In its inaugural “Compliance Spotlight,” the Federal Reserve stated that it had issued findings to certain institutions that charging non-sufficient funds fees on re-presented items was unfair under a UDAP (Unfair and Deceptive Acts and Practices) analysis. But, unlike other regulators who have issued guidance on this topic, the Fed did not clarify when such a charge might be considered fair.
Historically, re-presentment of NSF fee transactions (in which NSF fees may be assessed each time a merchant presents the transaction for payment and the debit is declined) have been litigated as “deceptive”, due to disclosures which may not explain that a fee may be assessed each time the transaction is presented.
Lately, however, regulators have begun taking the position that charging fees on a re-presented item may not only be deceptive — if inadequately disclosed — but also unfair, given the lack of control the consumer has over when a fee may be assessed. While every regulator has recommended not charging NSF fees, their other risk mitigation recommendations vary.
FDIC: Give consumers sufficient notice and opportunity
The FDIC’s analysis from its Spring 2022 “Consumer Compliance Supervisory Highlights” report and August 2022 guidance focused on giving consumers “sufficient notice or opportunity” to bring their accounts positive in order to avoid additional NSF fees. The FDIC also emphasized that financial institutions were responsible for maintaining adequate oversight of third-party activities, including understanding whether their third-party partners were able to identify and track re-presented items.
The FDIC listed several risk mitigation practices including not charging NSF fees, or only charging one NSF fee per transaction, regardless of the number of times a transaction was re-presented. The FDIC also recommended reviewing customer notification practices regarding NSF fees, ensuring that customers had adequate time to replenish their accounts before additional NSF fees would be assessed.
The FDIC expected institutions to self-identify re-presentment NSF fee issues and take full corrective action, both to redress past harm as well as to address ongoing practices.
OCC: Consumers must have control
The OCC’s April 2023 bulletin commented that NSF fees charged on re-presented items might be considered unfair “if consumers cannot reasonably avoid the harm and the other factors for establishing unfairness under Section 5 are met.” The OCC observed that “consumers typically have no control” over when an item will be re-presented.
In the OCC’s assessment, having high limits — or no limits — on charging multiple NSF fees in a single day was more likely to lead to an unfair determination, since such a policy could lead to high costs for consumers and difficulty in bringing the accounts positive.
Like the FDIC, the OCC’s list of mitigating policies included giving consumers notice and opportunity to bring their balance current, by sending automated near-real time alerts and providing a grace period in which to replenish their accounts. The OCC further recommended limiting fees to single daily fees, and ensuring the amounts are reasonably related to actual costs incurred by the institution.
CFPB: NSF re-presentment fees provide consumers no benefit
In its July consent order with a large bank (which mirrored the CFPB’s Winter 2023 Supervisory Highlights), the CFPB also focused on a consumer’s ability to avoid subsequent fees. In that order, the CFPB noted that even if consumers understood they could be charged a fee for each re-presentment, they were not able to avoid the fee because they did not know when merchants would re-present transactions, which could be as soon as the next day. While the FDIC and OCC mentioned, in passing, their view that NSF fees on re-presentment items might not be outweighed by countervailing benefits to consumers, the CFPB fleshed out that claim, asserting that these fees provide little to no benefit to consumers, and present no relevant deterrence since consumers cannot avoid them. The practice is therefore unfair, per the CFPB.
Notably the CFPB observed that the Respondent had stopped assessing re-presentment NSF fees on ACH transactions in November 2021, and then stopped charging NSF fees altogether in February 2022, perhaps reflecting the difficulty of charging re-presentment NSF fees in a way that satisfied regulator concerns. The CFPB did not address other mitigation tactics that could be taken by the bank.
Federal Reserve: Consumers cannot avoid harm and receive no benefit
With its Compliance Spotlight, the Federal Reserve joins the other banking regulators in concluding that NSF re-presentment fees may be unfair under UDAP. Per the Fed, such a fee may be unfair under a UDAP analysis because, a) the fees resulted in monetary harm to the consumer, b) consumers could not reasonably avoid the harm because “the merchant controlled the number and timing of re-presentment, and the bank determined whether it paid or declined the re-presented transaction, and whether it assessed an NSF fee on the re-presented transaction;” and c) the fees were retained by the bank and did not provide the customer with a benefit.
Like the OCC and the FDIC, the Federal Reserve listed certain mitigating steps an institution may take, the first being not to charge a fee. The Federal Reserve also indicated it would expect institutions to make sure third parties involved were able to comply with UDAP. If third-party partners could not comply with the Federal Reserve’s directions, the Federal Reserve wanted to be informed.
Finally, while the Federal Reserve indicated banks should make sure their customer disclosures regarding re-presented transactions were accurate and consistent with the bank’s policy and any system limitations, the Fed did not clarify under what circumstances the assessment of a fee on the re-presented transaction could be considered fair under UDAP. For example, unlike the FDIC and OCC, the Fed did not discuss giving the customer adequate notice and time to replenish their account.
Conclusion
In light of these Supervisory Observations, financial institutions should work with their Federal Reserve examiner to determine under what circumstances, if any, the charging of an NSF fee on a re-presented item would be considered fair. Institutions should also work with their payment processors to ensure re-presented items can be properly identified so that charging a re-presentment NSF fee can be avoided if there are no other options available.
Therese Kieffer, JD, CRCM, is a Specialized Consulting Manager with the Regulatory Analysis team of Wolters Kluwer’s Compliance Center of Excellence.