Four Letters. Infinite Potential.
Avoid Legal Risk with Transparency and Full Disclosure

Avoid Legal Risk with Transparency and Full Disclosure

Three precautions to mitigate risk of Overdraft/NSF fee demand letters

By Cheryl Lawson, EVP of Compliance Review


Legal scrutiny for community banks and credit unions has picked up recently with an increase in the number of demand letters alleging deceptive practices and excessive Overdraft/NSF fees. While recent allegations of improper fee assessment and misleading disclosures aren’t new, the actions by plaintiff attorneys have become more aggressive.


In some cases, attorneys have used social media platforms to target consumers who have been charged overdraft fees in an effort to initiate class action lawsuits. And it turns out, efforts to provide information intended to explain the assessment of overdraft and NSF fees via websites have backfired as plaintiff attorneys scour the web to identify potential class action targets.


Following are three precautions you can take to mitigate your risk of potential legal issues from Overdraft/NSF fee demand letters. A commitment to these best practices can also improve your level of compliance certainty and increase awareness among your account holders about how your overdraft service works to improve their financial well-being.


1. Maintain awareness of the issues attracting legal interest

At this time, regulators are still considering whether to make any rule changes regarding overdraft programs. But litigators continue to actively pursue opportunities to take action on issues related to improper fee charges, as well as practices that are misleading or aren’t fully disclosed. It is imperative to maintain awareness of existing issues that can put account holder relationships and your reputation at risk.


For example, class action cases have focused on the practice of assessing overdraft/NSF fees based on the “available balance,” which factors in any holds on deposits and debit card transactionsrather than the “actual balance” or “ledger balance”without accurately describing this practice in disclosures.


Other complaints include the assessment of multiple NSF fees charged on items that are presented multiple times against insufficient funds. Also, charging fees for POS transactions authorized on good funds but settled after an account balance has been depleted by intervening transactions that caused there to be insufficient funds to pay the original POS items (Positive Swipe/Negative Settlement) continues to be a concern.


You should be able to avoid this issue if you have the capability to automatically identify authorized transactions and mark the item “fee or no fee” when the item is authorized. But if your core does not provide a reliable solution for the problem, then the error must be corrected as soon as it is identified.


2. Commit to full disclosure and error resolution

A major point of contention in these legal actions results from a lack of clear disclosureleaving the consumer unaware and uninformed. To avoid the possibility of legal jeopardy in these situations, make sure all Deposit Account Agreements, Disclosures and Policies provide clear, consistent messaging about the account terms you use and the specific details of how your overdraft program works.  This will allow your account holders to make informed financial decisions and feel more confident in their relationship with your financial institution.

In the event a fee is charged in error, make sure procedures are in place to correct the situation quickly. Taking a proactive approach to error resolution will help you to maintain compliance and lessen the possibility of a service complaint that could become a viral headache or lengthy legal concern. 


3. Arm yourself with proven tools and reliable support

In addition to maintaining an on-going focus on full disclosure and transparency, take advantage of the tools and additional resources that can support your efforts to offer a socially responsible overdraft solution. The result will be a greater benefit for your account holders and increased peace of mind when it comes to avoiding increased legal scrutiny.


•  Technology

Next generation overdraft program software with improved automation provides reliable, comprehensive data analytics and up-to-date reporting capabilities. This greatly enhances your ability to monitor program results, gauge account holder activity, spot potential problems and anticipate when to implement changes to improve service delivery.


Having easy access to this level of information can also alert you to situations where additional communication with account holders might be warranted. Keeping account holders informed about their account activity through automatically distributed communications shows you are committed to their long-term financial health.


Real-time data is also a helpful tool for ensuring that performance and potential issues are being dealt with effectively.


•  Best practices and compliance proficiency

Plaintiff attorneys are constantly on the lookout for situations where consumer laws have been broken or regulations overlooked. Wouldn’t it be helpful to know you have a professional overdraft program provider on your side to help you avoid potential legal pitfalls? Overdraft program experts can review your existing policies, procedures and disclosures to make sure they are fully compliant and consumer friendly. They can also advise you on how to maintain the best disclosures and communications policies as well as provide all of the information your account holders need to use your overdraft program effectively to meet their financial needs.


•  Program management guidance

In an increasingly changing and competitive environment, it can be difficult to maintain services that are effective, compliant and results-oriented—while managing daily responsibilities and dealing with new initiatives and unexpected situations.


Expertise and guidance can help you get the best results from your overdraft program through on-going program monitoring to identify improvement recommendations; extensive employee training and educational opportunities to ensure everyone is up-to-speed on program details and confident in their ability to present the program accurately. And, don’t forget, on-going service and performance recommendations to ensure your program is providing the best results for you and your account holders.


Be proactive to ward off potential legal scrutiny

Are your account holders aware of how you determine when to assess an overdraft fee? Are they familiar with how specific transactions can impact their balance?


On-going communication—along with periodic reviews of your processes, procedures and the disclosures you are using to address issues related to overdraft fees and  procedures—are key components of a proactive approach for ensuring that your services are addressing your account holders’ long-term financial needs, while providing nothing of interest for attorneys interested in uncovering deceptive practices and excessive fees.

For more information about evaluating your overdraft strategy for compliance risks, contact your local JMFA representative or call 800-809-2307. 


Cheryl has more than 30 years of experience in information technology and financial operations, as well as consulting, communications, training and project management. She serves as JMFA’s principal compliance liaison for regulatory requirements of overdraft services, including consumer protection issues, and strategies that enhance safety and soundness.


JMFA is one of the most trusted names in the industry. Whether it’s recovering lost revenue, uncovering new savings with vendor contract negotiations, creating more value, improving service delivery or delivering a 100 percent compliant overdraft service—JMFA can help you deliver measurable results with proven solutions. We are proud to be a preferred provider among many industry groups. 


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