FDIC: ‘Authorize positive, settle negative’ overdraft fees present risks of unfairness 

The FDIC yesterday said that overdraft fees resulting from “authorize positive, settle negative” transactions may present risks of possible unfairness violations under unfair or deceptive acts or practices—UDAP—regulations. Under this pattern, a first transaction is authorized on positive funds. Then, a second transaction authorizes and posts, lowering the available balance (or bringing the available balance below $0). When the first transaction posts, it posts against negative funds, and the customer is assessed an overdraft fee.

In its financial institution letter, the FDIC said that APSN overdraft fees present risks of unfairness under the Dodd-Frank Act and Section 5 of the Federal Trade Commission Act because the consumer cannot reasonably avoid receiving these fees due to the “complicated nature of overdraft processing systems” and because “the consumer does not have the ability to effectively control payment systems.” According to the FDIC, the risks of unfairness exist under either “available balance” or “ledger balance” methods of assessing overdraft fees, but may be “more pronounced” when the bank uses available balance methods.

Disclosures may not mitigate UDAP risk, the agency said. Instead, the FDIC directed banks to “ensure customers are not charged overdraft fees for transactions consumers may not anticipate or avoid.” Significantly, the FDIC did not direct banks to provide remediation to customers over a “lookback” period or indicate that any bank has been cited for a UDAP violation for charging APSN overdraft fees.

In March, the CFPB said it has cited institutions for unfairness where the institution charged consumers APSN overdraft fees. The CFPB’s action followed a circular it issued in October saying that overdraft fees assessed by financial institutions on transactions that a consumer “would not reasonably anticipate,” including APSN overdraft fees, are “likely unfair.” Acting Comptroller of the Currency Michael Hsu also has stated that APSN overdraft fees present risks of unfairness. 

OCC Weighs In

In related news, the Office of the Comptroller of the Currency yesterday issued a bulletin that also stated that overdraft fees resulting from “authorize positive, settle negative” transactions may present risks of unfairness UDAP violations. The OCC stated that, even when disclosures were accurate, the OCC found APSN overdraft fees were “unfair,” under Section 5 of the FTC Act, because consumers were “unlikely to be able to reasonably avoid injury.”

The OCC also stated that it has found that banks’ assessment of multiple nonsufficient funds fees when a transaction is presented multiple times against insufficient funds in the customer’s account resulted in “findings in some instances that the practice was unfair and deceptive.” Even when banks’ disclosures accurately describe that a represented transaction may result in more than one NSF fee, “a bank’s practice of assessing fees for each representment may also be unfair . . . if consumers cannot reasonably avoid the harm.” The OCC said that consumers “typically have no control over when a returned ACH transaction or check will be presented again and lack knowledge of whether an intervening deposit will be sufficient to cover the transaction and related fees.”

The OCC also stated that high limits or the lack of daily limits on the number of overdraft or NSF fees that can be assessed has “contributed to determinations that banks’ overdraft protection programs as a whole were unfair” under Section 5 of the FTC Act. In addition, charging a continuous overdraft fee has “contributed to findings of unfairness and deception” under Section 5.