Protecting the Rights of Consumers
For Over 25 Years
Edelman, Combs, Latturner & Goodwin, LLC
On April 26, 2023, the Office of the Comptroller of the Currency (OCC), which regulates federally chartered banks, and the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits and regulates state-chartered banks, issued supervisory guidance regarding bank overdraft practices. OCC Bulletin 2023-12; FDIC FIL-19-2023.
The guidance criticized (1) assessing overdraft fees on an “authorize positive, settle negative” basis (2) assessing fees each time a third party resubmits the same item for payment after it has been returned by a bank for non-sufficient funds.
"Authorize positive, settle negative" refers to a practice of some banks of assessing overdraft fees on debit card and ACH transactions that are authorized (i.e., the customer can use the debt card, or funds are transferred pursuant to an ACH debit) when a customer’s available balance is positive but that are later posted to the account when the available balance is negative. Banks use a "ledger balance" and an "available balance." The ledger balance refers to the actual amount of funds in a customer’s deposit account after accounting for all items that have settled and posted. The available balance reflects the ledger balance minus "holds" for recently deposited funds that have not yet cleared and for authorized but pending debit card transactions.
A customer’s account may have a sufficient available balance to cover a debit card transaction when the transaction is authorized but, due to one or more intervening transactions, has an insufficient available balance to cover the transaction at the time it settles, usually at the end of the day. This is commonly referred to as an "authorize positive, settle negative" (APSN) transaction. In addition to assessing an overdraft fee on the APSN transaction, some banks also assess an overdraft fee on intervening transactions that exceed the customer’s available balance. In this scenario, for example, the bank reduces a customer’s available balance by an amount that is more than, equal to, or less than the initial authorized debit card transaction, and subsequently, an intervening transaction further reduces the customer’s available balance so that the account no longer has a sufficient available balance. The bank charges an overdraft fee on both the intervening transaction and the initial APSN transaction when posted to the customer’s account.
The FDIC warned that assessing overdraft fees on an “authorize positive, settle negative” basis may constitute an unfair, deceptive or abusive practice because consumers “cannot reasonably avoid” such fees, as they lack “the ability to effectively control payment systems and overdraft processing systems practices.” The problem is especially acute if items are considered overdrawn if they exceed the "available balance" as opposed to the "ledger balance." The FDIC also warned that disclosures describing how transactions are processed may not eliminate their unfair, deceptive or abusive nature. Banks were encouraged to “ensure customers are not charged overdraft fees for transactions consumers may not anticipate or avoid.”
The OCC warned that account disclosures may be misleading if they fail to clearly explain that multiple or additional fees may result from multiple presentments of the same item. When a bank receives a check or automated clearing house (ACH) transaction that is presented for payment from a customer’s deposit account, and the account has insufficient funds to pay the check or ACH transaction, the bank may decline to pay the transaction and charge the customer an NSF fee. If the same check or ACH transaction is presented to the bank again and the customer’s account still has insufficient funds, some banks will either again return the transaction unpaid and assess an additional NSF fee or pay the transaction and assess an overdraft fee. This practice of charging an additional fee each time a single transaction (e.g., ACH transaction or check) is presented for payment by a third party without further action by the customer contributes to customer costs in circumstances in which those customers cannot reasonably avoid the additional charges. In addition, some creditors have been known to take a single NSF transaction (e.g., a $100 payment) and split it up into multiple transactions (e.g., two $50 payments). This may be done to (1) see if a smaller transaction will be paid, (2) punish the consumer by causing the imposition of multiple overdraft or NSF fees, or (3) evade consumer attempts to stop the presentment of preauthorized debits.
Other practices that the OCC criticized include (1) charging overdraft or NSF fees with a high limit (or without limit) for multiple transactions in a single day and (2) charging a fixed, periodic fee for failure to cure a previous overdrawn balance, especially when the bank does not accurately disclose the circumstances under which the customer could incur these fees. These practices make it more difficult for customers facing liquidity challenges to reasonably avoid these fees by bringing their account balances positive.
Please contact us if you believe that you have been the victim of one of these practices.