The Overdraft/NSF Fee Discussion is Not Over Yet

Article

By Amanda Scott, CBAP, CCBCO and Linda Albrecht, CBA, CRP, CRCM, AMLP

Regulatory scrutiny of overdraft and NSF fees is increasing, specifically as it relates to re-presented items. Traditionally, most banks’ terms and conditions disclosures, fee schedules, and overdraft notices indicate that overdrafts are charged per item or per transaction.

However, particular emphasis has been given to the age-old practice of re-presenting items that consequently result in another charge to the customer. For example, a recent lawsuit filed by a consumer at Navy Federal Credit Union alleged they had written a $96 check to their insurance company and were charged a $29 NSF fee. When the insurance company attempted to present the check for payment again, the consumer was charged another $29 NSF fee, despite their account agreement stating that fees would be charged per item.

UDAP Violations

This practice is now being considered a UDAP violation, due to the apparent disparity between what was disclosed to customers and what they are being charged, as well as the potential for consumer harm. Instances of these violations have been relatively limited, but will likely increase, as all federal regulating bodies have indicated a desire to take an active role in guiding more responsible overdraft programs.

There have recently been several high-profile violations and settlements:

  • Navy Federal Credit Union agreed to a $16 million settlement after several members filed a suit alleging the multiple fees charged to them violated the terms of their account agreement 
  • The CFPB ordered TCF Bank to pay $5 million in civil monetary penalties, in addition to the $3 million required by the OCC, as well as $25 million in restitution 

The FDIC discusses this issue in a recent Supervisory Highlights release. In this issue, they discuss mitigating options to this problem, including eliminating NSF fees altogether, ensuring that no more than one NSF fee is charged per item, regardless of the number of times presented, and updating account agreement disclosures to state that, while the bank’s practice is to charge NSF fees per item, they are not in control of whether items are re-presented, and that any additional presentments could result in additional NSF fees.

Even if these changes are made, banks are expected to perform a lookback of up to two years and refund additional fees charged for the same item. The FDIC issued additional guidance and expectations of banks in order to avoid a UDAP violation. FIL-40-2022 details the steps banks are expected to take.

Disclosures, Amendments and Notifications

Now is the time to begin the process of amending disclosures and providing change in terms notifications, researching the depth and breadth of customers impacted and amount of fees charged, and making any possible policy changes. There may be no way to avoid refunding customers for some of these fees, but banks taking a proactive approach may steer clear of violations and civil monetary penalties.

Overdraft Protection Act

Also worth noting is a bill that is currently pending in the House of Representatives; H.R.4277, also known as the Overdraft Protection Act, aims to reduce deceptive practices with overdraft fees, and curb excessive fees to consumers. Among other things, the bill proposes the following: limits on the number of overdraft fees a consumer may be charged in each month and year, a reasonability test for the fee amount, prohibitions on charging overdraft fees stemming from debit holds, and clear disclosure of the right of the consumer to elect to have transactions declined to avoid being charged a fee. The bill was introduced in the House in the summer of 2021, but was recently advanced out of committee, meaning that the House should be reviewing it soon.

The regulatory landscape is once again shifting to favor consumers’ rights regarding overdraft fees, and to limit a bank’s ability to take advantage of consumers in a potentially vulnerable position. Several banks, including Ally Bank, Bank of America, Capital One, and Citibank, have recently discontinued the practice of charging overdraft fees.

While smaller community banks may not be able to eliminate these fees entirely, a review of their overdraft program should be able to conclude the following:

  • The bank is not relying on overdraft fees for revenue 
  • The customer is being adequately informed of the potential fees they could be charged, and alternatives to opt out of being charged 
  • The fees charged by the bank are reasonable 

Act now to avoid further regulatory criticism. Start reviewing your fee disclosures and policies to make sure you are compliant and fair.

Our advisors can help you remain compliant with all NSF/overdraft fees legislation.

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