment transaction.
According to the FDIC, “[i]n these situations, there is an elevated risk of violations of law and harm to consumers.”
Matthew Hanaghan
Regulators Ramp Up Examination
Regulatory focus on this issue intensified in 2021 when the Consumer Financial Protection Bureau announced its concentration on overdraft fees practices, which includes NSF fees. According to the CFPB and its director, Rohit Copra, “[r]ather than competing on quality service and attractive interest rates, many banks have become hooked on overdraft fees” and that the CFPB will “be taking action to restore meaningful competition.”
On the state level, the New York State Department of Financial Services issued a letter in July 2022 stating that the agency will evaluate whether New York-regulated institutions are engaged in deceptive or unfair practices with respect to NSF fees.
The concept of unfair or deceptive acts or practices was recently the focal point of August guidance issued by the FDIC. According to the guidance, charging multiple NSF fees for the same transaction may implicate Section 5 of the Federal Trade Commission (FTC) Act, which prohibits unfair or deceptive acts or practices.
Armand J. Santaniello
Compliance concerns may be exacerbated by the use of third-party core data processors, which are commonly used by smaller financial institutions that typically do not have the resources to bring these data processing services in-house.
According to industry publications, the systems of core processors are not ready to discern between the original presentment of a transactions and its re-presentment. Some core processors have indicated that software updates will not be ready until early 2023 to identify re-presentment, and for some core processors, the software upgrades may not be implemented until mid-year 2023.
Banks Face Challenges Responding
According to the FDIC guidance, financial institutions should make appropriate changes and clarifications to customer disclosures to clearly and conspicuously explain when and how NSF fees will be charged and should also review customer notification or alert practices to avoid multiple fees for re-presented transactions. A financial institution’s failure to disclose how re-presentment can affect NSF fees has the potential to mislead customers and be considered deceptive under Section 5 of the FTC Act.
Importantly, the FDIC’s guidance goes on to say that “[w]hile revising disclosures may address the risk of deception, doing so may not fully address the unfairness risk.”
If a bank charges multiple NSF fees in a short period of time without sufficient notice or opportunity, the financial institution’s NSF fee practices may be considered unfair under Section 5 of the FTC Act. The guidance suggests that banks will be expected to identify and track re-presented transactions and determine when multiple NSF fees are assessed for the same transactions. The guidance encourages banks to review and understand the risks presented from their core processing system settings related to multiple NSF fees and review the timing of charges to ensure customers are provided an opportunity to avoid multiple fees.
These suggested risk mitigation practices highlight the difficulties that financial institutions may encounter when trying to monitor re-presented transactions. Such transactions are a small subset of all transactions, and the time and effort that comes with these monitoring efforts may be unfeasible.
Response Highlights Compliance Difficulty
The FDIC’s guidance indicates that financial institutions will be expected to oversee their third-party vendors, including core processors, to identify and control risks arising from third-party payment processing relationships to the same extent as if the activity was performed within the bank. The practical compliance challenge, of course, is that neither financial institutions nor their core processors can efficiently review each NSF charge manually.
In response to regulatory scrutiny and threat of litigation, financial institutions are trending towards reduction or elimination of overdraft and NSF fee practices altogether instead of revamping compliance measures for NSF fees.
According to publicly available information, Capital One Financial Corp. eliminated overdraft and NSF fees for consumer banking customers, and Ally Financial Inc. has reportedly eliminated overdraft fees entirely.
Meanwhile, Bank of America and Wells Fargo & Co. did not completely eliminate overdraft fees but took steps to reduce the financial burden on consumers, including elimination of NSF fees for certain consumer banking customers.
It remains to be seen whether community banks, which often lack other opportunities for fee income, will follow in the footsteps of the financial behemoths.
Michael Krebs, Matthew Hanaghan and Armand Santaniello are a partner, of counsel and associate, respectively, in Nutter’s corporate and transactions department. All are members of the firm’s banking and financial services group.
