Unfair? Deceptive? Unlawful? The Battle Over NSF Fees for Re-presentments
Unfortunately, consumers occasionally have ACH transactions or checks presented against their bank account when their account doesn’t have the money to cover that presentment. Financial institutions commonly charge a non-sufficient funds (NSF) fee in these instances when charges are presented but cannot be covered by the balance in the account. These fees are typically disclosed in the account agreement as being charged, “per item,” or “per transaction.” If you’ve been hearing troubling things about this process and these fees, you’re not alone.
In the normal course of business, after having these ACH transactions or checks declined merchants will often re-present the charges. The NACHA rules allow two retries following an initial return, for a total of up to three attempts to present a particular ACH transaction. Federal regulations do not limit the number of times a check may be re-presented for payment, but it is common for it to be re-presented two or three times as well. Although not done by all financial institutions, it has been commonplace in the industry for institutions to charge NSF fees for each re-presentment of the charge. Either practice has historically been acceptable, and federal regulation does not contain an express prohibition against charging NSF fees for re-presentments.
There are three separate issues that are currently being scrutinized regarding these NSF re-presentment fees: 1) whether account agreements have clearly stated that a separate NSF fee may be charged for each re-presentment, and if not whether that constitutes a breach of contract, 2) whether this potentially unclear language in an account agreement constitutes a deceptive practice and 3) whether the practice of charging multiple NSF fees for the same transaction is an inherently unfair practice.
Not only are there are pending class action lawsuits against banks regarding the above issues, the FDIC discussed this issues in the Spring 2022 Consumer Compliance Supervisory Highlights, and the CFPB published a blog post regarding the issues. At present a lot of these issues have yet to be resolved, leaving a lot of questions unanswered.
Additionally, we’re hearing unusual stories from our members about their examinations and how this issue is affecting them. In one such example a bank that had already updated their disclosures and fee schedules to clarify when fees would apply was told early in the exam that if they were to issue refunds for re-presented items, the bank would not be cited for a UDAP violation. Subsequently the territorial manager indicated that the bank might get the UDAP violations regardless and if so, then issuing refunds would be voluntary. In another example a bank proactively changed their disclosures to clarify fees, and it ultimately made the matter worse during the exam. In yet another example a bank was criticized for not taking action to change their disclosures and provide greater clarity about these NSF re-presentment fees.
On the other side of this issue are financial institutions and their operational concerns. Depending on how a transaction is coded there may be no way to know with certainty that the re-presented transaction had been previously presented for payment. For example, the NACHA rules require the use of the code “Retry Pymt” for re-presentments. However, many core systems lack the functionality to run alerts in a manner to identify these resubmitted transactions. In addition, many ACH re-presentments are made using other codes. Regarding checks, there doesn’t seem to be a way for most institutions to automate a search to identify re-presented checks, so any such searches would need to be done manually. A further challenge is that a check can be resubmitted as an ACH transaction, further complicating the process of trying to identify re-presented charges.
Durbin 2.0: Competition for Credit Card Networks on the Horizon?
Only July 28, 2022 the Credit Card Competition Act of 2022 (S. 4674) was introduced into the U.S. Senate, and was referred to the Committee on Banking, Housing, and Urban Affairs, where it currently sits. The stated purpose of this bill, according to its sponsors, Senators Durbin (D-IL) and Marshall (R-KS) is the enhancement of competition and choice in the credit card network market.
There are currently four credit card networks in the U.S., with Visa and Mastercard being the largest and together accounting for nearly 83% of general-purpose credit cards, with American Express and Discover sharing the remainder. Visa and Mastercard are “four-party” networks, with the four parties being the cardholder, the card-issuing bank, the merchant, and the acquirer. In these transactions Visa and Mastercard act as agents for thousands of card-issuing banks and set the fees that the network and the bank receive for each transaction. The transactions on the Visa and Mastercard networks earned those two networks a combined $77.48 billion in fees collected from U.S. merchants in 2021. American Express and Discover are “three-party” networks in which the card-issuer and acquirer are the same entity.
For debit cards (as opposed to credit cards) banks commonly issue debit cards with either Visa or Mastercard but there are also smaller networks with names like Pulse, Shazam and Star which charge an estimated 10 cents less per transaction than Visa or Mastercard. Each use of a debit or credit card generates fees for the payment networks, which are normally collected by banks, which retain their portion and pass most of it to the network, most often Visa or Mastercard.
The Credit Card Competition Act would require that banks with more than $100 billion in assets ensure that their credit cards provide a choice of at least two networks that can be used to process these transactions, at least one of which must be outside of the top two largest networks. If this sounds somewhat familiar, it was this same Sen. Durbin who added an amendment to the 2010 Dodd-Frank Act that required banks to include two unaffiliated networks with every debit card they issue. So, this isn’t the first time that Senator Durbin has been tied to legislation related to payment networks and their associated fees.
A provision of the Credit Card Competition Act that was not part of the 2010 Durbin Amendment is a requirement that banks accept practically any kind of transaction, which could functionally require financial institutions to onboard potentially many more than just two networks, including unregulated networks, such as China’s UnionPay, India’s RuPay or Nigeria’s Verve International. Merchants will have the ability to choose which network handles their transactions and may choose alternative networks, such as those with lower fees.
Supporters of this bill, which has been referred to as “Durbin Amendment 2.0,” claim that the proposed changes will result in lower fees paid by merchants which will in turn lead to lower prices for consumers. Critics of this bill argue that although this bill could lower fees for merchants, it would also reduce revenue for card-issuing banks and could also potentially harm consumers. Unfortunately, some alternative networks could have lower security standards and may be a bit riskier for consumers. Additionally, many of the benefits and rewards offered to card holders are provided due to the fees made on card transactions. By reducing these fees, card issuers may limit or eliminate rewards programs or consider annual fees for such programs.
Deposit Insurance & Cryptocurrency
Recently the FDIC issued a financial institution letter (FIL-35-2022)which includes an Advisory to regarding deposit insurance and crypto companies. The advisory mainly addresses misrepresentations about FDIC deposit insurance by crypto companies, but also applies to insured depository institutions that may have relationships with crypto companies. Additionally, a consumer Fact Sheet has been posted to provide additional information about deposit insurance coverage.
As the advisory reminds us, FDIC insurance only pays in the unlikely event of an insured-bank failure. Coverage is only available for the deposits that are held in the insured bank at the time of its failure. FDIC deposit insurance covers deposit products offered by insured banks, such as checking accounts and savings accounts, and certificates of deposit.Deposit insurance does not apply to non-deposit products, such as stocks, bonds, money market mutual funds, securities, commodities, or crypto assets. FDIC deposit insurance does not protect against losses due to theft or fraud, which are addressed by other laws.
The FDIC protects depositors of insured banks against the loss of their deposits, up to at least $250,000. Since the FDIC began insuring deposits in 1934, no depositor has lost a penny of FDIC-insured funds as a result of an insured bank’s failure. FDIC insurance does not protect a non-bank’s customers against the default, insolvency, or bankruptcy of any non-bank entity, including crypto custodians, exchanges, brokers, wallet providers, or other entities that are similar to banks but are not.
As part of the advisory, the FDIC advises insured banks to be aware of how FDIC insurance operates and the need to assess, manage, and control risks arising from crypto companies along with other third-party relationships. Banks should confirm and monitor that these companies do not misrepresent the nature or availability of deposit insurance and should take appropriate action to address any misrepresentations.
Communications related to deposit insurance need to be clear and well understood. Non-bank entities, such as crypto companies, that advertise or offer FDIC-insured products in relationships with insured banks could reduce consumer confusion by doing the following: 1) stating that they are not an insured bank; 2) identifying the insured bank where customer funds may be held on deposit; and 3) explaining that crypto assets are not FDIC insured and may lose value. To that end, banks can help minimize harm and confusion by regularly reviewing and monitoring the nonbank’s marketing material and relevant disclosures to ensure accuracy and clarity.
Banks should have appropriate risk-management policies and processes in place to ensure that services provided by, or deposits received from crypto companies (or other third parties) are in compliance with applicable laws and regulations.
Additionally, the FDIC’s rules and regulations regarding false advertising, misrepresentation of insured status, and misuse of the FDIC’s name or logo (found at 12 CFR § 328.100ff), can apply to non-banks, such as crypto companies. Therefore, insured banks should determine if its third-party risk management policies and procedures effectively manage crypto-related risks, including compliance risks related to the false advertising, misrepresentation and misuse addressed in the FDIC rules and regulations.
FDIC Issues Supervisory Guidance on NSF Re-presentments
A few weeks ago, we wrote to let you know the latest regarding NSF fees for re-presented items. Since then the FDIC has issued Supervisory Guidance on the matter, so we thought it was important to update you with the latest information.
As you might recall, there are three issues that are currently being scrutinized regarding these NSF re-presentment fees: 1) whether not clearly stating in account agreements that separate NSF fees may be charged for each re-presentment constitutes a breach of contract, 2) whether unclear language in an account agreement constitutes a deceptive practice and 3) whether the practice of charging multiple NSF fees for the same transaction is an inherently unfair practice.
For those not closely following this saga, non-sufficient funds (NSF) fees occur when charges are presented but cannot be covered by the balance in the account, at which point the bank declines the charge and assesses a fee on the customer’s account. Sometimes these declined ACH transactions or checks will be re-presented two or three times, and some banks have been charging NSF fees for each re-presentment of the charge. It is this last activity which is currently under fire and was recently addressed in FDIC supervisory guidance.
The FDIC supervisory guidance is divided into sections related to risk management, the FDIC’s supervisory approach, and the potential risks related to re-presentments. The risk management section provides a nine-point bulleted list of risk-mitigating activities that banks have taken to reduce consumer harm and avoid regulatory violations. Chief among these activities are: 1) The eliminate NSF fees altogether, and 2) the limiting of NSF fees to one per item, regardless of any re-presentments. The additional activities mentioned include reviewing policies and procedures and making sure that disclosures clearly reflect fee practices.
In the FDIC’s supervisory approach it is noted that although proactive efforts to self-identify and correct violations will be recognized, the guidance is clear that failing to provide restitution to harmed customers will not be considered to have taken full corrective action. The FDIC expects financial institutions to promptly address this issue. Additionally, recent exams have shown instances of banks being unable to access ACH data for re-presentments beyond two years, and in these cases, a two-year lookback period for restitution was deemed acceptable, and would generally be considered as having made full corrective action.
If a bank self-identifies NSF re-presentment issues, the FDIC expects them to take full corrective action, including providing restitution to harmed customers, as well as promptly correcting any fee disclosures and account agreements to reflect the bank’s updated practices. Additionally, banks should consider whether additional measures are needed to reduce potential unfairness and monitor activity and feedback to ensure meaningful and long-lasting corrective action.
In the section highlighting potential risks related to re-presentments call out three specific risks: consumer compliance risk, third-party risk, and litigation risk. Consumer compliance risks are said to be risks of Unfair or Deceptive Acts or Practices (UDAP) violations. Specifically, practices could be deceptive if multiple NSF fees are assessed for the same transaction, and the disclosures do not sufficiently inform customers of this practice. Unfair practices are also a part of consumer compliance risks, which could include multiple NSF fees assessed for the same transaction in a short period of time without sufficient notice or opportunity for customers to bring their account to a positive balance to avoid additional NSF fees.
As a part of third-party risk banks are expected to fully understand the risks presented by core processing system settings related to NSF fees, as well as understanding the capabilities and limitations of their core systems. One example of such a limitation is systems’ inability to identify and track re-presented items, which numerous banks have previously said presents problems for their core systems.
In discussing litigation risk, the FDIC notes that many financial institutions have faced class action lawsuits for breach of contract due to inadequately disclosed re-presentment fees. Some of these lawsuits resulted in significant settlements, which included restitution to the harmed customers, as well as legal fees.
This is just supervisory guidance from the FDIC, and the other regulators may choose to issue their own opinion on the state of these fees. Because of all that is happening, this is still an evolving story, and Compliance Alliance will keep you updated with the latest developments.