Vol. XXXIV, No. 19 FDIC Guidance - Multiple NSF Fees Charged for Re-PresentmentThe Federal Deposit Insurance Corporation (FDIC) has released guidance on the practice of charging multiple non-sufficient fund fees for transactions presented multiple times against insufficient funds in a customer’s account. The guidance indicates that the FDIC will recognize and institution’s proactive efforts to self-identify and correct violations. I. Background Many financial institutions charge NSF fees when checks or Automated Clearinghouse (ACH) transactions are presented for payment but cannot be covered by the balance in a customer's transaction account. After being declined, merchants may subsequently resubmit the transaction for payment. Some financial institutions charge additional NSF fees for the same transaction when a merchant re-presents a check or ACH transaction on more than one occasion after the initial unpaid transaction was declined. In these situations, there is an elevated risk of violations of law and harm to consumers. The FDIC has identified violations of law when financial institutions charged multiple NSF fees for the re-presentment of unpaid transactions because disclosures did not fully or clearly describe the financial institution's re-presentment practice, including not explaining that the same unpaid transaction might result in multiple NSF fees if an item was presented more than once. Practices involving the charging of multiple NSF fees arising from the same unpaid transaction results in heightened risks of violations of Section 5 of the Federal Trade Commission (FTC) Act, which prohibits unfair or deceptive acts or practices (UDAP). Third parties, including core processors, often play significant roles in processing payments, identifying and tracking re-presented items, and providing systems that determine when NSF fees are assessed. Such third-party arrangements may also present risks if not properly managed. There may also be heightened litigation risk. Numerous financial institutions, including some FDIC-supervised institutions, have faced class action lawsuits alleging breach of contract and other claims because of the failure to adequately disclose re-presentment NSF fee practices in their account disclosures. Financial institutions are encouraged to review their practices and disclosures regarding the charging of NSF fees for re-presented transactions. The FDIC has observed some risk-mitigation practices financial institutions implemented to reduce the risk of consumer harm and potential violations. The FDIC will take appropriate action to address consumer harm and violations of law when exercising its supervisory and enforcement responsibilities regarding re-presentment NSF fee practices. II. Potential Risks Arising from Multiple Re-Presentment NSF Fees Consumer Compliance Risk: Practices involving the charging of multiple NSF fees arising from the same unpaid transaction results in heightened risks of violations of Section 5 of the Federal Trade Commission (FTC) Act, which prohibits unfair or deceptive acts or practices (UDAP). While specific facts and circumstances ultimately determine whether a practice violates a law or regulation, the failure to disclose material information to customers about re-presentment and fee practices has the potential to mislead reasonable customers, and there are situations that may also present risk of unfairness if the customer is unable to avoid fees related to re-presented transactions.
Third-Party Risk: Third parties, including core processors, often play significant roles in processing payments, identifying and tracking re-presented items, and providing systems that determine when NSF fees are assessed. Such third-party arrangements may present risks if not properly managed. Institutions are expected to maintain adequate oversight of third-party activities and appropriate quality control over products and services provided through third-party arrangements. In addition, institutions are responsible for identifying and controlling risks arising from third-party relationships to the same extent as if the third-party activity was handled within the institution. Institutions are encouraged to review and understand the risks presented from their core processing system settings related to multiple NSF fees, as well as understand the capabilities of their core processing system(s), such as identifying and tracking re-presented items and maintaining data on such transactions. Litigation Risk: Multiple NSF fee practices may result in heightened litigation risk. Numerous financial institutions, including some FDIC-supervised institutions, have faced class action lawsuits alleging breach of contract and other claims because of the failure to adequately disclose re-presentment NSF fee practices in their account disclosures. Some of these cases have resulted in substantial settlements, including customer restitution and legal fees. III. Risk Mitigation Practices Institutions are encouraged to review their practices and disclosures regarding the charging of NSF fees for re-presented transactions. The FDIC has observed various risk-mitigating activities that financial institutions have taken to reduce the potential risk of consumer harm and avoid potential violations of law regarding multiple re-presentment NSF fee practices. These include:
If institutions self-identify re-presentment NSF fee issues, the FDIC expects supervised financial institutions to:
IV. FDIC's Supervisory Approach When exercising supervisory and enforcement responsibilities regarding multiple re-presentment NSF fee practices, the FDIC will take appropriate action to address consumer harm and violations of law. The FDIC’s supervisory response will focus on identifying re-presentment related issues and ensuring correction of deficiencies and remediation to harmed customers. In reviewing compliance management systems, the FDIC recognizes an institution’s proactive efforts to self-identify and correct violations. Examiners will generally not cite UDAP violations that have been self-identified and fully corrected prior to the start of a consumer compliance examination. In addition, in determining the scope of restitution, the FDIC will consider an institution’s record keeping practices and any challenges an institution may have with retrieving, reviewing, and analyzing re-presentment data, on a case-by-case basis, when evaluating the time period institutions utilized for customer remediation. In recent examinations, the FDIC has identified instances where institutions have been unable to reasonably access accurate ACH data for re-presented transactions beyond two years. In these cases, the FDIC has accepted a two-year lookback period for restitution. The FDIC expects supervised institutions to promptly address this issue. Institutions with challenges readily accessing accurate ACH data that self-correct this issue and provide restitution to harmed customers, as appropriate, for transactions occurring two years before the date of this Financial Institution Letter will generally be considered as having made full corrective action. Failing to provide restitution for harmed customers when data on re-presentments is reasonably available will not be considered full corrective action. If examiners identify violations of law due to re-presentment NSF fee practices that have not been self-identified and fully corrected prior to a consumer compliance examination, the FDIC will evaluate appropriate supervisory or enforced actions, including civil money penalties and restitution, where appropriate. V. Conclusion Based on the foregoing guidance, banks should review existing disclosures with respect to its multiple re-presentment NSF fees practices to determine if clarifications to their disclosures are in order. In addition, the bank should determine if it should consider adopting some of the “risk mitigation practices” outlined above and to the extent possible, conduct a “look back” to identify any customers who may be entitled to restitution for transactions occurring two years before the date of the FDIC Supervisory Guidance. The foregoing Compliance Update is for informational purposes only, and does not constitute legal advice. As a reminder, the NBA general counsel is the attorney for the Nebraska Bankers Association, not its member banks. The general counsel is available to assist members with finding resources to help answer their questions. However, for specific legal advice about specific situations, members must consult and retain their own attorney.
Vol. XXXIV, No. 18 BSA-AML-Risk-Based Approach to Assessing Customer Relationships and Conducting Customer Due DiligenceThe Federal Banking Agencies have issued a joint statement to remind banks of the risk-based approach to assessing customer relationships and conducting customer due diligence (CDD). The statement does not alter existing Bank Secrecy Act/Anti-Money Laundering (BSA/AML) legal or regulatory requirements, nor does it establish new supervisory expectations. The Agencies recognize that it is important for customers engaged in lawful activities to have access to financial services. Therefore, the Agencies are reinforcing a longstanding position that no customer type presents a single level of uniform risk or a particular risk profile related to money laundering, terrorist financing, or other illicit financial activity. Banks must apply a risk-based approach to CDD, including when developing the risk profiles of their customers. More specifically, banks must adopt appropriate risk-based procedures for conducting ongoing CDD that, among other things, enables banks to: (i) understand the nature and purpose of customer relationships for the purpose of developing a customer risk profile, and (ii) conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. Customer relationships present varying levels of money laundering, terrorist financing and other illicit financial activity risks. The potential risk to a bank depends on the presence or absence of numerous factors, including facts and circumstances specific to the customer relationship. Not all customers of a particular type automatically represent a uniformly higher risk of money laundering, terrorist financing or other illicit financial activity. Banks that operate in compliance with applicable BSA/AML legal and regulatory requirements, and effectively manage and mitigate risks related tot he unique characteristics of customer relationships, are neither prohibited nor discouraged from providing banking services to customers of any specific class or type. As a general matter, the Agencies do not direct banks to open, close or maintain specific accounts. The Agencies continue to encourage banks to manage customer relationships and mitigate risks based on customer relationships, rather than decline to provide banking services to entire categories of customers. In addition, the Agencies recognize that banks choose whether to enter into or maintain business relationships based on their business objectives and other relevant factors, such as the products and services sought by the customer, the geographic locations where the customer will conduct or transact business, and banks' ability to manage risks effectivley. The statement addresses the Agencies' perspective on assessing customer relationships as well as CDD requirements. It applies to all customer types referenced in the Federal Financial Institutions Examination Council (FFIEC) Bank Secrecy Act/Anti-Money-Laundering Examination Manual and also applies to any customer type not specifically addressed in the FFIEC BSA/AML Examination Manual. Full-Text PDF The foregoing Compliance Update is for informational purposes only, and does not constitute legal advice. As a reminder, the NBA general counsel is the attorney for the Nebraska Bankers Association, not its member banks. The general counsel is available to assist members with finding resources to help answer their questions. However, for specific legal advice about specific situations, members must consult and retain their own attorney.
Vol. XXXIV, No. 17 NSF Fees for Re-Presentment - Disclosure ClarificationI. Introduction The NBA has recently received numerous inquiries regarding increased scrutiny of overdraft practices by regulatory agencies, including multiple fees imposed on re-presented items. Banks have been criticized by their regulators for not accurately disclosing their fees and processes, and in some cases have been ordered to submit "Restitution Plans" to reimburse customers for overdraft fees. Independent litigation and class action lawsuits have challenged banks' overdraft practices. II. Re-Presented Items When an ACH transaction or check is presented against the customer's account without sufficient funds to cover the item presented, banks typically charge a non-sufficient funds (NSF) fee. The fees are commonly disclosed in the account agreement as being charged on a "per item" or "per transaction" basis. It is not uncommon for a merchant, after an ACH transaction or check is declined, to re-present the item. NACHA rules allow two re-presentments following the initial return of an ACH transaction. While re-presentment checks are not limited, it is not unusual for a check to be re-presented multiple times. It is standard practice for banks to charge NSF fees for each re-presentment of these items. Until recently, this practice has not been questioned and federal regulations contain no express prohibition against charging NSF fees for re-presentments. In scrutinizing banks' practices, the regulators have focused on whether account agreements have clearly indicated that a separate NSF fee may be charged for each re-presented item. If not, the bank may be alleged to be in breach of contract, the language could be alleged to constitute a deceptive practice, or the practice of charging multiple NSF fees for the same transaction may be considered an inherently unfair practice. III. Operational Concerns Member banks have expressed significant operational concerns with the regulatory interpretations. The manner in which a transaction is coded may effectively prevent a bank from being able to identify if a re-presented item has been previously presented for payment. In addition, most banks are not equipped to conduct an automated search to identify re-presented checks, dictating a manual search to identify transactions for which multiple NSF fees may have been charged for re-presentments. IV. Updating Disclosures In response to regulatory criticism, banks may be reviewing their disclosures to ensure that they clearly explain how and when overdraft fees may be imposed. If banks elect to update their disclosures, it is recommended that any such changes be disclosed to existing customers as a CLARIFICATION. The bank does NOT want to provide the updated language as a CHANGE IN TERMS. Casting the revisions as a change in terms could imply that the existing disclosures do not authorize the bank to charge multiple NSF fees on re-presented items and could result in the regulators requiring reimbursement for overdraft fees previously charged to customers. Banks electing to update their disclosures may provide the clarification through a notice on their periodic statements sent to customers. Because this would not constitute a change in terms to existing accounts, there is no waiting period involved. The foregoing Compliance Update is for informational purposes only, and does not constitute legal advice. As a reminder, the NBA general counsel is the attorney for the Nebraska Bankers Association, not its member banks. The general counsel is available to assist members with finding resources to help answer their questions. However, for specific legal advice about specific situations, members must consult and retain their own attorney.
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