- OCC, FDIC warns banks of regulatory risks presented by certain overdraft protection practices.
- The overdraft guidance comes after the White House and members of Congress have urged banking regulators and banks to limit overdraft fees.
- Banks should prepare for scrutiny from supervisors by reviewing strategy, risk management, and oversight frameworks of overdraft protection products.
Regulators and Congress Increase Pressure on Overdraft Fees
On April 26, the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) each issued guidance warning banks about overdraft protection practices that could create regulatory risks for banks.
The agencies’ guidance comes after regulators and members of Congress have magnified their focus on overdraft fees because of the consumer harm that many believe is caused by such fees. On March 30, Acting Comptroller of the Currency Michael Hsu delivered remarks on “Elevating Fairness” in banking, in which he stated that OCC examiners are encouraging banks to review their overdraft protection programs.
Hsu’s speech also referenced an October 2022 Consumer Financial Protection Bureau (CFPB) guidance which stated that when financial institutions charge “surprise overdraft fees” they may be breaking the law. Banking regulators’ scrutiny of overdraft fees is a component of the President’s initiative on what he labels as “junk fees” and related pricing practices. Banking regulators have also received pressure from Democratic senators to limit overdraft fees, and Democratic senators urged banks themselves to lower or eliminate overdraft fees.
Amidst regulatory and public pressure, several banks have reduced or eliminated overdraft fees in the past two years, including Bank of America and Capital One. A CFPB data report from February 2023 noted that bank overdraft and non-sufficient fund fee revenue has trended downward in each quarter since the fourth quarter of 2021.
Risk Areas Identified by the OCC and FDIC Guidance
The OCC guidance identified practices that may result in heightened risk for banks. Risk includes potential violations of section 5 of the Federal Trade Commission (FTC) Act which prohibits unfair or deceptive acts or practices, and Section 1036 of the Consumer Financial Protection Act of 2010, which prohibits unfair, deceptive, or abusive acts or practices. Practices identified by the OCC include:
- Authorize positive, settle negative (APSN) overdraft fees, described by the OCC as “assessing overdraft fees on debit card transactions that are authorized when a consumer’s available account balance is positive but later posted to the account when the available balance is negative;”
- Representment fees, described by the OCC as “assessing an additional fee each time a third party resubmits the same transaction for payment after a bank returns the transaction for non-sufficient funds;” and
- High limits or a lack of daily limits on overdraft fees or charging periodic fees for a sustained overdraft balance.
The OCC warned that violations of FTC or CFPB regulations may lead to corrective action. In a September 2022 action involving overdraft, the CFPB ordered Regions Bank to refund $141 million to customers and pay a $50 million penalty. To avoid penalties, the FDIC recommended that banks:
- “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.” The FDIC indicated that consumers cannot reasonably avoid APSN overdraft fees because “the consumer does not have the ability to effectively control payment systems and overdraft processing systems practices.”
- Review arrangements with third parties that could lead to representment fees.
- “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.”
Risk Management Implications for Banks
In explaining background for its guidance, the OCC noted that the agency “continues to observe evolution in the consumer banking landscape,” including banks offering deposit accounts that do not allow overdrafts, offering no fee overdrafts, or reducing overdraft fees.
Here, regulators appear to be incentivizing a cycle of behavior—regulators increase scrutiny on overdraft fees, banks respond by adjusting market offerings to reduce these fees, and regulators cite market behavior as context for further tightening scrutiny of overdraft fees.
Banks can take several steps to avoid potential adverse effects of this cycle. Per the OCC, banks should review board and management oversight, including ongoing monitoring to self-identify weaknesses. Additionally, banks should explore opportunities to incorporate policies and control systems recommended by the OCC with respect to overdraft, such as grace periods, daily fee limits, and complaints management.
Communications strategy is also important for regulatory compliance. Banks should be prepared to explain to regulators their oversight over fee programs, and why they believe any fees are fair to customers and consistent with relevant laws and regulations.
Put Patomak’s Banking Expertise to Work
Patomak has deep experience in helping banks and other financial institutions identify and manage risks and respond to developments in banking regulation and supervision. Patomak can work with boards and management to assess their governance and internal risk and control functions proactively to ensure they exceed supervisory expectations and support their business objectives. Contact us to learn how Patomak can help you navigate these challenges and help you meet your business goals.
- OCC Bulletin: Overdraft Protection Programs: Risk Management Practices (4/26/23)
- FDIC Financial Institution Letter: Supervisory Guidance on Charging Overdraft Fees for Authorize Positive, Settle Negative Transactions (4/26/23)
- CFPB Consumer Financial Protection Circular 2022-06: Unanticipated overdraft fee assessment practices (10/26/22)
- White House Press Release: The President’s Initiative on Junk Fees and Related Pricing Practices
- CFPB Data Spotlight: Banks’ overdraft/NSF fee revenue declines significantly compared to pre-pandemic levels (February 7, 2023)
- Press release: CFPB Orders Regions Bank to Pay $191 Million for Illegal Surprise Overdraft Fees (September 28, 2022)
- Letters from members of Congress regarding overdraft:
- Letter from Senators Booker and Warnock urging banking regulators to limit overdraft fees (3/21/23)
- Letter from Senators Brown and Warnock urging banks to lower or eliminate overdraft fees (3/25/22)
- Letter from Senate Banking Committee Republicans urging CFPB Director Chopra to reverse course on overdraft fees (9/12/22)
- See also – April 13, 2023 letter
- Letter from Representative Luetkemeyer outlining challenges that the CFPB overdraft proposal would create