For a little over a year now, banks and their regulators have exhibited an unprecedented amount of focus on non-sufficient funds (or NSF) fees charged on checks or ACH entries that are presented multiple times for payment from a consumer’s deposit account that does not have a large enough balance to pay it. While these NSF fees on “re-presented” items have been charged for decades, they have become disfavored by regulators in recent years, particularly following the focus on “junk fees” by the Consumer Financial Protection Bureau (CFPB) and other federal banking regulators.

Initially, the regulatory scrutiny centered on the disclosures provided to consumers and whether the bank’s account agreement and account opening disclosures adequately informed consumers that they could be charged multiple NSF fees for the re-presentment of an item. This was one of the major themes of the Federal Deposit Insurance Corporation’s (FDIC) “Supervisory Guidance on Multiple Re-Presentment NSF Fees” that was first published in August 2022 and revised in June 2023. That Supervisory Guidance stated the following:

“In a number of consumer compliance examinations, the FDIC determined that if a financial institution assesses multiple NSF fees arising from the same transaction, but disclosures do not adequately advise customers of this practice, the misrepresentation and omission of this information from the institution’s disclosures is material. The FDIC found that if this information is not disclosed clearly and conspicuously to customers, the material omission of this information is considered to be deceptive pursuant to Section 5 of the FTC Act” (emphasis added).

By now, many bankers recognize Section 5 of the Federal Trade Commission Act as the source of the infamous “UDAP” finding when examiners deem a practice unfair, deceptive, or abusive. This is a threat that has become more real each year following the passage of the Dodd-Frank Act and the creation of the CFPB. As alluded to in the quote above, the initial regulatory focus on NSF fees charged for re-presented items was whether a bank’s account disclosures adequately described this possibility before the fee was charged to the customer so as not to be deceptive. This emphasis was reinforced by FDIC field examiners following issuance of the August 2022 Supervisory Guidance, who routinely reviewed revisions made by banks to account disclosures in order to address the deception concerns and provided those banks a “pass” if restitution was made to consumers harmed by the prior deception within the time frame recommended by the Supervisory Guidance.

There is one other aspect of the Supervisory Guidance, though, that has not yet received as much attention, although it appears to be gaining prominence, particularly within the Federal Reserve. In a bullet point within the FDIC’s August 2022 Supervisory Guidance just under the one quoted above, the FDIC went on to say the following:

“In certain circumstances, a failure to adequately advise customers of fee practices for re-presentments raises unfairness concerns because the practices may result in substantial injuries to customers; the injury may not be reasonably avoidable; and there may be no countervailing benefits to either customers or competition. In particular, a risk of unfairness may be present if multiple NSF fees are assessed for the same transaction in a short period of time without sufficient notice or opportunity for customers to bring their account to a positive balance in order to avoid the assessment of additional NSF fees. While revising disclosures may address the risk of deception, doing so may not fully address the unfairness risks” (emphasis added).

In its September 22, 2023, “Consumer Compliance Outlook Compliance Spotlight” addressing supervisory observations on re-presentment fees, the Federal Reserve stated that “examiners cited the assessment of NSF fees on re-presented transactions as an unfair practice in violation of Section 5 of the Federal Trade Commission Act” at more than one supervised institution. This means that, by focusing on the “U” of UDAP, the Federal Reserve criticized the practices at these institutions, regardless of what their disclosures said. What is even more interesting is that the Compliance Spotlight said nothing about the traditional unfairness trigger of insufficient notice of an NSF transaction and opportunity to address it prior to a re-presentment. Instead, for managing risks, it advised institutions to refrain from charging NSF fees on re-presented items, and if for some reason they are unable to do so because of limitations presented by third-party service providers who are unable to prevent them, to inform examiners of that limitation and ensure information provided to consumers was accurate and consistent with the bank’s policy and systems limitations.

This seems like a paradigm shift away from the regulatory approach of allowing NSF fees on re-presented items if they are adequately disclosed to consumers so as not to be deceptive, and toward a more restrictive approach that regards NSF fees charged on re-presented items as unfair regardless of how they are disclosed or implemented as long as it is within the control of the bank to prevent them. This is reinforced by the fact that at least one of our clients has received pre-exam communications from its Federal Reserve senior examiner that referenced the September Consumer Compliance Outlook, relayed personal experience in the application of the unfairness concept described in that article, and advised the bank to be proactive in discontinuing the practice of charging NSF fees on re-presented transactions before the Federal Reserve began its examination of the bank. Evidently, despite the amount of time and money banks have spent over the past couple of years to ensure a clear description of their practice in charging NSF fees, it may not be enough to save NSF fees charged on re-presented items from being condemned as a junk fee unfit for banking.