The OCC and FDIC Issue Far-Reaching Guidance on Overdraft Programs

This week, the Office of the Comptroller of the Currency (the “OCC”) and the Federal Deposit Insurance Corporation (the “FDIC”) issued new guidance cautioning banks regarding a variety of perceived compliance risks associated with overdraft programs. The guidance discusses certain overdraft practices that the OCC and FDIC take the position may present heightened risk of violating the prohibition against unfair, deceptive acts or practices (“UDAAP”).   

This guidance follows similar guidance issued by the Consumer Financial Protection Bureau (the “CFPB”) on October 26, 2022, wherein the CFPB indicated that certain “unanticipated” overdraft fee assessment practices may violate UDAAP. While the FDIC had also previously identified some of these overdraft issues as concerns in earlier Consumer Compliance Supervisory Highlights, the OCC has now clearly entered the foray on overdraft practices and taken a definitive position on these issues to presumably align itself with both the CFPB and FDIC.

APSN Transactions
Both the FDIC and OCC guidance highlight potential UDAAP concerns in connection with overdraft practices related to “authorize positive, settle negative” (“APSN”) transactions. In an APSN transaction, a customer’s account has a sufficient balance to cover a debit card transaction when the transaction is authorized but, due to one or more intervening transactions, has an insufficient balance to cover the transaction at the time it settles. The regulators indicate that many banks commonly charge an overdraft fee on both the intervening transaction and the initial APSN transaction when posted to the consumer’s account. The OCC stated that misleading disclosures and the inability of a consumer to reasonably anticipate and avoid these fees can make the practice both deceptive and unfair. The FDIC presented a similar view on APSN transactions, stating that “due to the complicated nature of overdraft processing system and payment system complexities outside of the consumer’s control, consumers may be unable to avoid injury.” This same theory has been the focus of class action litigation and was the subject of a $50 million CFPB consent order in September of 2022. Notably, the OCC indicated that this compliance risk may exist regardless of whether “banks assess overdraft fees based on either a negative ledger balance or negative available balance for APSN transactions.”

Representment Fees
In addition to concerns related to APSN transactions, the OCC separately cautioned against representment fee practices. The OCC’s guidance on this issue, follows similar guidance issued by the FDIC in August of 2022. Representment fees occur when a bank charges an insufficient funds fee on the same item, when it is presented multiple times for payment and each time there are insufficient funds in the account to cover the item. Similar to APSN transactions, the OCC stated that these practices may violate UDAAP due to insufficient disclosures and a consumer’s inability to avoid the harm. Specifically, the OCC indicated that, “[e]ven when customer disclosures explain that a single check or ACH transaction may result in more than one fee, a bank’s practice of assessing fees on each representment may also be unfair, for purposes of Section 5, if consumers cannot reasonably avoid the harm and the other factors for establishing unfairness under Section 5 are met.” The OCC explained that this practice is potentially “unfair” because “[c]onsumers typically have no control over when a returned ACH transaction or check will be presented again and lack knowledge of whether an intervening deposit will be sufficient to cover the transaction and related fees.” 

Additional Practices that Present Risk
In addition to the above specific overdraft fee concerns, the OCC also noted additional overdraft practices that may present heightened risks, including:

1. High limits or lack of daily limits on the number of fees assessed. Unfortunately, the OCC does not identify what constitutes a “high limit” or what daily limits should be in place, but the OCC cautions that “charging overdraft or NSF fees with a high limit (or without limit) for multiple transactions in a single day has contributed to determinations that banks’ overdraft protection 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.”
2. Sustained overdraft fees. The OCC also notes concerns with the practice of charging a “fixed, periodic fee for failure to cure a previous overdrawn balance,” indicating that such fees have contributed to “findings of unfairness and deception, for purposes of Section 5, especially when the bank does not accurately disclose the circumstances under which the customer could incur these fees.” The OCC indicates that it is concerned that these “practices make it more difficult for customers facing liquidity challenges to reasonably avoid these fees by bringing their account balances positive.”

Key Takeaways:

• Institutions must be aware of the ever-evolving guidance on overdraft practices, as the agencies are increasingly taking aggressive stances to crack down on practices that are perceived as unfair or deceptive. In addition to heightened regulatory focus, these very same issues continue to be at the center of class action litigation.
• All overdraft program disclosures should be carefully reviewed and updated in light of the evolving overdraft guidance, including assessment of whether to alter or eliminate certain practices altogether.
• Any third parties involved in an institution’s overdraft program must be closely reviewed and evaluated in light of this guidance. This includes discussions with an institution’s core provider to determine if there are updated settings that may help institutions better navigate these risks.

This new guidance demonstrates that the heightened focus on overdraft programs is not receding. Instead, the recent action by the OCC to further align with the FDIC and CFPB, confirms that the various regulatory agencies are honing in on these issues for careful scrutiny during examinations. It is critical that institutions stay abreast of these issues and be proactive in preparing for those examinations. Such actions may not only mitigate against regulatory risk but help to mitigate against the risk of class action litigation on these very same theories.
 

Abigail Lyle and Lucia Jacangelo are members of the Consumer Financial Compliance and Litigation and Financial Institutions Corporate and Regulatory practice groups at Hunton Andrews Kurth LLP. This article presents the views of Ms. Lyle and Ms. Jacangelo and does not necessarily reflect those of Hunton Andrews Kurth or its clients. The information presented is for general information and education purposes. No legal advice is intended to be conveyed; readers should consult with legal counsel with respect to any legal advice they require related to the subject matter of the article. Ms. Lyle regularly advises institutions on topics related to overdraft programs and defends institutions in class action litigation and enforcement actions related to overdraft and insufficient fund fee practices. She may be reached at (214) 979-8219 or alyle@HuntonAK.com.