Misleading and Unfair – Multiple NSF Charges on Representations of the Same Transaction
In recently released guidance, the Federal Deposit Insurance Corporation (“FDIC”) stated that charging multiple insufficient funds (“NSF”) fees is a “violation of law” when customer disclosures do not fully explain and clearly that the same unpaid transaction could result in multiple NSF charges if an item is presented more than once.
Supervisory Guidance on Multiple Re-Presentment NSF Fees, Federal Deposit Insurance Corp. Financial Institutions Letter, August 18, 2022.
Targeted financial service providers
The guidance is intended for financial institutions insured and supervised by the FDIC. Section 5 of the Federal Trade Commission Act (“Section 5”) prohibits “unfair and deceptive acts or practices in or affecting commerce” and applies to all persons engaged in commerce, including banks . The FDIC is empowered under Section 8 of the Federal Deposit Insurance Act to take appropriate action against non-member state banks and institutionally affiliated parties for violations of the law. , which includes Section 5. Pursuant to Section 5, such as banks, fintechs, such as as “neobanks”, that charge or similarly benefit from NSF fees could be held liable by the Federal Trade Commission for failing to disclose to clients that, in connection with a transaction involving the assessment of an NSF fee, re-submission of the same transaction, even after it has already been rejected for insufficient funds, may result in additional charges for NSF checks taken from customer accounts. Fintech’s exposure to law enforcement stems from compliance with FDIC guidance that such inadequate disclosure practices “result in increased risks of violations of Section 5 of the Federal Trade Commission Act.” The WIRE also expressly calls upon the responsibility of the relevant institutions to manage the risks presented by the practices and procedures of their primary processors and other third party service providers.
Although technically not binding on other federal and state regulators, these FDIC guidelines increase the potential for adoption of these guidelines by other banking supervisory regulators. In addition, the FDIC guidelines increase the potential for enforcement of the UDAAP by the Consumer Financial Protection Bureau (“CFPB”) under its independent enforcement powers under the Dodd-Frank Wall Street Improvement and Consumer Act. Protection Act of 2010 (“Dodd-Frank Act”). , which includes non-banking financial service providers, such as neobanks. The FIL emphasizes that its view that “these practices may also violate Section 1036(a)(1)(B) of the [Dodd-Frank Act] (12 USC § 5536(a)(1)(B))…” CFPB Director Rohit Chopra discussed earlier this year the CFPB’s intention to proactively address practices considered harmful to consumers, calling NSF charges “junk fees,” which do not relate to any benefit to the consumer.
State laws that provide equal or greater consumer protection are not preempted by the UDAAP provisions of the Dodd-Frank Act. In addition to enforcing state laws, the Dodd-Frank Act expressly empowers state attorneys general to bring civil actions to enforce the UDAAP provisions of the Dodd-Frank Act and CFPB regulations. State consumer protection laws may also provide consumers with private rights of action, including class actions, for violations of the UDAAP.
The guidance succinctly outlines specific actions supervised institutions could take to mitigate the risk of harm to consumers and avoid potential breaches of the law:
- Eliminate NSF fees.
- Refuse to charge more than one NSF fee for the same transaction, whether or not the item is resubmitted.
- Conduct a comprehensive review of policies, practices and monitoring activities related to representations and make appropriate changes and clarifications, including providing revised information to all existing and new clients.
- Clearly and prominently disclose the amount of NSF fees to customers and when and how these fees will be imposed, including:
- Information about whether multiple fees may be assessed as part of a single transaction when a merchant submits the same transaction for payment multiple times;
- The frequency with which these charges may be assessed; and
- The maximum number of fees that can be assessed in a single transaction.
- Review practices for notifying or alerting customers related to NSF transactions and the timing of charges to ensure customers have the opportunity to effectively avoid multiple charges for resubmitted items, including reinstating the their account balance to a sufficient amount before subsequent NSF charges are assessed.
The guide goes on to prescribe specific actions that it waits supervised institutions that “self-identify” in terms of NSF representation:
- Take comprehensive corrective action, including offering restitution to aggrieved customers, in accordance with the restitution approach outlined in this guide;
- Promptly correct NSF fee information and account agreements for existing and new customers, including providing revised information and agreements to all customers;
- Consider whether additional risk mitigation practices are needed to reduce potential risks of injustice; and
- Monitor ongoing activities and customer feedback to ensure comprehensive and sustained corrective action.
Deceptive and unfair practices
The FDIC has identified violations of Article 5 during a number of recent examinations of financial institutions under its supervision. The standards of injustice and deception are independent of each other. Although a specific act or practice may be both unfair and deceptive, an act or practice is prohibited by section 5 if it is either unfair Where misleading. The FDIC has identified as a “deceptive” practice the charging of multiple NSF fees on multiple presentations arising from the same customer transaction when the possibility of such multiple presentations and resulting fees is not sufficiently disclosed to customers. In other words, the FDIC does not expect consumers to know, for example, that a merchant accepting an ACH payment could present that item multiple times if the initial presentation is returned as NSF. Specifically, the FIL states that in a number of consumer compliance reviews: “The FDIC has found that if this information is not clearly and conspicuously disclosed to customers, the material omission of this information is considered misleading under in Section 5 of the FTC Act.”
The FIL goes on to explain that reviewing consumer disclosures may not be enough to avoid accusations of “unfairness.” The FIL explains that failure to properly inform customers of pricing practices can result in significant harm to customers, which may not be reasonably avoidable and may have no offsetting benefit to customers or competition:
“In particular, a risk of unfairness may be present if multiple NSF charges are assessed for the same transaction within a short period of time without sufficient notice or an opportunity for customers to return their account to a positive balance in order to avoid the assessment of additional costs. NSF fees.
Third Party Practices
The FDIC guidelines emphasize that insured financial institutions are responsible for monitoring the activities of third parties with whom they contract services, including basic processors. While holding insured financial institutions accountable for the actions of their core processors, the FDIC guidelines also encourage insured financial institutions to ensure that they use the capabilities offered by contracted third parties to implement compliant practices. , such as item identification and tracking capabilities and the retention of data on these transactions.
Notwithstanding an insured financial institution’s supervisory liability, neobanks and other fintechs for which insured financial institutions provide licensed banking may also be subject to penalties arising from the same fees, to the extent such entities control NSF fees. billed to accounts held by financial institutions. institution. So while the FDIC could hold the sponsoring insured financial institution liable for NSF fees charged by or on behalf of neobanks or fintechs, based on a theory that they are in fact providing services to the bank’s depositors, neobanks or fintechs that charge NSF fees or contractually benefit from such fees could face enforcement action directly from the FTC. These exposures may also arise indirectly through contractual obligations between fintechs and financial institutions, such as liability for compensation for costs or penalties incurred or breaches of representations and warranties of compliance with applicable law. While such contractual provisions can effectively allocate financial responsibility for compliance, they do not deflect initial enforcement burdens, financial institution oversight “black marks”, or reputational damage to either the other of the parties.