Vol. XXXV, No. 10 FDIC Supervisory Guidance Charging Overdraft Fees for Authorize Positive, Settle Negative TransactionsI. Introduction The Federal Deposit Insurance Corporation (FDIC) has issued guidance to ensure that supervised institutions are aware of the consumer compliance risks associated with charging an overdraft fee on a transaction that was authorized against a positive balance but settled against a negative balance, a practice commonly referred to as "Authorize Positive, Settle Negative" (APSN). The FDIC previously identified concerns with this practice in its June 2019 Consumer Compliance Supervisory Highlights. The guidance expands on the 2019 Supervisory Highlights article by discussing the FDIC's concerns with both the available and ledger balance methods used by institutions when assessing overdraft fees. This guidance also clarifies that disclosures describing transaction processing may not mitigate these concerns. II. Background In the case of APSN transactions, which involve consumers being assessed overdraft fees for transactions where they had sufficient account balances at the time the transactions were initiated, it may not be possible for consumers to determine when fees will be assessed and how they may be avoided. Financial institutions’ processing systems generally use either a ledger balance method or an available balance method, including for the purpose of assessing overdraft-related fees. An account’s available balance may be impacted by pending debit transactions. Some banks assess overdraft fees on debit card transactions that authorize when a customer’s available balance is positive but later post to a customer’s account when their balance is negative. In this scenario, a customer’s account has a sufficient available balance to cover a debit card transaction when the transaction is authorized but, due to one or more intervening transactions, has an insufficient balance to cover the transaction at the time it settles. In addition to assessing an overdraft fee on the APSN transaction, some banks also assess overdraft fees on intervening transactions that exceed the customer's account balance. In this scenario, for example, the bank reduces a customer's balance to account for the initial authorized debit card transaction, and subsequently, an intervening transaction further reduces the customer's available balance so that the account no longer has a sufficient balance. The bank charges an overdraft fee on both the intervening transaction and the initial APSN transaction when posted to the customer's account. III. Potential Risks Failure to take steps to avoid assessing overdraft-related fees when transactions are authorized on positive balances but settle on negative balances results in heightened risks of violations of Section 1036(a)(1)(B) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which prohibits any covered person or service provider from engaging in any unfair, deceptive or abusive acts or practices in connection with a consumer financial product or service (Dodd-Frank UDAAP) and Section 5 of the Federal Trade Commission (FTC) Act, which prohibits unfair or deceptive acts or practices (FTC UDAP). The FDIC applies the same standards as the Consumer Financial Protection Bureau (CFPB) and FTC in determining whether an act or practice is unfair under the respective statutes. An act or practice is unfair when it (1) causes or is likely to cause substantial injury to consumers, (2) cannot be reasonably avoided by consumers, and (3) is not outweighed by countervailing benefits to consumers or to competition. Public policy may also be considered in the analysis of whether a particular act or practice is unfair. Unanticipated and unavoidable overdraft fees can cause substantial injury to consumers. A consumer is likely to suffer injury when charged more overdraft fees than may have been anticipated based on the consumer's actual spending. While not all overdraft fees may be attributable to APSN transactions, the likely presence of intervening transactions may cause additional injury. The consumer cannot reasonably avoid the injury because the consumer does not have the ability to effectively control payment systems and overdraft processing systems practices. Due to the complicated nature of overdraft processing systems and payment system complexities outside the consumer's control, consumers may be unable to avoid injury. Additionally, in some cases, the institutions' methodology for assessing overdraft fees on APSN transactions resulted in unanticipated and unavoidable overdraft fees that were not outweighed by a countervailing benefit to consumers or competition. Dodd-Frank UDAAP and FTC UDAP risks exist in both available balance and ledger balance methods of assessing overdraft fees but may be more pronounced in situations where institutions use available balance methods. For example, the use of available balance to assess overdraft fees may exacerbate the injury, as temporary holds may lead to consumers being assessed multiple overdraft fees when they may have reasonably expected only one. IV. Risk Mitigation Practices Institutions are encouraged to review their practices regarding the charging of overdraft fees on APSN transactions to ensure customers are not charged overdraft fees for transactions consumers may not anticipate or avoid. Third parties often play significant roles in processing transactions, identifying and tracking balances at the time of authorization, and providing systems that determine when overdraft fees are assessed. Institutions should ensure overdraft programs provided by third parties are compliant with all applicable laws and regulations. Such third-party arrangements may present risks if not properly managed by financial institution management. Institutions are encouraged to review these third-party arrangements, as institutions are expected to maintain adequate oversight of third-party activities and appropriate quality control over products and services provided through third-party arrangements. Institutions are also encouraged to review and understand the risks presented from third-party system settings for overdraft-related fees, as well as understand the capabilities of their core processing system(s), such as identifying and tracking transactions authorized on a positive balance but settled on a negative balance and maintaining data on such transactions. Some third parties offer data processing system enhancements aimed at preventing overdraft-related fees from being charged for a transaction when a debit hold authorizes against a positive balance. Note that some third parties may offer these enhancements as optional or require client financial institutions to take action in order to implement them. In addition, institutions are also generally encouraged to review disclosures and account agreements to ensure the financial institution's practices for charging any fees on deposit accounts are communicated accurately, clearly, and consistently. However, disclosures generally do not fully address Dodd-Frank UDAAP and FTC UDAP risks associated with APSN transactions and related overdraft fees. 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. XXXV, No. 9 OCC-Overdraft Protection Programs: Risk Management PracticesI. Introduction The Office of the Comptroller of the Currency (OCC) has issued a bulletin to address the risks associated with overdraft protection programs. Overdraft protection programs can present a variety of risks, including compliance, operational, reputation, and credit risks. Specifically, the bulletin discusses certain practices that may present heightened risk of violating prohibitions against unfair or deceptive acts or practices. The OCC encourages banks to explore offering low-cost accounts, as well as other lower-cost alternatives for covering overdrafts, such as overdraft lines of credit and linked accounts. The OCC recognizes, however, that some consumers with short-term liquidity needs may benefit from the availability of funds from overdraft protection programs via deposit accounts. Based on examinations of overdraft protection programs at a number of banks in recent years, the OCC has observed that certain overdraft protection program practices may present a heightened risk of violations of Section 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices. These include practices known as authorize positive, settle negative (APSN) and multiple NSF representment fees. II. Authorize Positive, Settle Negative Fee Practices Banks generally maintain a "ledger balance" and an "available balance" on customer deposit accounts for numerous purposes, including assessing overdraft fees. The ledger balance refers to the actual amount of funds in a customer's deposit account after accounting for all items that have settled and posted. The available balance generally reflects the ledger balance minus "holds" for recently deposited funds that have not yet cleared and for authorized but pending debit card transactions. Some banks assess overdraft fees on debit card transactions that authorize when a customer's available balance is positive but that later post to the account when the available balance is negative. In this scenario, a customer's account has a sufficient available balance to cover a debit card transaction when the transaction is authorized but, due to one or more intervening transactions, has an insufficient available balance to cover the transaction at the time it settles. This is commonly referred to as an APSN transaction. In addition to assessing an overdraft fee on the APSN transaction, some banks also assess an overdraft fee on intervening transactions that exceed the customer's available balance. In this scenario, for example, the bank reduces a customer's available balance by an amount that is more than, equal to, or less than the initial authorized debit card transaction, and subsequently, an intervening transaction further reduces the customer's available balance so that the account no longer has a sufficient available balance. The bank charges an overdraft fee on both the intervening transaction and the initial APSN transaction when posted to the customer's account. The OCC has reviewed a number of overdraft protection programs that assess overdraft fees on APSN transactions. In some instances, the OCC has found account materials to be deceptive, for purposes of Section 5, with respect to the banks' overdraft fee practices. In these instances, misleading disclosures contributed to findings that the APSN practice was also unfair for purposes of Section 5. In addition, and based on subsequent analysis, even when disclosures described the circumstances under which consumers may incur overdraft fees, the OCC has found that overdraft fees charged for APSN transactions are unfair for purposes of Section 5 because consumers were still unlikely to be able to reasonably avoid injury and the facts met the other factors for establishing unfairness. The OCC recognizes that compliance risk may exist when banks assess overdraft fees based on either a negative ledger balance or negative available balance for APSN transactions. III. Representment Fee Practices When a bank receives a check or automated clearing house (ACH) transaction that is presented for payment from a customer's deposit account, and the account has insufficient funds to pay the check or ACH transaction, the bank may decline to pay the transaction and charge the customer an NSF fee. If the same check or ACH transaction is presented to the bank again and the customer's account still has insufficient funds, some banks will either again return the transaction unpaid and assess an additional NSF fee or pay the transaction and assess an overdraft fee. This practice of charging an additional fee each time a single transaction (e.g. ACH transaction or check) is presented for payment by a third party without further action by the customer contributes to customer costs in circumstances in which those customers cannot reasonably avoid the additional charges. Through ongoing supervision, the OCC has identified concerns with a bank's assessment of an additional fee on a representment transaction, resulting in findings in some instances that the practice was unfair and deceptive. Disclosures may be deceptive, for purposes of Section 5, if they do not clearly explain that multiple or additional fees (NSF or overdraft) may result from multiple presentments of the same transaction. Even when customer disclosures explain that a single check or ACH transaction may result in more than one fee, a bank's practice of assessing fees on each representment may also be unfair, for purposes of Section 5, if consumers cannot reasonably avoid the harm and the other factors for establishing unfairness under Section 5 are met. Consumers typically have no control over when a returned ACDH 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. IV. Additional Practices That May Present Heightened Risk
V. Risk Mangement Practices A bank's risk management systems should be commensurate with the bank's size, complexity, and risk profile. Therefore, as part of sound risk management of overdraft protection programs, the OCC encourages a bank to assess and analyze the risks posed by the bank's overdraft protection program activities; adjust the bank's risk management practices; and incorporate oversight of overdraft protection programs into the bank's compliance management system. An effective compliance management system typically should include processes and practices designed to manage compliance risk, ensure compliance with applicable laws and regulations, and prevent consumer harm. VI. Board and Mangement Oversight A bank's board of directors has ultimate responsibility for overseeing management's implementation of a bank's overdraft protection program. Effective board and management oversight generally includes:
Bank management is responsible for developing, implementing, and effectively managing overdraft protection programs in line with the board's direction, the bank's objectives and the bank's risk appetite, an in compliance with all applicable laws and regulations. Sound risk management generally should include appropriate policies, processes, personnel, and control systems that focus on consumer protection requirements and consider customer outcomes. VII. New Activities Processes and Third-Party Risk Management Banks should have processes in place to manage the risks associated with offering new, modified, or expanded products or services (collectively, new activities), including new overdraft protection programs or changes to existing overdraft protection programs. Effective new activity development processes typically consider the financial attributes of consumers using the products, consumer disclosures, use of new technologies, use of alternative underwriting information, and use of third-party relationships. An effective risk management program should be in place if banks use third-party relationships as part of their overdraft protection programs. Third-party relationships include a bank's arrangement with its service providers that often play a significant role in processing and reprocessing transactions, processing of payments, and providing systems that determine when overdraft or NSF fees are assessed. VIII. Policies, Processes and Control Systems A bank's processes and control systems should align with established policies and incorporate procedures and practices for managing risks associated with overdraft protection programs. The following non-exhaustive list outlines examples of potentially appropriate risk management practices that banks may consider adopting:
IX. Corrective Action The OCC encourages banks to have processes in place to identify and correct risk management weaknesses and violations of laws and regulations. OCC violation findings at specific banks related to overdraft protection programs have typically led to corrective action, including remediation to harmed consumers. The OCC encourages banks to review their overdraft protection programs and related practices to ensure that banks comply with Section 5 and other applicable laws and regulations and take corrective action as appropriate. 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. XXXV, No. 8 Joint Statement on Liquidity Risks to Banking Organizations Resulting from Crypto-Asset Market VulnerabilitiesI. Introduction The federal banking agencies have issued a Joint Statement on the liquidity risks presented by certain sources of funding from crypto-asset-related entities, and some effective practices to manage such risks. The Statement reminds banking organizations to apply existing risk management principles; it does not create new risk management principles. Banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation. II. Liquidity Risks Related to Certain Sources of Funding From Crypto-Asset-Related Entities The Statement highlights key liquidity risks associated with crypto-assets and crypto-asset sector participants of which banking organizations should be aware. In particular, certain sources of funding from crypto-asset-related entities may pose heightened liquidity risks to banking organizations due to the unpredictability of the scale and timing of deposit inflows and outflows, including, for example:
More broadly, when a banking organization’s deposit funding base is concentrated in crypto-asset-related entities that are highly interconnected or share similar risk profiles, deposit fluctuations may also be correlated, and liquidity risk therefore may be further heightened. III. Effective Risk Management Practices In light of these heightened risks, it is important for banking organizations that use certain sources of funding from crypto-asset-related entities, such as those described above, to actively monitor the liquidity risks inherent in such funding sources and establish and maintain effective risk management and controls commensurate with the level of liquidity risks from such funding sources. Effective practices for these banking organizations could include, for example:
In addition, banking organizations are required to comply with applicable laws and regulations. For insured depository institutions this includes, but is not limited to, compliance with brokered deposits rules, as applicable, and Consolidated Reports of Condition and Income (also known as the Call Report) filing requirements. 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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