Nonsufficient Fund Fees
Minnesota Bankers Association v. Federal Deposit Insurance Corporation
Date: Aug. 1, 2024
Issue: Whether the Federal Deposit Insurance Corporation’s (FDIC) Financial Institutions Letter 40-2022: Supervisory Guidance on Multiple Re-Presentment Nonsufficient Funds (NSF) Fees (FIL 40) violates the Administrative Procedure Act (APA).
Case Summary: The American Bankers Association filed a coalition amicus brief urging the Eighth Circuit to reverse a Minnesota district court’s dismissal in the Minnesota Bankers Association’s and Lake Central Bank’s lawsuit challenging the FDIC’s supervisory guidance on NSF fees.
In August 2022, the FDIC issued FIL 40. The guidance only directly applied to state-chartered banks and thrifts with assets of less than $10 billion that are not members of the Federal Reserve System. The guidance explained the FDIC expects institutions self-identifying re-presentment NSF fee issues to take full corrective action, such as paying full restitution; correcting NSF fee disclosures; providing revised disclosures to customers to consider whether additional risk mitigation practices are needed to reduce potential unfairness risk; and monitoring ongoing activities and customers’ feedback to ensure lasting corrective action. In 2023, the FDIC issued Financial Institution Letter 32-2023 (FIL 32) to replace FIL 40 as the operative guidance document.
The Minnesota Bankers Association and Lake Central Bank sued the FDIC in Minnesota federal court to vacate FIL 40, alleging three claims. Plaintiffs alleged FIL 40: is a legislative rule because it imposes new legal obligations on banks and commits the FDIC to bring enforcement actions under specific circumstances; is an arbitrary and capricious agency action; and exceeds the FDIC’s statutory authority. The FDIC moved to dismiss arguing plaintiffs’ claimed injuries were not redressable; FIL 32 is not subject to APA review; and plaintiffs misstated and misapplied the ripeness doctrine. Judge Paul Magnuson granted the FDIC’s motion to dismiss, ruling plaintiffs lacked standing to sue because FIL 32 is not a final agency action under the APA. Plaintiffs appealed the district court’s decision.
In its brief, the American Bankers Association argued that FIL 32 has legal and practice consequences banks cannot avoid without incurring significant compliance costs, which constitutes a final agency action. The brief explained FIL 32 forces banks to choose between costly compliance and the FDIC’s wide-ranging supervisory authority—which includes the power to severely limit a bank’s operations or even shut down a bank entirely. ABA emphasized not complying with FIL 32 could result in severe monetary penalties, significant injunctive relief including restrictions on the growth of the bank, and lower CAMELS ratings. In addition, ABA argued complying with FIL 32 creates immediate and significant burdens. The brief explained banks must identify whether their core processing systems asses multiple NSF fees on the same transaction; revise disclosures to ensure customers are adequately informed; ensure fees are not charged in such short succession that a customer has no opportunity to restore their account to a positive balance; and provide restitution to customers harmed by multiple NSF fees in the past.
ABA also argued the district court’s ruling would permit the FDIC to promulgate improper legal rules without fair process or accountability. ABA highlighted that FIL 32 illustrates why notice-and-comment procedures are important to legislative rulemaking. Notice-and-comment procedures ensure federal agencies are accountable to the public. By allowing the FDIC to promulgate FIL 32 as unreviewable guidance, the FDIC escapes accountability for a deeply unfair rule that is wrong as both a matter of law and policy. As a result of the district court’s ruling, ABA also argued FDIC’s erroneous interpretation of section 5 of the Federal Trade Commission Act (FTCA), and its application of NSF fees, will never be tested by courts. Without judicial review under the APA, FDIC guidance, which carries legal consequences and significant practical burdens, could be entirely insulated which undermines core tenets of the APA and the U.S. Constitution’s framework.
Finally, ABA argued that allowing the FDIC to promulgate de facto legislative rules establishing lawful and unlawful behavior under the FTCA is particularly concerning because Congress stripped the FDIC of such authority. The brief underscored that such rulemaking authority is reserved for the Federal Trade Commission, and in any event, it is unclear whether the FDIC has the power to issue guidance interpreting section 5 of the FTCA.
Bottom Line: FDIC’s response brief is due Aug. 25, 2024.
Document: Brief
