Regional FDIC Office Releases Overdraft Fee Guidance

by Manatt, Phelps & Phillips, LLP

Earlier this month the Kansas City Regional Office of the Federal Deposit Insurance Corporation (FDIC) released updated guidance on overdraft fees.

The Regional Office noted that many changes have occurred in the industry since the 2005 guidance on overdraft programs issued by the Federal Financial Institutions Examination Council. For example, amendments to Regulations E and DD have caused a number of institutions to adopt or increase continuous (or extended) overdraft or negative balance fees. Depending on how a bank sets up its overdraft program, continuous overdraft fees may be charged every day the account is overdrawn or once every few days.

In its updated guidance the Regional Office warns that a bank’s disclosures and practices relating to continuous overdraft fees may run afoul of the Federal Trade Commission’s prohibition on unfair or deceptive trade practices.

For example, some banks assess continuous overdraft fees based on calendar days, but customers can cure the overdraft only on business days. Consequently, if a bank charges a continuous overdraft fee after three days, and an overdraft occurs on a Thursday, the third calendar day is Sunday, a non-processing day. If the bank were to charge the fee on a Friday, that effectively leaves the consumer with just one day to cure the overdraft, not three as promised.

“Such practices have been cited as unfair, in violation of Section 5 [of the Federal Trade Commission Act],” the FDIC said.

To avoid potential issues, banks should review their fees and ask the question, “As a customer, would I know enough about how the fee is assessed to prevent myself from incurring it, should I accidentally overdraw my account?”

The agency proposed other considerations, such as whether a fee is assessed before the decision to pay or return an item and disclosure of whether the assessment of a bank service charge may cause an extended negative balance fee to be assessed. In the latter situation, the Regional Office suggests that the bank inquire whether “the consumer [is] told that other fees can lead to a negative balance, which can lead to additional fees.”

The guidance also offered two best practices for banks. When providing notice of an overdraft via a real-time communication method such as e-mail or text message, the bank should “amend default messages to include when the continuous overdraft fee will be assessed,” the agency suggested. Also when determining how much time to provide between notice of an overdraft fee and the actual assessment, the Regional Office suggested that the bank “give the customer a reasonable time to cure the overdraft prior to assessing any fee.”

Disclosures – particularly about how the bank calculates when fees will be assessed and the number of days to cure an overdraft – should be reviewed for accuracy, and banks should consider testing to ensure that fees are being assessed as intended and are consistent with disclosures.

“If discrepancies are found between what the bank discloses and what fees are assessed, that bank management should consider issuing new disclosures and making voluntary restitution to customers,” the FDIC said. “A review of depositor accounts for potential restitution should be conducted back to the date when the customers were assessed fees in excess of what should have been charged. Correcting such issues, including making full restitution, will be considered by the FDIC in reviewing the bank’s disclosures and practices.”

To read the Kansas City Regional Office’s guidance, click here.

Why it matters: Banks would be well-advised to review the guidance and consider whether any of their disclosures and practices relating to overdraft programs could run afoul of the Section 5 prohibition on unfair and deceptive acts or practices.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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