By J. Marc Ward - Fredrikson & Byron, P.A
If you charge a fee for non-sufficient funds (NSF) you should be aware of a recent guidance from the FDIC. This is doubly true if you charge multiple NSF fees for re-presentment of an item. And it becomes critical if you rapidly charge these fees without giving your customer sufficient time to cover the amount due.
FDIC guidance does not lay down hard and fast rules regarding NSF policies and practices. It does not define how much time a customer should have between re-presentments but only that it cannot be a “short period of time.”
The biggest challenge for banks that rely on core processors to assess NSF fees will be core processor cooperation. While the FDIC encourages banks to work with these third parties to reduce the risk of unfair or deceptive practices with regard to NSF fees, it has been our experience that data processors are not very cooperative in correcting these practices.
FDIC guidance does not lay down hard and fast rules regarding NSF policies and practices. It does not define how much time a customer should have between re-presentments but only that it cannot be a “short period of time.”
The biggest challenge for banks that rely on core processors to assess NSF fees will be core processor cooperation. While the FDIC encourages banks to work with these third parties to reduce the risk of unfair or deceptive practices with regard to NSF fees, it has been our experience that data processors are not very cooperative in correcting these practices.
Our experience also indicates that when the FDIC conducts a consumer compliance examination, the FDIC will provide a bank a safe harbor by only requiring corrective action for the two prior years, as opposed to a theoretically possible unlimited lookback.
So what should your bank do? The FDIC naturally suggests that you eliminate NSF fees or charge only one fee regardless of the number of re-presentments. A more practical response would be to review your NSF policies and practices to determine whether your disclosure of NSF fees is clear and conspicuous. You should reexamine your NSF policies for clarity of disclosure and the quality of disclosure. To do this, step into the shoes of your typical customer and read your disclosure from their point of view. The views of the bank and its customers may not align. In a court decision handed down this Spring regarding an NSF class action lawsuit, the intended meaning of “item” was a key point. The bank and the customer each had a different understanding. Guess who won.
If you conclude that your current disclosure of NSF practices is lacking, you should take action with respect to past transactions and transactions going forward.
Regarding past transactions, you should consider going back as many years as you think is reasonable and offering refunds to your customers for their NSF fees. Two years might be enough. One difficulty will be locating those persons who are no longer customers. A reasonable effort to find them may pass muster with the FDIC.
Going forward, make sure that your disclosures to customers clearly and conspicuously disclose your practice with respect to NSF fees. This is especially true if you charge a fee for each presentment including re-presentments. Clear and conspicuous is in the eye of the beholder, but it would seem a bank would meet this test if the disclosure is made early in the account agreement that describe the terms and conditions of the account, uses plain English, and perhaps even has a larger font size than the rest of the document.
So what should your bank do? The FDIC naturally suggests that you eliminate NSF fees or charge only one fee regardless of the number of re-presentments. A more practical response would be to review your NSF policies and practices to determine whether your disclosure of NSF fees is clear and conspicuous. You should reexamine your NSF policies for clarity of disclosure and the quality of disclosure. To do this, step into the shoes of your typical customer and read your disclosure from their point of view. The views of the bank and its customers may not align. In a court decision handed down this Spring regarding an NSF class action lawsuit, the intended meaning of “item” was a key point. The bank and the customer each had a different understanding. Guess who won.
If you conclude that your current disclosure of NSF practices is lacking, you should take action with respect to past transactions and transactions going forward.
Regarding past transactions, you should consider going back as many years as you think is reasonable and offering refunds to your customers for their NSF fees. Two years might be enough. One difficulty will be locating those persons who are no longer customers. A reasonable effort to find them may pass muster with the FDIC.
Going forward, make sure that your disclosures to customers clearly and conspicuously disclose your practice with respect to NSF fees. This is especially true if you charge a fee for each presentment including re-presentments. Clear and conspicuous is in the eye of the beholder, but it would seem a bank would meet this test if the disclosure is made early in the account agreement that describe the terms and conditions of the account, uses plain English, and perhaps even has a larger font size than the rest of the document.
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