On April 26, 2023, the FDIC published a new FIL concerning “Supervisory Guidance on Charging Overdraft Fees for Authorize Positive, Settle Negative Transactions” or APSN transactions. As noted in our November blog post, these occur when a transaction authorizes on a positive balance and settles on a negative balance. This new FIL highlights the heighted risks associated with APSN transactions and violations of Section 1036(a)(1)(B) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 as well as Section 5 of the Federal Trade Commission Act. Both of the aforementioned sections relate to UDAAP findings or unfair, deceptive, or abusive acts or practices. Potential violations of both Dodd-Frank UDAAP and FTC UDAP are present on both the available balance and ledger balance but institutions who use the available balance can see a greater risk in violations. Considering the general statements of the new FIL, banks should continue to review both account agreements and disclosures to ensure practices are communicated correctly, review their third-party agreements to ensure that the agreements are compliant, review any agreements to understand any risks associated with APSN transactions, and look for any enhancements that can be made to reduce those risks. Most core processors now have “good funds” flags on overdraft reports or other “good funds” reporting that allows banks to quickly identify when transactions which were authorized positive on good funds have later settled negative. Also, some core processors have parameter settings which do not allow for overdraft charges on APSN transactions. Implementing such enhancements can greatly reduce UDAAP risk with APSN transactions.
Similarly, the OCC also published a bulletin to address “Overdraft Protection Programs: Risk Management Practices” on April 26, 2023. This bulletin primarily discusses practices that may present risk of violating UDAAP guidelines as well as practices that can assist in managing overdraft program risk. Two practices that are specifically mentioned by the OCC are APSN transactions and Representment fees. APSN transactions are considered by the OCC to be unfair for the purposes of Section 5 even when disclosures described the circumstances under which a customer may incur fees. With concerns on representment fees, the OCC has identified that a bank’s assessment of an additional fee on a represented transaction can result in findings of an unfair or deceptive practice. The charging of a representment fee may be considered unfair or deceptive, with regards to Section 5, even if the disclosures clearly state that a single check or ACH can result in multiple fees charged. Alongside APSN transactions and representment fees, the OCC bulletin identifies two other practices that may carry heightened risk with them. Those include high limits or lack of limits on the number of fees charged and sustained overdraft fees. In conjunction with the risks that are highlighted in this bulletin, the OCC also provided some risk-mitigating or management practices for banks to comply with Section 5 of the Federal Trade Commission Act. Considering the nature of the information provided, banks should assess and analyze the risks posed by overdraft program activities, adjust their management practices to decrease risk, incorporate oversight into their overdraft program, and review their overdraft program for Section 5 compliance. Much like the FDIC, the OCC declines to issue clear requirements on these APSN transactions and representment fees.
For more information, please visit the following links:
OCC Bulletin 2023-12