Fed: Representment NSF fees are ‘unfair’

In a “compliance spotlight” issued Friday, the Federal Reserve stated that it has cited banks for unfairness, under section 5 of the Federal Trade Commission Act, for charging multiple nonsufficient fees when a transaction is presented multiple times against insufficient funds in the customer’s account.

Institutions have mitigated unfair or deceptive acts or practices, or UDAP, risk by ceasing to charge representment fees and by ensuring that their disclosures were “accurate and consistent with the bank’s policy and any systems limitations,” the Fed said in the document. The agency also said that for institutions that used a third party to identify representments, the institution should monitor the third party’s system settings for compliance with UDAP regulations. “Examiners also found it helpful when institutions informed their Federal Reserve contact if a third party was unable to comply with their directions related to representments,” according to the publication.

Earlier this year, the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency issued guidance documents stating that those regulators have cited banks for unfairness UDAP violations for charging representment fees. Under guidance issued by those agencies and the Fed, a bank’s clear disclosures of multiple representment fees are not sufficient to avoid negative exam findings.

The American Bankers Association has criticized regulators’ statements that charging multiple NSF fees for represented transactions is “unfair.” ABA has pointed out that – under the applicable UDAP standard – consumers can “reasonably avoid” multiple NSF fees. Banks provide notice of the first NSF fee, and consumers can check account balances using online and mobile applications and replenish their account before the merchant resubmits the transaction for payment.