FDIC and OCC Take Aim at Certain Overdraft Practices

Last month, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) warned financial institutions about overdraft practices that they consider unfair or deceptive, saying that continuing with those practices could put them at risk of violating the Dodd-Frank Wall Street Reform and Consumer Protection Act or Section 5 of the Federal Trade Commission Act.

The agencies agreed that the practice of “authorize positive, settle negative” (APSN) could be considered deceptive and offered guidance for banks to keep their policies in compliance. APSN transactions are authorized when a consumer’s account balance is positive, but later post to the account when the balance is negative, so consumers have difficulty preparing for such fees.

“Even when disclosures described the circumstances under which consumers may incur overdraft fees, the OCC has found that overdraft fees charged for APSN transactions are unfair for purposes of Section 5 because consumers were still unlikely to be able to reasonably avoid injury and the facts met the other factors for establishing unfairness,” said the agencies in a statement, according to American Banker.

The FDIC urged banks in its notice to ensure that third-party providers comply with regulations and to review the role they play in processing transactions, tracking balances, and providing systems to determine when overdraft fees are assessed. The OCC warned firms against charging consumers representment fees, which are charged every time a third party re-enters a transaction for payment after the bank returns it for insufficient funds.

Banking Dive noted that the OCC also warned against overdraft policies with high limits or that lack limits on how many fees can be assessed daily. Banks should resist charging a fixed fee for failure to resolve a previously overdrawn balance, “especially when the bank does not accurately disclose the circumstances under which the customer could incur these fees,” said the OCC.

The OCC recommended adopting modified overdraft programs to reduce the risk of violating regulations, and said that appropriate risk management programs include overdraft limits, grace periods, automatic alerts, and short-term single payment structures.