In recent months, regulators have issued multiple documents in the form of supervisory guidance and observations, raising concerns for community banks. Notably, the October 2023 Supervisory Highlights from the Consumer Financial Protection Bureau (CFPB) addressed “unlawful junk fees” discovered in their supervision of financial institutions that are $10B and above. The areas of attention in deposit accounts include Multiple Fees on Re-Presented Items and Authorize Positive, Settle Negative (APSN), among other things.

Addressing Multiple-Representments

Multiple fees on re-presented items can occur when NSF items are re-presented after being returned to the originating financial institution. The CFPB recognized core processing systems are responsible for the assessment of fees on re-presented items. The Supervisory Highlights state, “Examiners concluded that, in the offering and providing of core service platforms, core processors engaged in an unfair act or practice by contributing to the assessment of unfair NSF fees on re-presented items.” It is unclear whether the CFPB will mandate that core processing systems implement technology to avoid assessing re-presentment NSF fees. However, they did comment that proper coding by originating financial institutions, in concert with core processing system solutions, will avoid the assessment of fees on re-presented items.

It was also reported that “financial institutions engaged in unfair acts or practices by charging consumers re‑presentment NSF fees without affording the consumer a meaningful opportunity to prevent another fee after the first failed representment attempt.” As indicated in the Supervisory Highlights, the CFPB recognizes that only checks and (some) ACH items can be identified as re-presented items and recommends remediation of consumers for those identifiable re‑presentment NSF fees.

Tackling Authorize Positive, Settle Negative (APSN) Concerns

APSN occurs when overdraft fees for debit card or ATM transactions are assessed where the consumer had a sufficient available balance at the time the consumer authorized the transaction, but the account balance becomes insufficient at the time of settlement due to the delay between authorization and settlement. Regulators have expressed concerns about the potential for APSN practices to lead to unanticipated overdraft fees for consumers.

To address the issue, financial institutions should consider technology solutions from their core processor that can avoid assessing fees for items authorized on a positive balance. Several core processors offer such capabilities — financial institutions can avoid regulatory criticism by implementing the necessary APSN technology.

What to Expect from Regulatory Examinations

Being ready for anything and everything is the best way to approach regulatory exams in this somewhat uncertain climate. Expect examiners will arrive with a longer checklist of questions about your overdraft program than in the past. To prepare for these examinations, community banks should:

• Stay up-to-date on the latest regulatory guidance and industry insights
• Review their overdraft fee policies and procedures to ensure compliance with regulations
• Analyze their fee structure to ensure it is fair and reasonable
• Consider implementing strategies to reduce consumer costs, such as grace periods, de minimis thresholds, proportional fees and reasonable fee amounts

Strategies to Reduce Consumer Cost

In addition to implementing technology solutions and preparing for regulatory examinations, financial institutions can also consider implementing strategies to reduce consumer costs associated with overdraft fees. These strategies include:

• Providing a grace period: If a transaction is presented that would trigger an overdraft or NSF fee, give the account holder a grace period to make a deposit and then refund the fee.
• Introducing a de minimis: Instead of charging a fee for every transaction that takes an account negative, consider only charging the fee if the account becomes negative by a threshold amount.
• Implementing proportional fees: Consider establishing a smaller fee amount based on the transaction amount.
• Ensuring reasonable fees: Assess the reasonableness of your overdraft and NSF fees relative to the local market to ensure the fees are not prohibitive.

Make Informed Decisions

While some financial institutions have heavily marketed their low or “eliminated” overdraft fees, that doesn’t necessarily mean your fee needs to change. Instead of making sweeping changes based on what others are doing, ask yourself, “What are our fees, and why were they set that way?” If you’ve raised your fees over time and now yours is higher than the rest in your market, maybe a change is needed. But if your consumers believe your overdraft fee is fair and you’re not having issues with unrecoverable losses, your fee may be appropriate.

More importantly, a thorough analysis of your program and fee structure will help uncover any necessary changes to ensure you’re offering a consumer-first overdraft solution.

Cheryl Lawson serves as JMFA’s principal liaison for regulatory requirements of overdraft services, including consumer protection issues and strategies to enhance safety and soundness.

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ADVANTAGE, powered by JMFA, is a trusted consulting partner helping community banks improve their overdraft strategy and stay competitive with a compliant, consumer-first overdraft solution.