Photographer: Andrew Harrer/Bloomberg
Bankers are aggressively pushing back against efforts by regulators to punish banks for assessing multiple fees when a consumer doesn't have enough money in their bank account.
Not so long ago, writing a check that bounced or making a purchase with a debit card on an overdrawn account was considered fraud, punishable as a criminal offense. But these days regulators have turned the tables and now are seeking civil penalties against banks for charging multiple nonsufficient funds fees when a customer overdraws their account. Often a merchant submits the transaction to a bank for a second time, incurring multiple nonsufficient funds, or NSF fees.
Bankers say regulators never had a problem with NSF fees until the Biden administration took on the mantra of eliminating so-called "junk fees," and lumped all bank fees into the mix, including those that long considered to be legal.
"This is one of the most challenging issues bankers face," said Joe Witt, president and CEO of the Minnesota Bankers Association.
The Minnesota trade group sued the Federal Deposit Insurance Corp. and FDIC Chairman Martin J. Gruenberg
"One of the major claims that we have with the FDIC is a question of whether they have authority to do what they did," said Witt.
The FDIC issued guidance
Earlier this year, both the FDIC and the Office of the Comptroller of the Currency
Bankers object to even some NSF fees being labeled as "unfair," or "deceptive," without regulators going through the rulemaking process. The bankers are claiming that the FDIC failed to follow the proper procedures as required by Administrative Procedure Act, which requires all major changes in regulations to clear the notice-and-comment process.
"This is a very important issue in which a [regulator] is creating a new obligation without going through the thoughtful and deliberative rulemaking process," said Bryan Schneider, a partner at Manatt, Phelps & Phillips, and a former associate director for supervision, enforcement, and fair lending at the Consumer Financial Protection Bureau. "Agencies feel compelled to move very quickly. But there are other times when they have the authority to move, but it has to be through the specific process."
Regulators may prefer issuing "guidance," because doing so bypasses the lengthy rulemaking process that can eat up time and resources, experts say. Given that 2024 is a presidential election year, some experts point out that Republicans could use the Congressional Review Act to overturn regulations that have been recently finalized and implemented as one reason the FDIC issued guidance and not a rule. If there is a change in control in the White House there also will be new people named to lead federal agencies, and a rulemaking on NSF fees could be jettisoned.
In the lawsuit against the FDIC, the Minnesota Bankers trade group was joined by one of its member banks, Lake Central Bank, a $210 million-asset bank in Annandale, Minn.
"The NSF fee issue is not the point in this lawsuit," said Bryan Bruns, president and CEO of Lake Central Financial, the parent of Lake Central Bank.
The Minnesota Bankers Association and Lake Central Bank jointly filed a lawsuit against the Federal Deposit Insurance Corp. over its nonsufficient funds fee rules' inclusion of "unfair or deceptive acts or practices" violations in its policy.
Bruns said that regulators are required to follow the rules for any major changes in regulations by issuing a formal proposal with a notice-and-comment period that gives industry a chance to respond. Some suggest the FDIC is not even the proper regulator to issue a rule given that the CFPB has jurisdiction over deposit accounts and disclosures.
"The issue is the fact that we have regulators acting outside of their authority and even if they do have the authority, they are not following the proper procedures," Bruns said.
The lawsuit asserts that regulators "cannot mandate sweeping new notice of alert and disclosure obligations, deem specific conduct unfair or deceptive, or retroactively enforce these new mandates by requiring restitution under the direct threat of civil penalties and enforcement actions."
The issue is further complicated because multiple agencies have authority to issue fines, penalties and redress to consumers.
Last week, two regulators hit Bank of America with enforcement actions for assessing multiple NSF fees on a single transaction. The CFPB ordered Bank of America to reimburse consumers $80.4 million and pay a $60 million fine for repeat nonsufficient fund charges. The OCC also ordered BofA to pay a $60 million fine for violations. The OCC specified that BofA didn't clearly explain to consumers that they could get multiple fees from the same transaction and the customer had no ability to know when or if a merchant would resubmit a transaction again. The CFPB cited the Dodd-Frank Act's prohibition on "unfair, deceptive and abusive acts and practices," known as UDAAP.
The CFPB comes into the equation as well because it is potentially writing a rule that would address nonsufficient funds fees. The bureau listed a rule on NSF fees as being in
While prudential regulators can take action against supervised banks on a case-by-case basis, bankers say specifically that the FDIC does not have the authority to make changes to deposit accounts, which are the purview of the CFPB.
"If the CFPB had decided that they wanted to expand the disclosure requirements, they would have had the authority to do that, and the way they would have done it is through the full notice-and-comment rulemaking process," said Witt with the Minnesota bankers. "Does the FDIC have authority to make the legal determination? We believe the answer is no, and even if they did have the authority, they didn't follow the right procedures."
Still, in its guidance last year, the FDIC said NSF fee disclosures could be deemed "deceptive" if a bank does not adequately disclose the charges to consumers. Specifically, the FDIC claimed "that some disclosures provided to customers did not fully or clearly describe the institution's re-presentment practice, including not explaining that the same unpaid transaction might result in multiple NSF fees if an item was presented more than once."
The FDIC declined to comment.
Bank lawyers say it isn't a crazy notion for a bank to charge multiple NSF fees on the same transaction because merchants often resubmit transactions for payment a second time, typically a day later, and the bank also has no way of knowing if or when that happens. If a consumer doesn't have funds in their account to cover the payment, or has not "opted in" for overdraft protection, then the bank charges another NSF fee, typically $35, which is also known as return-item fee.
The regulatory crackdown on NSF fees could have unintended consequences, lawyers say. Some banks are planning to close accounts of customers with frequent NSF charges, which could force some customers out of banks and into alternative providers like check cashers and prepaid cards.
Several bankers said NSF fees are legitimate, necessary, and fully-disclosed fees that consumers agree to pay as part of their obligations in obtaining a bank account. More importantly, a consumer can avoid the fee by depositing money in their account.
"There have been several regulators that have looked at this issue from several different ways and never has this issue come up. And now all of a sudden, it has come up," said Bruns, of Lake Central Financial.
