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Are You Putting Account Holders First?

Are You Putting Account Holders First?

Focus on consumer protection enforcement may be increasing


By Richard Miller, Executive Vice President


The shift away from implementing new regulations on financial products and services is welcome news for financial institutions already dealing with other present and emerging challenges this year. But recent signals shed light on possible efforts to strengthen the enforcement of some regulations already in place which protect consumers against unfair products and practices.


Earlier this month, the House Committee on Financial Services held a hearing entitled, “Putting Consumers First? A Semi-Annual Review of the Consumer Financial Protection Bureau” (CFPB). This was the first of two annual hearings on CFPB activity mandated by the Dodd-Frank Act.


During the session, lawmakers questioned CFPB Director Kathy Kraninger on the changes made to existing rules and the significant drop in enforcement on actions that harm consumers. Committee Chairwoman, Congresswoman Maxine Waters (D-CA), re-introduced a discussion draft of the Consumers First Act that she originally filed in 2018. This Act would restore the supervisory and enforcement powers of the Consumer Financial Protection Bureau (CFPB).


While this doesn’t definitely signal immediate changes in the regulatory landscape, banks and credit unions should be cautious not to underestimate the importance of regulatory compliance at all times.


One area in particular to watch is the uncertainty regarding communication, disclosures and error resolution around the assessment of an overdraft fee for POS transactions that were authorized on good funds but settle after the account balance has been depleted by an intervening transaction that causes there to be insufficient funds to pay the original item (“authorize positive/settle negative" transactions).


How a positive swipe becomes a negative experience

From the consumer perspective, when a debit card purchase is approved, an account holder assumes that the transaction is complete. This can occur whether the financial institution uses an “available balance” (which might include disclosed overdraft limits) or a ledger balance to authorize the debit card transaction.


But on the processing side of the equation, if a core system doesn’t have the capability to identify authorized items (where no fee is assessed) among the other items presented against the account while the authorized amount is being held from the balance — such as POS debit card transactions that fall below a merchant’s floor limit and don’t require authorization, checks, ACH items and teller transactions — the available balance can be depleted. When this happens, the account holder can be hit with an unexpected overdraft fee because there aren’t enough funds to pay the amount that was authorized on a positive balance.


Why this is a compliance problem

According to guidance released by all regulatory agencies since 2015, charging an overdraft fee on an authorized POS transaction in this circumstance is a violation of the Unfair and Deceptive Acts and Practices (UDAP) Rule because the available balance was positive at the time of authorization. Under regulatory guidelines this transaction cannot be assessed a fee at the time of settlement, regardless of the account balance.


Failure to address such UDAP policy violations can result in fines, regulatory orders to refund fees, and damage to account holder relationships and reputation if the issue is made public. Keep in mind, negative comments about a bad banking experience can do exponential damage to an institution’s reputation if they go viral on social media.


Added legal risk for non-disclosure

What’s more, if an institution hasn’t provided an easy-to-understand explanation of what constitutes an “available balance” in the account, along with clear disclosure about the use of available balance to determine how an account becomes overdrawn, account holders don’t have the information they need to make the best financial decisions.


Most legal actions related to POS transaction fees occur because financial institutions did not provide clear disclosure regarding the use of available balance — leaving account holders unaware and uninformed.


Awareness is key to maintaining compliance

Authorized POS transactions can’t be identified when an item settles. It is up to an institution’s core processor to distinguish authorized transactions among all of the transactions that impact the available balance and mark them “fee or no fee” when they are authorized.


But if the core isn’t able to identify the transactions at the appropriate time— or offers a module that attempts to correct the problem but isn’t consistently reliable —it is the institution’s responsibility to immediately resolve the issue by refunding any fees that are assessed in error as soon as the issue is identified, in order to maintain compliance.


Avoid the potential pitfalls of POS transaction fees

As the number of POS debit card transactions continues to increase, maintaining reliable processes, clear disclosures and error resolution regarding fees that are charged due to “authorize positive/settle negative" transactions is increasingly important to avoid potential harm to account holders.


Regardless of what’s making news in the regulatory arena, fair and responsible treatment of account holders should be an on-going priority for banks and credit unions. An expert in overdraft solutions can provide the expertise, technology and tools your institution needs to adequately handle any fee and disclosure issues to help you avoid the possibility of regulatory violations and maintain positive performance and service results.



Richard Miller is executive vice president for John M. Floyd & Associates. With a broad base of management experience in community banking he offers great insight on building relationships and improving organizational structure.  Learn more about Richard.


JMFA is considered one of the most trusted names in the industry helping community banks and credit unions improve their performance and profitability. Whether it’s recovering lost revenue, uncovering savings opportunities, serving your account holders better or offering a 100% compliant overdraft program—JMFA has the right solutions to help you deliver measurable results. We are proud to be a preferred provider among many industry groups. To learn more please contact your local representative or call us at (800) 809-2307.



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