August 19, 2022

FDIC Issues Guidance on Re-Presentment Fees for Non-sufficient Funds

Most bank compliance officers have heard the rumblings over the last several months about examiner criticisms and class action lawsuits centered on assessing multiple non-sufficient funds (NSF) fees in connection with a single check or ACH transaction. Unlucky compliance officers have even been on the front-end of this emerging issue during an examination or lawsuit.

The position that these agreements, disclosures and practices have been around for years, neigh decades, with no mention of a problem do not appear to be holding water. On August 18th, 2022 the FDIC issued Financial Institution Letter (FIL) 40-2022, which includes Supervisory Guidance on Multiple Re-Presentment NSF Fees (Guidance) that addresses risks related to consumer compliance, third parties and litigation.

UDAP and Disclosing Multiple NSF Fees

The discussion of consumer compliance risk cites unfair or deceptive acts or practices (UDAP) under Section 5 of the Federal Trade Commission Act with a footnote referencing abusive acts or practices to make UDAP, UDAAP. The guidance states that disclosures which “do not adequately advise” consumers that more than one NSF may be assessed if an unpaid check or ACH transaction is presented for payment more than once is deceptive. While this concern may be mitigated by revising the appropriate disclosures to adequately advise consumers of the potential for multiple NSF fees, the risk of unfairness remains.

To address the risk of unfairness, the Guidance suggests that consumers be notified that funds are insufficient and be given the opportunity to resolve the insufficiency and avoid potential additional NSF fees.

What Should Financial Institutions Do?

The Guidance lists several steps that can be taken to reduce the amount of risk associated with this practice.  Begin with a review of your policies, procedures, practices, disclosures and agreements that affect NSF fees. Assuming that you do not want to eliminate NSF fees, which is the first risk mitigation step listed in the Guidance, ask yourself the following:

  • Is there a way to avoid charging multiple NSF fees for the same transaction? This may involve a discussion with your core processor (remember the third-party risk we briefly mentioned earlier?).
  • Are your disclosures and agreements clear about how NSF fees will be assessed?  If not, consider revising these documents and provide them to existing and future customers. Yes, existing customers. The Guidance suggests that this information should include not only the fact that multiple NSF fees may be assessed, but also the maximum number of NSF fees that can be assessed for a single transaction and the frequency with which these fees may be assessed.
  • Are your customers notified that their account has insufficient funds, and do they have a reasonable way to avoid multiple NSF fees? If not, how could you implement such a system to mitigate the risk of a finding of an unfair practice?

Avoiding a UDAP Violation

If you have come to the unfortunate conclusion that your practices likely won’t pass muster with the examiners, or the scrutiny of a lawsuit, and have answered the questions above, the next question that comes to mind is: what about restitution? To avoid the citation of a self-identified UDAP violation, the Guidance states that the violation must be fully corrected and that a violation will not be considered fully corrected in the presence of a failure to provide restitution when the data to do so is reasonably available. No specific look-back period for restitution is mentioned, only that recordkeeping practices could be a factor in such a determination.

While this Guidance does not answer all of our questions regarding multiple NSF fees on re-presented items, it does provide some insight into the FDIC’s perspective and approach and is an important read for any bank that charges NSF fees. The Anders team of Banking and Financial Institutions compliance specialists closely follow changes to FDIC and related guidance. Contact Anders below to discuss your unique situation and reporting requirements.

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