The FDIC has filed motion to dismiss the lawsuit filed in July 2023 in a Minnesota federal district against the FDIC and its Chairman seeking to invalidate the FDIC’s supervisory guidance on charging multiple non-sufficient funds (NSF) fees for the same unpaid item. See out prior blog here.

Last August, the FDIC-issued Financial Institutions Letter 40-2022: Supervisory Guidance on Multiple Re-Presentment NSF Fees (“FIL 40”). The guidance directly applies only to state-chartered banks and thrifts with assets of less than $10 billion that are not members of the Federal Reserve System.  National banks and federal thrifts are supervised by the Office of the Comptroller of the Currency and state-chartered banks that are members of the Federal Reserve System are supervised by the Federal Reserve Board with respect to the legality of NSF fees if their assets are less than $10 billion. The CFPB has supervisory authority for compliance with Federal consumer financial laws (which includes the Dodd-Frank UDAAP prohibition) over all banks and thrifts with $10 billion or more in total assets.

FIL 40 discussed consumer compliance risk, third-party risk and litigation risk. For risk mitigation, the FDIC suggested supervised institutions eliminate NSF fees or not charge more than one NSF fee per transaction. The guidance further stated that the FDIC expects institutions that self-identify re-presentment NSF fee issues to: (1) take full corrective action, including providing full restitution consistent with the guidance; (2) promptly correct NSF fee disclosures and account agreements for both existing and new customers, including providing revised disclosures and agreements to all customers, (3) consider whether additional risk mitigation practices are needed to reduce potential unfairness risk, and (4) monitor ongoing activities and customers’ feedback to ensure full and lasting corrective action.

The 40-page complaint alleges that FIL 40 is a legislative rule promulgated without adherence to the Administrative Procedure Act (APA) notice and comment rulemaking process, resulting in an arbitrary and capricious agency action and that the FDIC exceeded its statutory authority. The complaint also addressed the FDIC-issued Financial Institutions Letter 32-2023: FDIC Clarifying Supervisory Approach Regarding Supervisory Guidance on Multiple Re-Presentment NSF Fees (“FIL 32”) in which the supervisory approach was clarified “to not request an institution to conduct a lookback review absent the likelihood of substantial consumer harm.” The clarification, however, did not change the FDIC’s mandate to take corrective action.

The complaint further alleges that (1) the Federal Trade Commission, not the FDIC, has the exclusive authority to define unfair and deceptive acts and practices under 15 U.S.C. § 57a(a)(1)(B) and the FDIC exceeded its statutory authority under 5 U.S.C. § 706(2)(C) since “[n]o provision of federal law imbues the FDIC with authority to promulgate rules identifying specific UDAP violations or rules governing disclosure requirements for consumer deposit accounts and ACH transactions,” and (2)“FIL 40, even as revised by FIL 32, is a legislative rule that imposes new legal obligations on regulated financial institutions and commits the FDIC to take enforcement actions under specific circumstances related to the new obligations.” The relief sought includes vacating FIL 40 and a permanent injunction to prevent its application or enforcement.

As an initial matter, the FDIC asserts that the lawsuit should be dismissed because plaintiffs have asked the court to invalidate the wrong guidance document. The FDIC states that FIL 32 revised and replaced FIL 40 and that since FIL 32 is the operative guidance document, its motion to dismiss focuses on FIL 32 but the same arguments apply to both versions of the guidance.

The other arguments made by the FDIC in support of its motion to dismiss include the following:

1. The plaintiffs lack standing to sue the FDIC because they cannot show that their claimed injuries are redressable by a ruling in their favor. In the administrative context, an injury may be redressable if a rule stands in the way of a desired outcome and a favorable decision would remove the obstacle. No rule stands in the plaintiffs’ way and a favorable decision would not remove the obstacle they seek to avoid, namely the possibility of future enforcement actions related to charging multiple NSF fees. Since the plaintiffs’ legal obligations under the FTC Act and Dodd-Frank Act remain even if the court invalidates FIL 32, a favorable decision will not remove this possibility. FIL 32 is intended to advise institutions about the potential risks associated with assessing multiple NSF fees. It does not declare a particular practice to be risky, unfair, or deceptive and nothing in the guidance requires banks to discontinue assessing multiple NSF fees. Even if FIL 32 is withdrawn, institutions must still comply with the law and minimize risk and the FDIC would still retain its authority to redress violations of those obligations through the administrative processes established by the FDI Act.
2. Even if the plaintiffs had standing, they have failed to state a claim because FIL 32 does not constitute final agency action and is not subject to review under the APA. It is a general statement of policy, does not impose new rights or obligations or give rise to legal consequences, and was not intended to be a binding legislative rule. FIL 32 is a general statement of policy, couched as advisory rather than mandatory, advising banks of risks and sharing risk mitigation practices. It does not declare specific conduct to be unfair or deceptive or threaten enforcement actions on the basis of noncompliance with the guidance and instead makes clear that any future enforcement action would be evaluated under the specific facts and circumstances presented. Rather, the guidance is intended to assist institutions in avoiding potential enforcement actions and seeks to ensure that, if institutions are engaged in a practice that involves heightened risk of a legal violation, they are aware of the risk mitigation practices they can use to avoid violations and obviate the need for further enforcement action. The possibility of future enforcement actions resulting from engaging in a practice that carries heightened risk without employing risk mitigation efforts does not amount to legal consequences flowing from the guidance itself. FIL 32 was not intended to be a rule but is merely a statement of policy. The FDIC has consistently characterized FIL 32 and FIL 40 as guidance, did not publish either FIL 32 (or FIL 40) in the Federal Register or the Code of Federal Regulations, and designed both FILs to avoid creating binding effects or imposing legal consequences.
3. The plaintiffs have failed to state a claim because FIL 32 is not arbitrary or capricious. The APA’s “arbitrary or capricious” standard governs final agency action and FIL 32 does not qualify as final agency action.
4. The plaintiffs have failed to state a claim because the FDIC did not exceed its statutory authority by defining specific acts or practices to be deceptive in FIL 32. The “exceeding statutory authority” theory only applies to final agency action and FIL 32 does not qualify as final agency action. Also, FIL 32 does not define specific conduct to be unfair or deceptive and instead makes clear that “specific facts and circumstances ultimately determine whether a practice violates a law or regulation.” The FDIC’s authority to examine the institutions that it supervises include the power to define the scope of those exams or enforcement actions.
5. The plaintiffs cannot, by attacking FIL 32, limit the FDIC’s discretion to address unsafe and unsound banking practices using the tools available to it, including enforcement actions.
6. The plaintiffs’ claims are unripe because FIL 32 is not a final agency action. Even if FIL 32 constituted final agency action, the plaintiffs would not be harmed if judicial review were withheld because FIL 32 does not commit FDIC examiners to any specific supervisory determination. At most, it notifies institutions about an area of supervisory focus that, following examination and administrative processes, might lead the FDIC to seek corrective action through an administrative process. The threat of enforcement alleged by the plaintiffs cannot constitute a significant hardship because, concluding otherwise, would allow banks to subvert the FDIC’s supervisory process before it begins. Exposing the FDIC’s risk-based discretionary choices to judicial review before any administrative action takes place runs counter to the ripeness doctrine’s core purpose. Also, every FDIC-supervised institution can seek further review if the FDIC were to take final action based on FIL 32. A finding that the plaintiffs’ claims are ripe would incentivize institutions to preempt the FDIC’s administrative review process through potentially unnecessary judicial intervention.

Given these arguments from the FDIC, they should not be citing any financial intuitions for violating FIL 32. Additionally, the recent ruling by the Federal District Court for the Eastern District of Texas invalidating the CFPB’s addition of discrimination to its UDAAP Exam Manual may support the denial of the motion to dismiss. In that case, the Court held that the changes to the exam manual constituted a “rule” and final agency action under the APA even though the CFPB had not yet enforced the changes to the exam manual against any party. This case supports a similar argument that FIL 32 is a “rule” and final agency action that the FDIC should be prohibited from enforcing. 

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