I. INTRODUCTION
The Office of the Comptroller of the Currency (OCC) has issued a bulletin to banks to address the risks associated with overdraft protection programs. Overdraft protection programs can present a variety of risks, including compliance, operational, reputation, and credit risks. Specifically, the bulletin discusses certain practices that may present heightened risk of violating prohibitions against unfair or deceptive acts or practices.
The OCC encourages banks to explore offering low-cost accounts, as well as other lower-cost alternatives for covering overdrafts, such as overdraft lines of credit and linked accounts. The OCC recognizes, however, that some consumers with short-term liquidity needs may benefit from the availability of funds from overdraft protection programs via deposit accounts.
Based on examinations of overdraft protection programs at a number of banks in recent years, the OCC has observed that certain overdraft protection program practices may present a heightened risk of violations of Section 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices. These include practices known as authorized positive, settle (APSN) and multiple NSF representment fees.
II. AUTHORIZE POSITIVE, SETTLE NEGATIVE FEE PRACTICES
Banks generally maintain a “ledger balance” and an “available balance” on customer deposit accounts for numerous purposes, including assessing overdraft fees. The ledger balance refers to the actual amount of funds in a customer’s deposit account after accounting for all items that have settled and posted. The available balance generally reflects the ledger balance minus “holds” for recently deposited funds that have not yet cleared and for authorized but pending debit card transactions. Some banks assess overdraft fees on debit card transactions that authorize when a customer’s available balance is positive but that later post to the account when the available balance is negative.
In this scenario, a customer’s account has a sufficient available balance to cover a debit card transaction when the transaction is authorized but, due to one or more intervening transactions, has an insufficient available balance to cover the transaction at the time it settles. This is commonly referred to as an APSN transaction. In addition to assessing an overdraft fee on the APSN transaction, some banks also assess an overdraft fee on intervening transactions that exceed the customer’s available balance. In this scenario, for example, the bank reduces a customer’s available balance by an amount that is more than, equal to, or less than the initial authorized debit card transaction, and subsequently, an intervening transaction further reduces the customer’s available balance so that the account no longer has a sufficient available balance. The bank charges an overdraft fee on both the intervening transaction and the initial APSN transaction when posted to the customer’s account.
The OCC has reviewed a number of overdraft protection programs that assess overdraft fees on APSN transactions. In some instances, the OCC has found account materials to be deceptive, for purposes of Section 5, with respect to the banks’ overdraft fee practices. In these instances, misleading disclosures contributed to findings that the APSN practice was also unfair for purposes of Section 5. In addition, and based on subsequent analysis, 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.
The OCC recognizes that compliance risk may exist when banks assess overdraft fees based on either a negative ledger balance or negative available balance for APSN transactions.
III. REPRESENTMENT FEE PRACTICES
When a bank receives a check or automated clearing house (ACH) transaction that is presented for payment from a customer’s deposit account, and the account has insufficient funds to pay the check or ACH transaction, the bank may decline to pay the transaction and charge the customer an NSF fee. If the same check or ACH transaction is presented to the bank again and the customer’s account still has insufficient funds, some banks will either again return the transaction unpaid and assess an additional NSF fee or pay the transaction and assess an overdraft fee. This practice of charging an additional fee each time a single transaction (e.g., ACH transaction or check) is presented for payment by a third party without further action by the customer contributes to customer costs in circumstances in which those customers cannot reasonably avoid the additional charges. Through ongoing supervision, the OCC has identified concerns with a bank’s assessment of an additional fee on a representment transaction, resulting in findings in some instances that the practice was unfair and deceptive. Disclosures may be deceptive, for purposes of Section 5, if they do not clearly explain that multiple or additional fees (NSF or overdraft) may result from multiple presentments of the same transaction. Even when customer disclosures explain that a single check or ACH transaction may result in more than one fee, a bank’s practice of assessing fees on each representment may also be unfair, for purposes of Section 5, if consumers cannot reasonably avoid the harm and the other factors for establishing unfairness under Section 5 are met. Consumers typically have no control over when a returned ACH transaction or check will be presented again and lack knowledge of whether an intervening deposit will be sufficient to cover the transaction and related fees.
IV. ADDITIONAL PRACTICES THAT MAY PRESENT HEIGHTEND RISK
V. RISK MANAGEMENT PRACTICES
A bank’s risk management systems should be commensurate with the bank’s size, complexity, and risk profile. Therefore, as part of sound risk management of overdraft protection programs, the OCC encourages a bank to assess and analyze the risks posed by the bank’s overdraft protection program activities; adjust the bank’s risk management practices; and incorporate oversight of overdraft protection programs into the bank’s compliance management system. An effective compliance management system typically should include processes and practices designed to manage compliance risk, ensure compliance with applicable laws and regulations, and prevent consumer harm.
VI. BOARD AND MANAGEMENT OVERSIGHT
A bank’s board of directors has ultimate responsibility for overseeing management’s implementation of a bank’s overdraft protection program. Effective board and management oversight generally includes:
Bank management is responsible for developing, implementing, and effectively managing overdraft protection programs in line with the board’s direction, the bank’s objectives, and the bank’s risk appetite, and in compliance with all applicable laws and regulations. Sound risk management generally should include appropriate policies, processes, personnel, and control systems that focus on consumer protection requirements and consider customer outcomes.
VII. NEW ACTIVITIES PROCESSES AND THIRD-PARTY RISK MANAGEMENT
Banks should have processes in place to manage the risks associated with offering new, modified, or expanded products or services (collectively, new activities), including new overdraft protection programs or changes to existing overdraft protection programs. Effective new activity development processes typically consider the financial attributes of consumers using the products, consumer disclosures, use of new technologies, use of alternative underwriting information, and use of third-party relationships. An effective risk management program should be in place if banks use third-party relationships as part of their overdraft protection programs. Third-party relationships include a bank’s arrangement with its service providers that often play a significant role in processing and reprocessing transactions, processing of payments, and providing systems that determine when overdraft or NSF fees are assessed.
VIII. POLICIES, PROCESSES, AND CONTROL SYSTEMS
A bank’s processes and control systems should align with established policies and incorporate appropriate procedures and practices for managing risks associated with overdraft protection programs. The following non-exhaustive list outlines examples of potentially appropriate risk management practices that banks may consider adopting:
IX. CORRECTIVE ACTION
The OCC encourages banks to have processes in place to identify and correct risk management weaknesses and violations of laws and regulations. OCC violation findings at specific banks related to overdraft protection programs have typically led to corrective action, including remediation to harmed consumers. The OCC encourages banks to review their overdraft protection programs and related practices to ensure that banks comply with Section 5 and other applicable laws and regulations and take corrective action as appropriate.