On June 16, 2023, the Federal Deposit Insurance Corporation (FDIC) released an update to its Supervisory Guidance on Multiple Re-Presentment NSF Fees (FIL-40-2022) (the "Guidance"), to provide additional guidance for supervised institutions on the consumer compliance risks associated with assessing multiple non-sufficient funds (NSF) fees for the re-presentment of unpaid transactions. This alert discusses the potential risks the FDIC identified and outlines the risk mitigation practices that supervised institutions can implement to mitigate risks when processing multiple re-presentment NSF fees.
Although the Guidance's applicability is limited to FDIC supervised institutions, the information provided on potential risks and mitigation practices should be taken into consideration by any financial institutions or merchants that assess multiple re-presentment NSF fees in connection with billing consumers.
Potential Risks Arising from Multiple Re-Presentment NSF Fees
The Guidance identifies three categories of potential risk arising from the assessment of multiple re-presentment NSF fees: (i) consumer compliance risk, (ii) third-party risk, and (iii) litigation risk.
- Consumer Compliance Risk: The Guidance provides that "practices involving the charging of multiple NSF fees arising from the same unpaid transaction results in heightened risk of violations of Section 5 of the Federal Trade Commission (FTC) Act, which prohibits unfair or deceptive acts or practices."
- According to the Guidance, the FDIC has determined, in a number of consumer compliance examinations, that if a supervised institution assesses multiple NSF fees arising from the same transaction, but disclosures do not adequately advise consumers of this practice, the potential misrepresentation of this information and its omission from a supervised institution's disclosures are material. Failure to disclose multiple re-presentment NSF fee information clearly and conspicuously can be a material omission that constitutes a deceptive practice pursuant to Section 5 of the FTC Act.
- The FDIC did not cite to specific consumer compliance exams in the Guidance, where it was determined that a supervised institution committed an unfair practice involving multiple re-presentment NSF fees. However, the Guidance does warn supervised institutions of the risk of committing an unfair practice if the institution assesses multiple NSF fees for the same re-presented transaction without providing the consumer sufficient notice that multiple NSF fees will be charged or providing the consumer with an opportunity to bring their account to a positive balance and avoid the assessment of additional NSF fees.
- Third-Party Risk: As we recently detailed, the FDIC and other federal banking agencies recently released revised guidance concerning financial institutions' third-party oversight risk and how they should be managing third-party relationships. In the context of NSF fees, the Guidance reminds supervised institutions that they are expected to maintain adequate oversight of third-party relationships and are responsible for identifying and controlling risks associated with third-party relationships "to the same extent as if the third-party activity was handled within the institution."
- Litigation Risk: The Guidance warns supervised institutions that multiple NSF fee practices may lead to heightened litigation risk, as numerous financial institutions, including FDIC-supervised institutions, have faced class action lawsuits alleging breach of contract and other claims because of the failure to adequately disclose re-presentment NSF fee practices in their account disclosures.
Risk Mitigation Practices
The Guidance encourages supervised institutions to review their practices and disclosures regarding the charging of NSF fees for re-presented transactions. The FDIC notes it has observed several risk-mitigating activities that some supervised institutions have already taken to reduce the potential risk of consumer harm and avoid potential violations of law that can arise from multiple re-presentment NSF fee practices, including:
- Eliminating NSF fees
- Declining to charge more than one NSF fee for the same transaction, regardless of re-presentment
- Conducting a comprehensive review of policies, practices, and monitoring activities related to re-presentments and making appropriate changes and clarifications, including providing revised disclosures to all existing and new customers
- Clearly and conspicuously disclosing the amount of NSF fees to customers and when and how such fees will be imposed, including:
- Identifying whether multiple fees may be assessed in connection with a single transaction when it is re-presented
- The frequency with which such fees can be assessed
- The maximum number of fees that can be assessed in connection with a single transaction
- Reviewing customer notification or alert practices related to NSF transactions and the timing of fees to ensure customers are afforded an opportunity to avoid multiple fees for re-presented items, including restoring their account balance to a positive balance before subsequent NSF fees are assessed
In cases where supervised financial institutions self-identify NSF fee issues, the FDIC expects those supervised financial institutions to:
- Take full corrective action, including providing restitution to harmed customers consistent with the Guidance
- Promptly correct NSF fees disclosures and account agreements for both existing and new customers, including providing revised disclosures and agreements to all customers
- Consider whether additional risk mitigation practices are needed to reduce potential unfairness risks
- Monitor ongoing activities and customer feedback to identify any future needs for corrective action(s)
FDIC's Supervisory Approach
The Guidance notes that the FDIC's supervisory responses will be focused on identifying re-presentment related issues, ensuring correction of deficiencies, and providing remediation to harmed consumers, when appropriate. When reviewing compliance management systems, the FDIC recognizes when supervised financial institutions take proactive efforts to self-identify and correct violations. According to the FDIC, examiners will generally not cite UDAP violations that have been self-identified and fully corrected prior to the start of the consumer compliance examination. However, if examiners identify violations of law that have not been self-identified and fully corrected prior to examination—such as those due to non-compliant re-presentment NSF fee practices—the FDIC will evaluate appropriate supervisory or enforcement actions, which can result in civil money penalties and restitution, where appropriate.
What Should Your Institution Do Now?
For institutions supervised by the FDIC, conducting a review of institutional re-presentment NSF fee practices, policies and procedures concerning re-presentment NSF fees, and their consumer agreements and marketing materials to ensure that their re-presentment NSF fee practices align with the Guidance is critical. Given that the banking agencies recently jointly issued revised guidance on covered financial institutions' third-party oversight obligations, third-party partners and service providers are handling re-presentment NSF fees in compliance with the Guidance.
Similarly, those third parties handling re-presentment NSF fee tracking, assessment, or compliance on behalf of supervised institutions should also consider taking the foregoing steps to ensure compliance and the continuing success of their relationship with supervised institutions.