OCC and FDIC Issue Guidance on Overdraft Protection Programs
Recently, the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) have both issued guidance to address the risks associated with bank overdraft protection programs. The guidance comes after a similar circular from the Consumer Financial Protection Bureau (CFPB) was issued in October 2022 and identifies certain practices that may result in heightened risk exposure.
The FDIC and OCC both focused on cautioning supervised institutions against the practice of “Authorize Positive, Settle Negative” (ASPN), which is “charging an overdraft fee on a transaction that was authorized against a positive balance[.]” The FDIC notes that while not all overdraft fees may relate to ASPN transactions, APSN may put the supervised institutions at a higher risk of violating § 1036(a)(1)(B) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which prohibits any covered person or service provider from engaging in any unfair, deceptive, or abusive acts or practices in connection with a consumer financial product or service” (UDAAP), as well as violating Section 5 of the Federal Trade Commission Act (FTC Act) [1], “which prohibits unfair or deceptive acts or practices.”
Under these provisions, a practice is deemed unfair when:
it causes, or is likely to cause, a substantial injury to the consumer;
it cannot be reasonably avoided by the consumer; and
it is not outweighed by countervailing benefits to the consumer or to competition.
In determining whether a practice is unfair, the regulatory body must determine if the harm incurred by the consumer was unavoidable. To do so, the FDIC standard considers whether the harm to a consumer was outweighed by a countervailing benefit to the consumer or competition. If the answer is no, then the scale will tip in the favor of an unfair, deceptive, or abusive act or practice. Based on this standard, both the OCC and the FDIC found that in some instances, ASPN may pose a violation; especially, the OCC posed, when the disclosures presented to a consumer relating to the transaction were misleading.
The OCC guideline also warns against representment fee practices, which it defines as “charging an additional fee each time a single transaction (e.g., ACH transaction or check) is presented for payment by a third party without further action by the customer contributes to customer costs in circumstances in which those customers cannot reasonably avoid the additional charges.”
Specifically, the OCC has found the use of representment fees to be unfair or deceptive where disclosures presented to a consumer do not clearly explain that multiple fees may apply on the same transaction. However, even if consumer disclosures explain that a single transaction may result in additional fees, the OCC has found that the practice could still be considered unfair due to a consumer’s lack of control over when the transaction will be presented again and “lack knowledge of whether an intervening deposit will be sufficient to cover then transaction and related fees.”
Further, in some cases, charging overdraft or NFS fees with no limit or high limits for multiple transactions in a single day or charging fixed, periodic overdraft fees may be deemed unfair as both practices present high costs to consumers, which may result in difficulty bringing the account back to a positive balance.
The guidance evidences that the OCC, FDIC, and CFPB continue to focus on potential harms relating to overdraft protection programs while instructing supervised institutions on ways to mitigate against the risks. As such, your organization should engage in the following practices to reduce the risk of regulatory scrutiny:
staying current on the most recent guidance from these agencies; and
reviewing overdraft programs of their institution and the third parties involved in an institution’s overdraft program to ensure they comply with the recent guidance.
[1] https://www.federalreserve.gov/boarddocs/supmanual/cch/200806/ftca.pdf