Creating a sound and compliant overdraft program has always been the goal. Since the 2005 Final InterAgency Guidance was published, regulatory examiners were typically the only people who reviewed these programs. Maybe the financial institution auditor asked a few questions each year but that has now changed.
Many lawyers seem to have launched an all-out attack on financial institutions. What used to be the occasional lawsuit from an unhappy account holder has become a wave of demand letters to banks and credit unions of all sizes. What’s more, the letters even use the same boilerplate.
- I represent [consumer] and a proposed class of consumers who have been unfairly and deceptively charged overdraft fees… While we have not yet commenced the litigation, we intend to do so within [timeline] in the event you are unwilling to discuss my client’s claims and a resolution of them. I have litigated dozens of cases…. [Consumer] contacted me regarding her account… Courts have ruled….[case]…[case]…[case]… We are likely to disclose the true nature of your overdraft fee practices in litigation…
Three key areas to evaluate and review
The consumer who is named may or may not have an active account with the financial institution. Additional research may even uncover whether there is even a foundation for a claim. However, the law firms have consistently targeted a few areas, some which include:
- Actual versus available balance.Consumer disclosures that do not clearly communicate whether items are paid against an actual (ledger) or available balance have been found to harm consumers. Financial institutions should clearly communicate what balance is used and what makes up that balance to avoid consumer confusion and reduce the risk of claims.
- Authorize Positive, Settle Negative (APSN).Debit transactions which are authorized on a positive balance should not be assessed an overdraft fee, everyone agrees. However, between the time of authorization and the time of settlement, intervening transactions can deplete the account balance. When the authorized debit transaction settles into a negative balance, some core processors assess an overdraft fee. Additionally, the technology solution (e.g., Good Funds Module) may not be in place for all core processors. Refunds are appropriate, but it is virtually impossible to manually ‘catch’ all the fees assessed in error.
- Representment.Banking practices have consistently recognized that when an item is returned unpaid to many merchants, the merchant will send it back to the financial institution a second time to try and clear the item. Lawyers’ efforts to claim that these representments are unfair is a difficult issue, especially since there has been practice but no clear rules.
While regulatory changes have been few in recent years, overdraft litigation threats are increasingly adding pressure. Now is the time to act, especially if you haven’t reviewed your overdraft strategy in a while—or have concerns that your financial institution could be at risk.
Learn more about CHERYL LAWSON, EVP-Compliance Review for JMFA. She serves as JMFA’s principal compliance liaison for regulatory requirements of overdraft services, including consumer protection issues and strategies to enhance safety and soundness.