“Opt-in or opt-out?” That is the question all banks should ask customers regarding overdraft services. If a customer opts-in, the bank allows a transaction that would overdraw an account (subjecting the customer to an overdraft fee), whereas if a customer opts-out, the bank blocks any transaction that would overdraw an account (therefore avoiding a fee). Historically, banks did not offer the ability to opt-out, meaning that bank-authorized transactions that overdrew an account automatically led to a fee. These fees ignore the transaction amount, so a $5 sandwich or a $10 lottery ticket that overdraws an account quickly turns into a $50 charge once the bank imposes a $35 fee for the transaction and any others that overdraw the account. Banks utilized the opt-in to their advantage, some even going as far as re-presenting or rearranging pending payments to levy multiple overdraft fees on customers, a practice the Consumer Financial Protection Bureau declares as deceptive.
Various banks and financial institutions have settled multimillion-dollar class-action lawsuits from customers related to overdraft fees, including Bank of America, TD Bank and Capital One. To avoid similar litigation, many banks have reduced or altogether eliminated overdraft fees, causing a decrease in fees charged to customers by over 27% in the last three years.
The FDIC issued guidance in August explaining risks of harming consumers and potential violations of law by continuing transaction re-presentment, methods to mitigate risks, and remedial actions expected from banks. Moving forward, FDIC examinations will include a search for re-presented transactions and whether banks have self-identified issues and provided corrective action, including restitution for all past-charged fees associated with re-presented transactions. Where appropriate, the FDIC will impose monetary penalties.
Even with these developments, Congress is deliberating legislation to further protect customers. The Overdraft Protection Act of 2021 intends to prohibit unfair or deceptive usage of overdraft fees by requiring them to be reasonable and proportional to underlying transactions, prohibiting transaction rearrangement and re-presentment, and codifying the opt-in/opt-out option.
Banks should consult with counsel to minimize the risk of class action litigation, avoid regulatory criticism and fines, and prepare for legislative changes.
This article appeared in the September 29, 2022, issue of The Journal Record. It is reproduced with permission from the publisher. © The Journal Record Publishing Co.
