CFPB Guidance: Surprise Overdraft Fees and Returned Check Fees Explained

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The Consumer Financial Protection Bureau (CFPB) published guidance on October 26, 2022, stating that “surprise overdraft fees” and “returned deposited item fees” generally constitute “unfair practices” in violation of the federal Consumer Financial Protection Act when consumers are unable to avoid them. In its analysis, the CFPB underlined that an act or practice is illegally unfair when it significantly harms consumers or is likely to do so, harm that consumers cannot reasonably be expected to avoid, and (ii) harm that is not outweighed by advantages to consumers or to competition.

The guidance from the Consumer Financial Protection Bureau (CFPB) (Circular 2022-06) focuses on “unanticipated” overdraft fees, or those resulting from activities that a consumer would not ordinarily anticipate an overdraft fee. The guidance focuses on debit card transactions in which the available amount appears to be sufficient when the consumer initiates the transaction but is insufficient when the transaction is settled, resulting in an overdraft fee. According to the guidance, consumers may readily check their available balance via mobile apps, the internet, ATMs, or their phone, so they shouldn’t fairly anticipate paying an overdraft fee in this circumstance.

In addition, the guidance states a consumer is likely to reasonably expect that if a debit card transaction is authorized at the point of sale, he or she will not later incur an overdraft fee. The guidance notes that consumers cannot reasonably be expected to understand and account for delays between authorization and payment, nor can they control the methods by which a financial institution settles other transactions that could affect the imposition of overdraft fees. The guidance concludes that the injury from unanticipated overdraft fees likely is not outweighed by any countervailing benefits to consumers or to competition.

According to the CFPB’s guidance (Circular 2022-06), practices that charge consumers flat fees for all transactions, regardless of the specifics of the transaction or patterns on the account, are probably unjust. Since a depositor typically has no influence over whether a deposited check will be paid or not and has no reason to anticipate that a placed check will be returned, the guideline emphasizes that consumers are not reasonably able to avoid such costs.

According to the guidance, returned deposited item costs harm consumers significantly and are not likely to be offset by advantages to consumers or to competition. It’s crucial to remember that the guidance focuses on financial institution policies that broadly impose returned deposited item fees in situations where consumers are unaware that checks may be returned. The guidance states that policies with fines that are intended to deter consumer conduct, such as frequently depositing faulty checks from the same originator or depositing checks that are not signed, are not in violation of the rule.

The good news is neither of these issues should prohibit any FI from keeping their ODP program in place! However, action must be taken to avoid both of these specific instances.

The CFPB is not offering a resolution for either of these issues via disclosure. Nor are they providing a time frame within which to achieve compliance. In fact, they are saying that transaction processing rules are often complex so regardless of disclosure it isn’t reasonable for consumers to necessarily understand how the process works. So, the only resolution for ‘authorize positive, settle negative’ is to stop doing it if that is how your transactions are processed today. Sadly, the CFPB has not yet issued a Rule mandating core processors to add the necessary capability to prevent charging a fee for an item allowed on “good funds.” In addition, some core processors may postpone the creation of the module (or patch), which eliminates the regulatory risk, in the absence of such a regulatory mandate. This will still fall on the financial institution to put controls in place to prevent charging these fees.

The solution on the returned deposit item fee appears relatively simple – if you charge a returned deposit item fee today – stop. The CFPB does offer some guidance on certain circumstances where changing that fee may be reasonable – for example, if a depository institution only charges consumers a fee if they repeatedly deposit bad checks from the same originator, or only charges consumers a fee when checks are unsigned, those fees would likely be reasonably avoidable by the consumer. However, my take on that is it really isn’t worth trying to monitor the specific reasons the fee was charged in each instance. Far easier to just not charge the fee and be sure to avoid the regulatory criticism. Returned deposit item fees really don’t have anything to do with ODP so we’re not familiar with the instance of occurrence, but I assume these fees don’t add up to much for the typical community institution.

Strunk’s recommendations have continued to include clearer wording and open information regarding how fees are calculated. We have actively helped community banks and credit unions address the problems mentioned in the bureau’s advice throughout the years. Strunk often receive feedback from clients regarding issues raised during their examinations. Additionally, we stay in contact with the state and national banking associations’ legal counsel on topics related to overdraft protections to make sure we stay in front of any issues for our clients.

 

Overdraft Protection Programs?

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Several federal regulators have recently come up with “guidance” on how banks should handle the payment of debits that cause overdrafts and whether or not a fee should be levied against the account.

In August the FDIC warned banks that proper disclosure of charging a fee for an item presented a second time is important so that consumers understand that there can be more than one NSF charge on the same item. Even though banks have had the same practice for decades the FDIC is now warning banks of possible UDAAP violations.

More recently the CFPB wants banks to ensure they are not charging a fee for a debit card transaction that causes an overdraft when the item hits the books when it was previously approved at point of sale. Also, banks are warned to not charge consumers a fee for a deposited item that comes back to the account as a NSF item. It is yet to be seen what impact this will have on community banks but this “guidance” from the regulatory body covering banks with over $10B in assets should be reviewed by your bank.

Strunk’s Overdraft Privilege program is nearing its 30th year of existence and it remains a tremendous customer service for those who need it. Returning items unpaid to a merchant only creates havoc for consumers. Likewise, if a consumer wants their debit card transaction paid rather than denied at point of sale Overdraft Privilege can help out. Consumer choice is how banking should work. Providing proper disclosure and ensuring the bank follows the disclosures is key.

Contact Strunk at 800.728.3116 or at support@strunkaccess.com to learn more about how Overdraft Privilege can benefit your bank and your customers.

Hosted ODP Manager and Individual Account Information

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ODP Manager includes the ability to review the account level information for each account that has been imported into ODP Manager from your daily extract file. By using the Account Inquiry section in the hosted software, an institution’s users can view multiple accounts or details of a single account.

In Account Inquiry, users can select the view that contains the necessary columns and select groups or apply filters so only the desired accounts are shown. Once the list of accounts has been created, the data can be exported to Excel to be saved or for distribution. This information can be used to supplement ODP Manager’s existing standard reports. It also may be an alternative to creating custom reporting in the core system about accounts managed in the ODP Manager software.

Account Inquiry also allows access to the information for a single account. Since historical events are retained in the ODP Manager software, details can be viewed for both open and closed accounts. To manage the account, users may need to review an account’s contact information, event history, reminders, or comments. If the account is under a Fresh Start Loan or has charged off, users may need to view the related repayment schedule or charge-off items and recoveries.

Leveraging the information already included in ODP Manager may make it easier for your users to review and manage accounts efficiently. Please contact Strunk Support at support@strunkaccess.com with any questions or to find out more about using Account Inquiry.

 

What we know now about overdraft privilege

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Overdraft privilege appears to have been widely covered in the media over the past 12 months.  We wanted to address some of the most recent worries that have been raised in these news pieces because overdraft privilege programs have received a lot of negative attention and inaccurate information.

  1. Overdraft Privilege has not undergone any new regulatory changes: In July the U.S. House Committee on Financial Services passed the H.R. 4277, the Overdraft Protection Act. This legislation has been presented by Congresswoman Carolyn Maloney (NY) every year since 2009 to the House and has never pass the Senate.  Although the banking industry has evolved significantly since the initial version of the bill was introduced in 2009, its language has remained stagnant and does not take into account the realities faced by modern consumers.  Since the initial version of the bill was introduced, financial institutions have made considerable adjustments to their overdraft programs to be more consumer friendly.  Because overdraft privilege “remains one of the few short-term liquidity products available to consumers within the well-regulated, well supervised banking system,” financial institutions are expanding the flexibility of their product offerings to meet consumer demand and are emphasizing choice in an increasingly competitive market.  This is why it will be the same as the previous 10+ years in that this bill won’t go any farther than it already has.
  2. Almost all financial institution still have some sort of Overdraft Privilege Program: August 2021 we started hearing about financial institutions that were eliminating their overdraft fees. What we found that most financial institutions that were eliminating overdraft fees were doing it for specific accounts.  Most of these financial institutions created a ‘checkless’ checking account for consumers who did not want overdrafts/nsf on their checking accounts.  With these accounts, consumers would not have access to checks and also be limited on what they can do with their debit card transactions, providing no overdraft/nsf transactions. Unfortunately, these accounts are not always free accounts.  It seems most financial institutions are charging Monthly Maintenance fees for this account and some financial institutions are even charging excessive transaction fees.  This type of product is not for everyone because there are consumers that still want access to checks and don’t want to pay a monthly maintenance fee for their checking account.   This past year, through surveys we learned that consumers understand overdraft privilege, they would much rather their item be paid instead of returned, consumers believe od fees are reasonable, and they don’t want to see any reduction to their overdraft access. Overdraft Privilege is still a better product for consumers and consumers still want access to an overdraft limit.
  3. Regulatory groups have started to really focus on NSF fees and Re-Presentments: August 2022 FDIC released Supervisory Guidance on Multiple Re-Presentment NSF Fees. The FDIC stated that it is issuing the guidance because of its observations in consumers compliance exams where consumers are charged multiple NSF fees for the same transaction when a merchant resubmits the transaction for payment. The FDIC has also observed that some institutions’ disclosures did not adequately describe the institution’s re-presentment practice. Luckily for Strunk clients we have been sensitive to this issue for quite a while. In the Spring of 2020 Strunk issued suggested language for checking account agreements to all of our clients to provide enhanced disclosure regarding an arbitration provision.  Also, Strunk’s Overdraft Privilege Service Policy has always included specific language regarding re-presentments. These two things provide for a very strong argument that our client financial institutions are already handling disclosure regarding this issue properly.

Even though there have not been any changes to overdraft regulations, some financial institutions felt political and regulatory pressure to make changes to their overdraft privilege program.  We know that overdraft privilege is a much better service for consumers than returning their items.  Elimination of overdrafts, resulting in more payments being returned, which can lead to repercussions for the consumer such as late payment fees, merchant fees, and potential negative impacts to their credit.

How Strunk clients can properly handle the issue of re-presentment

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Strunk has been closely monitoring and sensitive to the issue of re-presentment of declined transactions for the past several years. Strunk provides clients with suggested language for checking account agreements to include enhanced disclosure regarding an arbitration provision as well as a service policy that includes specific language regarding re-presentment. These documents allow Strunk clients to handle disclosure of this issue, and many others, properly.

The suggested language for checking account agreements includes a section on re-presentment of declined transactions which addresses the points regarding disclosure referenced in the FDIC guidance – this was one of the main reasons for including the arbitration clause. Through the use of these materials Strunk clients are already handling disclosure regarding this issue properly.

In addition to disclosure, the other point that should always be stressed with examiners is that an account holder with Overdraft Privilege will essentially NEVER be charged a re-presentment NSF fee because their item will be paid the first time. The only way an ODP customer could be charged for a represented item is if they have already exceeded their overdraft limit – i.e if they have a limit of $800 and their balance is already negative $800 or more, items will begin to be returned.

Strunk clients that require current copies of the ODP service policy or the language for checking account agreements should contact Strunk support at support@strunkaccess.com or visit the Strunk Access portal. Additionally, Strunk offers periodic reviews of client programs, which would include commentary on each of the suggested potential remedies from the FDIC regarding re-presented items. These reviews also consist of solutions to address compliance and to increase service charge income.

Monitor Fresh Start Loan Repayment Schedules using ODP Manager

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After the daily import of information in the extract file from your core processor, the Letters, Reports, and Account Inquiry sections of ODP Manager are updated. In addition to this updated information, the hosted software also allows you to add additional information about repayment plans manually to facilitate monitoring of account’s Fresh Start Loan payments.

If you choose to use the Fresh Start Loan repayment plan feature, after completing your Fresh Start Repayment Plan assessment and approval process, you can enter the repayment schedule information directly in ODP Manager. The data in this schedule can be used to fill in your Fresh Start Loan agreement and will make it easier to generate the document to be signed by your customer.

Once the repayment schedule has been created, Strunk’s Reminder feature will create reminders for each payment. Your Strunk software users will be able to monitor each day whether any FSL payments are due and can then check your core system to see if the payments have been made as agreed. After verifying that a payment was received, your users will track the payment date and amount in the ODP Manager software. The repayment schedule is then updated to show the payments made and the outstanding balance on the Fresh Start Loan.

Repayment plans can be viewed not only for each account, but also on a summary list that can be exported to PDF or Excel for reporting purposes. The repayment plan tracking feature in ODP Manager can help your users streamline Repayment Plan Agreement generation, Fresh Start Loan payment tracking, and repayment plan reporting.

Please contact Strunk Support at support@strunkaccess.com with any questions or to find out more about using this feature.

Don’t Take Your Eye off of your Overdraft Program

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With all that is going on in our world, it is more important than ever before for the community financial institution to stay focused on the overdraft programs they offer. Account holders that utilize these programs and follow the guidelines properly should not fear that they will lose access to a valuable benefit of their checking account. There are several things that should be considered when administering an overdraft program.

Strunk’s ODP Manager offers helpful information that your organization can use to properly run a successful program. The Status Tracking report has information on the annual dollar amount of overdraft fees charged per active checking account and the annual amount of NSF fees charged per active checking account. Your organization is able to separate out OD fees from NSF fees through the daily file that is uploaded into the software. The program is also able to track waives and refunds so that your organization may track fees charged versus fees received. This would also help to capture the total annual dollar amount consumers receive in overdraft coverage compared to the amount of fees charged.

Strunk Heavy OD Users report will illustrate the prevalence of frequent users of overdraft. The Utilization Analysis and Opt-In Impact reports show the share of active checking accounts that are opted into overdraft programs for ATM and one-time debit transactions and those that have limits on their accounts.

Please contact Strunk at support@strunkaccess.com to see how ODP Manager might assist your organization in running a more effective and efficient overdraft program.

 

Overdraft Privilege Provides a Solution for Charging Multiple NSF Fees

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When a merchant transaction is presented for payment from a consumer account and is refused due to the customer’s insufficient funds to cover the transaction, financial institutions typically charge an NSF fee. When a merchant tries to present the same transaction again in order to recover the denied funds, he or she may be charged a re-presentment NSF fee. If a depository institution receives this type of repeated merchant payment transaction more than once, the depository institution may levy multiple NSF fees. If an Automated Clearing House (ACH) or other item is presented for payment and is denied owing to insufficient funds, certain financial institutions will levy an NSF fee for both the original presentment and each subsequent representation.

In recent class action lawsuits against financial institutions, the removal of key clauses pertaining to the assessment of representation fees was considered to be a violation of contract. Some lawsuits have been settled, with customers receiving refunds and legal fees.  Additionally, state, and federal financial regulators are reviewing DDA agreements searching for potential legal, regulatory and UDAP risks. With these potential risks it is important to review your deposit disclosures and contract language to ensure the way NSF fees are charged is being communicated clearly and consistent to what a consumer could reasonably expect.

This is a great time to make sure that you review your accounts and all of your customers/members that are eligible for Overdraft Privilege should be added to the ODP program unless they have opted out of the program.  By doing this it will minimize your risk for NSF fees being represented, because if your customers/members have an Overdraft limit their items will be considered for payment instead of returned.  Paying the item instead of returning it will ensure that the financial institution minimizes its risk for NSF re-presentments because the item is not returned.  Also, overdraft privilege provides a better service to your customers/members because they will not be faced with potential late fees, retailer fees and damage to their credit from returned items.

The Importance of Employee Training for your Overdraft Program

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Does your front-line staff have a biased opinion regarding overdraft privilege and present it in a negative tone?  Is your front-line staff having a hard time explaining overdraft privilege to your customers/members and not really sure what to say to them? If you haven’t had a chance to listen to your employees’ present overdraft privilege to your customers/members, especially Reg. E, Strunk recommends doing it now.  Your staff should explain overdraft privilege and its options to your customers/members in a clear, consistent, compliant, and impartial way.

Sometimes front-line employees do not understand the true benefits overdraft privilege can provide to the customer/member.  Some employees often have a bad perception of overdraft privilege because they associate it with disgruntled or confused account holders. This misunderstanding is one of the main reasons why overdraft privilege training and education are so important!  It is important to provide your employees with a script on how to present overdraft privilege and the benefits of opting into Reg. E. Employees that have practiced and memorized a customer/member-focused overdraft privilege and Reg. E script, ensure that the approach is compliant, succinct, and easy to grasp.

Using the technique of allowing the customer to choose how the financial institution should manage a transaction that would overdraw the customers/members account before the due date ensures their happiness and loyalty.  Strunk’s Overdraft Privilege training will provide a clear understanding of the overdraft program and provide consistent talking points to your employees.  After overdraft privilege training your employees will be equipped with correct and thorough knowledge regarding your program.  Strunk will ensure your employees are equipped with a non-biased, clear and compliant script that provides account holders accurate information so they can make the best decision possible for their situation.  Overdraft privilege training will increase your employees’ confidence as a result of this approach, which will boost their performance, productivity, and level of service to your customers/members.

 

The consumer case for overdraft privilege

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The last few years lawmakers have put extensive focus on overdraft privilege programs and are pushing for additional guidance on the way financial institutions handle overdrafts. It seems that the lawmakers that are pushing for changes only have one way of looking at overdraft privileges, so The American Bankers Association (ABA) wrote a response to the two overdraft research reports that the CFPB issued on December 1, 2021 with some additional data.

First, lawmakers have pushed the narrative that consumers do not want overdraft privilege and that the CFPB constantly gets complaints regarding overdrafts.  The facts show that in 2020 less than 0.15% of CFPB complaints were related to overdrafts.  The ABA reports found that 90% of adults find their bank’s overdraft protection valuable and that 23% of consumers intentionally overdraw their account to cover expenses. A Morning Consult study found that ½ of Americans think overdraft fees are fair and Curinos research found that 62% of consumers would reconsider their support for new regulation of overdraft if it limited access to the service.

Additionally, lawmakers believe that overdraft fees are not fair and are very expensive for consumers.  The ABA reports show that 62% of adults state overdraft fees are reasonable while only 21% state that overdraft fees are unreasonable.  Also, in the ABA report it states that 72% of adults were happy their payments were covered. The CFPB and lawmakers believe that low income consumers suffer the consequence of overdraft fees more than those who are financially comfortable by a large margin. The recent ABA report found that 25% of adults say they have paid an overdraft fee in the past year and that consumers across income brackets are equally likely to have paid an overdraft in the past year.  Post-grads are more likely to overdraw their account than regular college degree or those without a college degree.  According to an article that Indeed posted in 2021, employees who have a post-grad degree make well over double than that of an employee who only has a high school diploma.  The ABA reports found that lower-income households (<$24k annual deposits) avg 10 items paid into overdrafts annually versus 18 items for consumers in the highest income stratum (>$60k annual deposits).  Another point that the ABA report highlights is that lower-income consumers receive more fee waivers and refunds than higher-income consumers.

Before any new regulations around overdraft privilege are done, lawmakers need to look at the economic impact that such action will cause.  Currently overdraft users realize an economic benefit of over 7 to 1, providing annual stimulus to the economy of $65.6B.  Without overdraft privilege consumers lose $443 in purchasing power for each returned check or ACH transaction.  Some larger financial institutions have made changes to their overdraft privilege programs due to fear of potential changes in the regulation and because of competition.  The banks that have already announced changes are expecting hundreds of millions of dollars in lost revenue.  How will these financial institutions make up for this loss of revenue – will they increase other fees or will they have to decrease staffing to meet stockholders’ expectations? Only time will tell.

An independent certified public accountant has examined Strunk’s operations and found them to be in compliance with the AICPA’s Trust Service Principles. It was determined that Strunk meets the Security, Availability, Processing Integrity, Confidentiality, and Privacy criteria for SOC 2 established by the AICPA.