Navy Federal Credit Union (“NFCU”) recently entered into a $95 million settlement and consent order with the Consumer Financial Protection Bureau regarding its “Optional Overdraft Protection Program” (“OOPS”). The scope of the practices at issue spanned from 2017 to 2022 and, like many other recent regulator actions, focused on “surprise” overdraft fees. The CFPB took issue with two practices in particular – first, “authorize positive, settle negative” (APSN) transactions and, second, undisclosed processing times on peer-to-peer (“P2P”) payments. With both of these practices, the Bureau argued, consumers were not provided with the information necessary for them to be able to anticipate that certain transactions would incur an overdraft and the related fees.
Regulator concern over ASPN transactions should not come as a surprise to banks, as this is not the first time that it has been addressed in guidance. ASPN transactions happen when a customer has a positive balance at the time they initiate a transaction, but due to intervening transactions, lacks sufficient funds at the time that the transaction is actually posted. Regulator guidance has recommended that banks adopt an available balance method that calculates the account balance based on authorized, as well as actually settled, transactions. The available balance method should enable the customer to see the actual funds available to pay new transactions, rather than showing only transactions that have settled.
The issue with the P2P payments is almost the flip side of the same issue. With the P2P payments, NFCU would display P2P deposits to the consumer’s account before they had been settled and before the funds were truly available to the consumer. A consumer viewing these transactions could potentially believe the funds to be available and initiate transactions based on that belief, only to incur overdraft fees if their transactions settled before the P2P funds became available. As with APSN transactions, the available balance method cures this issue by displaying to the consumer the funds that are actually available to them.
Going forward, banks will want to evaluate their practices to assess the risk of overdraft fees that could be considered a “surprise.” While most banks have adopted the preferred available balance method, the issue of surprise overdrafts may sometimes nonetheless arise in the context of transaction posting errors. In cases where transactions did not process correctly, banks may occasionally post transactions later than normal or in situations where the transactions were not correctly factored into the customer’s available balance. In these cases, based on the NFCU action and other related guidance, it appears that there may be UDAAP risk in assessing overdraft fees when these transactions are added, as it would raise the same concern that the consumer may not have reasonably been able to anticipate that overdraft fees would be incurred.
This settlement adds to a variety of other indicators that regulators are focusing heavily on overdraft fees, much of which is summarized in the OCC’s 2023 Bulletin on this topic and in the recent CFPB Circular on Reg E Opt-Ins. As always, our Compliance Alliance Hotline team is also available to assist with any questions you may have.