Doubling up on NSF fees? Make sure your customers know.

For some financial institutions, fee income is a vital source of revenue. Regulatory changes over the past several years have targeted and chipped away at many of these fees. For example, joint supervisory guidance issued in 2005 and 2010 set expectations that financial institutions would take certain actions which, while helpful to consumers, ultimately resulted in less fee income.

Over the past few years, there has been increased scrutiny of overdraft/NSF fee practices by regulators and some members of Congress. Some of these practices are being viewed as potentially unfair or deceptive under Federal Trade Commission Act Section 5 (UDAP). These types of violations can result in large penalties and reputational damage.

One specific area of recent attention involves customers being charged multiple Not-Sufficient-Fund (NSF) fees for a single transaction. While the solution seems simple – only charge an NSF fee on the initial presentation of the item – this has proven difficult in practice due to limitations with core providers. For at least some core providers, systems are unable to distinguish between the initial presentment of an item and the re-presentment of an item, which also means the financial institution is unable to distinguish between them. We understand that core providers are currently working on solutions for this issue.

Below are some key points from the March 2022 FDIC Consumer Compliance Supervisory Highlights section titled “Re-presentment of Unpaid Transactions: Heightened Risk for Section 5 Violations”:

• “During 2021, the FDIC identified consumer harm when financial institutions charged multiple NSF fees for the re-presentment of unpaid transactions. Some disclosures and account agreements explained that one NSF fee would be charged “per item” or “per transaction.” These terms were not clearly defined and disclosure forms did not explain that the same transaction might result in multiple NSF fees if re-presented.”

• “Disclosure and fee practices for re-presentments may result in a heightened risk of violations of Section 5 of the FTC Act, which covers both business and consumer accounts.”

• “Re-presented transactions have also been the subject of a number of recent class action lawsuits involving financial institutions, including some supervised by the FDIC. These lawsuits generally allege a breach of contract due to the omission of key terms related to the assessment of re-presentment fees. Lawsuit settlements have resulted in customer restitution and legal fee reimbursements.”

If the FDIC determines that a financial institution has violated Section 5, it can require that a bank reimburse customers who incurred multiple NSF fees on the same transactions. For example, one bank was recently required by the FDIC to compensate affected customers over a five-year look-back period.

Here are some ways listed in the Highlights that some banks are mitigating these risks:

• Eliminating NSF fees.
• Declining to charge more than one NSF fee for the same transaction, regardless of whether the item is represented.
• Disclosing the amount of NSF fees and how such fees will be imposed, including:
  • Information on whether multiple fees may be assessed in connection with a single transaction;
  • The frequency with which such fees can be assessed; and
  • The maximum number of fees that can be assessed in connection with a single transaction.
• Reviewing customer notification practices related to NSF transactions and the timing of fees to provide the customer with an ability to avoid multiple fees for re-presented items.
• Conducting a comprehensive review of policies, practices, and disclosures related to re-presentments to ensure the manner in which NSF fees are charged is communicated clearly and consistently.
• Working with service providers to retain comprehensive records so that re-presented items can be identified.

It is important to note that financial institutions that are eliminating the NSF fee are not necessarily eliminating overdraft fees for items that are paid. If the item is paid, causing the account to be overdrawn, there could still be an overdraft fee charged. Elimination of the NSF fee is the elimination of the specific fee charged on an item that is returned by the financial institution. These would be the items that could potentially be re-presented, resulting in multiple fees for the same transaction. Items that are paid (causing an overdraft fee) would not be re-presented, so there would be no risk of multiple fees on those items.

According to a recent article in the May/June 2022 edition of ABA Bank Compliance magazine, “In recent months, Biden-appointed regulators have expanded their criticisms of bank overdraft services, suggesting that banks that receive a disproportionate share of their revenue from overdraft fees will fall under enhanced scrutiny for violations of law.”

We are not recommending that every financial institution eliminate NSF fees. However, due to the increased focus by regulators and the public, all institutions need to ensure that, at a minimum, (1) customers are provided clear and adequate disclosures regarding re-presented items, explaining that the same transaction might result in multiple NSF fees if re-presented, and (2) customers fully understand these disclosures.

Because financial institutions receiving a disproportionate share of the revenue from overdraft/NSF fees could face higher levels of scrutiny, those institutions may want to consider taking additional actions to mitigate the regulatory, legal, and reputational risks involved. While fee income is important to financial institutions, this should be weighed against these potential risks.

Our financial institutions' team will be happy to discuss any questions you may have on this, or any other, industry-related topic.

Additional Resources:

FDIC Consumer Compliance Supervisory Highlights

American Banker’s Association Compliance Magazine