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.