Overdraft fees and UDAAP

Does your bank charge an overdraft fee? If you’re nodding “yes” right now, you’re not alone. Data from the Consumer Financial Protection Bureau reveal that in 2019, U.S. consumers paid a staggering $15.5 billion in overdraft and bounced-check fees.

Wave of overdraft fee lawsuits

Your bank may need to reevaluate its practices regarding overdraft fees. Several banks and credit unions have faced allegations that they used deceptive practices in charging customers excessive overdraft fees. Now, some customers have filed lawsuits against the banks, claiming the financial institutions used deceptive practices related to excessive overdraft fees.

Excessive bank overdraft fees lawsuits have been filed and/or settled against a variety of banks, including Wells Fargo, Bank of America, M&T Bank, HSBC, UMB Bank and Wachovia. The lawsuits allege that banks charge excessive overdraft fees when customers' accounts go into overdraft. They further allege that the banks use a number of unethical practices to push their accounts into overdraft, such as misrepresenting customers' account balances and reordering debits and credits to accounts.

Credit unions are similarly impacted

While credit unions operate differently than banks, they may still face similar legal issues, such as lawsuits claiming excessive overdraft fees. According to the Credit Union Times, a wave of overdraft lawsuits had struck credit unions across the country.

"At least one dozen credit unions in nine states have been hit with class action lawsuits over their overdraft practices, Credit Union Times reported in January 2016. "Often, the dispute is over how credit unions disclose the methods under which they apply overdraft fees.

CFPB and OCC scrutiny increasing

The CFPB will be enhancing its supervisory and enforcement scrutiny of banks that are heavily dependent on overdraft fees. The bureau did not identify any banks it may be targeting, but said it had asked its examiners to focus on banks that rely heavily on overdraft fees. Banks with “a higher share of frequent overdrafters or a higher average fee burden for overdrafting” should also expect close supervisory attention. In recent years, the CFPB ordered TD Bank to pay $122 million in penalties and customer restitution, and ordered TCF Bank to pay $30 million in penalties and restitution.

On the credit union front, Navy Federal Credit Union recently settled a $16 million fee settlement to resolve claims that the financial institution charged unfair non-sufficient funds (NSF) fees. Representment of NSF fees means that the second or third non-sufficient funds fees charged to an account holder after the initial return by the institution.

With these recent settlements, financial institutions should expect regulators to increase scrutiny in this area. The OCC gave a recent speech about reforming overdraft programs to empower and promote financial health and for banks to implement a more responsible overdraft program (Acting Comptroller Michael J. Hsu remarks before the Consumer Federation of America's 34th Annual Financial Services Conference on Reforming Overdraft Programs to Empower and Promote Financial Health (occ.gov)). In the article, Mr. Hsu state “Traditional bank overdraft programs are a significant “part of the problem.

Financial institutions dropping overdraft fees

Many banks (e.g., Capital One and Ally Bank) and credit unions have made the decision to drop all overdraft fees. Customers are permitted to overdraft, and a fee will not be charged to do so as long as the overdraft is corrected within a specific timeframe (e.g., six days).

One of our banking clients (approx. $470 million in assets) went through their FDIC compliance examination during the fourth quarter of 2021. There was an increased focus on customer overdrafts. The examiners reviewed six months of overdraft information as compared to prior exams that reviewed only one month. Numerous others had peer discussions regarding if they were considering changing their overdraft fee process.

Review and update policies in 2022

As we step into 2022, now is the time for your financial institution to review policies and procedures with respect to the overdraft program. Overdraft charges should be analyzed with respect to unfair, deceptive, abusive acts and practices (UDAAP). Additionally, review your current process on how overdraft fees are being charged to the customer and the notification process to inform the customer of the charge.