The FDIC significantly misstepped when it issued Financial Institutions Letter 40-2022 nearly a year ago. The supervisory guidance discourages banks from charging multiple non-sufficient funds fees for the same item, and it urges banks to change long-accepted disclosures for item processing. The FDIC, which regulates state-chartered, non-Fed-member banks, has introduced new concerns and confusion among bankers with its heavy-handed implied enforcement of this guidance.
In violation of its own previously adopted supervisory guidance, the FDIC in FIL-40 asks banks to revise its disclosure documents around item re-presentment and eliminate fees or not charge more than one fee per transaction. The letter states that the FDIC expects banks to review their NSF fee collection practices and repay fees collected on transactions involving any item presented more than once.
The Minnesota Bankers Association filed a federal lawsuit on July 20 over the issue, saying the FDIC does not have the authority to mandate practices around fees charged for check processing, nor does it have the authority in a supervisory guidance to make up new requirements of banks. Lake Central Bank of Annandale, Minn., is filing the lawsuit with the MBA. Lake Central Bank President Bryan Bruns has been active in the MBA for many years.Their goal is for the court to rescind FDIC FIL-40, and recover the costs of the lawsuit. But I think more importantly, the purpose of the lawsuit is to remind the FDIC that it can’t simply declare anything it wants as a regulation — or the functional equivalent of a regulation — on banks. Congress is the only body that can create new law; regulators are, of course, in place to enforce the law, but they cannot make up the law.
With respect to its impact on banks, this guidance has been treated by the FDIC in the same manner as established law. I have spoken to bankers who affirm that FDIC examiners have required them to reconsider disclosures and practices around their payments processes and item re-presentment.
As the MBA explains in its lawsuit, payments processing is covered by the Electronic Fund Transfer Act and the Truth in Savings Act. These laws explain the requirements for bank disclosures to customers around fees related to payment processing. These acts, passed by Congress, represent laws that make requirements for banks. Supervisory guidance does not serve the same purpose as a law, nor can it be enforced as law.
And the FDIC knows this. In 2021, the FDIC adopted a final rule that codified the Interagency Statement Clarifying the Role of Supervisory Guidance, jointly issued by the bank regulatory agencies including the FDIC on Sept. 11, 2018. This is how it is recorded in the Federal Register:
By codifying the 2018 Statement, with amendments, the final rule confirms that the FDIC will continue to follow and respect the limits of administrative law in carrying out its supervisory responsibilities. The 2018 Statement reiterated well-established law by stating that, unlike a law or regulation, supervisory guidance does not have the force and effect of law. As such, supervisory guidance does not create binding legal obligations for the public. Because it is incorporated into the final rule, the 2018 Statement, as amended, is binding on the FDIC.
The FDIC is acting alone in prioritizing re-presentment issues as a source of potential trouble. Oftentimes, supervisory guidance comes from the FFIEC, as did the Sept. 11, 2018 guidance. The various bank regulatory agencies will work together to promulgate guidance and rules. But the FDIC issued FIL-40 on its own. The guidance does not have the endorsement of the other bank regulatory agencies.
If the FDIC had worked with the FFIEC on guidance for re-presentment issues, it might have put a proposed guidance out for public comment. Bankers and their representatives surely would have pointed out during a public comment period the difficulty of accurately counting the number of re-presented items. The core processing technology, upon which virtually all community banks are dependent, simply is not designed to provide this information.
On June 16, 2023, the FDIC issued Financial Institutions Letter 32-2023, “Clarifying FDIC Supervisory Approach Regarding Supervisory Guidance on Multiple Re-Presentment NSF Fees.” It says that unless there is “substantial consumer harm,” banks do not need to conduct a review of their NSF practices. It does, however, maintain that banks need to provide disclosure of re-presentment fees.
“What we found is that … banks were spending thousands of dollars; they might spend eight thousand dollars to find out they have five thousand dollars of reimbursements, which didn’t make sense,” explained James LaPierre, Regional Director for the FDIC’s Kansas City Region to bankers gathered for the Community Bankers of Iowa convention in Okoboji on July 20.
In FIL-32, “The FDIC said we are not going to require reimbursement. We are going to require disclosure, but we are not going to require reimbursement for situations where there is not significant consumer harm, and significant consumer harm is a very high bar,” LaPierre said. “I would suspect that almost any bank in our region or certainly, any community bank in our region, is probably not going to meet that criteria.”
LaPierre added: “If you do have questions please contact the local field office, and we’ll walk you through exactly what the expectations are to get past this. We are trying to get past it, I can assure you.”
Joe Witt, president and CEO of the Minnesota Bankers Association, says FIL-32 doesn’t clear up anything. The lawsuit states:
The backpedaling in FIL-32 by the FDIC highlights the errors with the original issuance of FIL-40, and, within less than a year, creates additional violations of law. FIL-32 revises only a small part of the rules issued in FIL-40 and does so in a way that provides no meaningful relief to institutions it regulates. The FDIC relies on a footnote (footnote 4) to announce its revised supervisory policy regarding lookbacks and multiple fees related to re-presentment. In the footnote, the FDIC indicates it “does not intend” to require a lookback “absent a likelihood of substantial consumer harm.” By use of the qualifying terms “does not intend” and “likelihood,” the FDIC leaves open that it may require a lookback at any time or even where there is truly no substantial consumer harm. The FDIC may believe there is a likelihood based on some unknown set of data, from prior examinations or otherwise, and still require a lookback.”
The MBA turned to Karen Grandstrand of Fredrikson law firm in Minneapolis to prepare the lawsuit. Now that the suit is public, other banks, trade groups or interested parties may file friend of the court briefs related to the case. Witt said that while the case could be resolved quickly, it is also possible that it could take years to get a final decision. However long it takes, the MBA already has demonstrated that it is watching the regulatory agencies closely and that it expects them to follow established law and procedure with respect to their regulatory and supervisory duties.