It’s all about Authorize Positive/Settle Negative (AP/SN)
“Unanticipated overdraft fee assessment practices” is the sub-heading of Circular 2022-06, published on October 26, 2022. The Consumer Financial Protection Bureau’s (CFPB) use of Circulars, rather than published rules, was announced in May 2022 to ensure federal consumer financial law is enforced consistently. Financial institution regulators (CFPB, FDIC, Federal Reserve, OCC, NCUA and others) are expected to adopt consistent enforcement strategies and approaches based on the publication of these Circulars.
The question the 2022-06 Circular raises is one that has been raised over the last several years by regulatory agencies and through litigation.
Can the assessment of overdraft fees constitute an unfair act or practice under the Consumer Financial Protection Act (CFPA), even if the entity complies with the Truth in Lending Act (TILA) and Regulation Z, and the Electronic Fund Transfer Act (EFTA) and Regulation E?
The Circular then provides a response to the question: Yes.
The front-page news stories and the presidential tweet seem to indicate that Overdraft Fees are being disallowed. Well, that is not quite the case.
When defining the “unanticipated overdraft fee,” the CFPB Circular recognizes that debit transactions are authorized against a positive balance. The Circular emphasizes that a consumer who has access to their account balance (e.g., through a mobile application) would reasonably expect that a specific item could be paid without the assessment of an Overdraft Fee.
In an illustration within the Circular, the consumer is assessed a fee on the -$50 transaction, which was authorized on Day 1, in addition to the -$120 transaction posted on Day 2. Two (2) Overdraft Fees are assessed, one for each transaction. If the core processor had determined whether the -$50 transaction would be assessed a fee at the time of authorization (on Day 1), there would have been no fee since the Available Balance and the Ledger Balance were both sufficient to pay the item. In other words, if the consumer had walked into the branch and taken the -$50 in cash, there would have been no Overdraft Fee. The Ledger Balance would have dictated that the account had sufficient funds to pay this transaction.
If the financial institution made the “fee or no fee” decision at the time of authorization, the -$50 transaction would not have been assessed a fee when it settled on Day 3 in this illustration. This is a technology solution some core processors have developed and implemented to avoid assessing a fee at settlement that would not have been assessed at authorization. JMFA tracks the core processors that have enabled the Authorize Positive/Settle Negative functionality to address this issue specifically.
As early as September 2018, JMFA recommended that our clients request the module to remove the issue by making the Overdraft Fee decision at the time of authorization. If your financial institution has not already done so, you should contact your core processing provider to request the installation of the “good funds” functionality.
Additionally, as a best practice, it is recommended to regularly, at least annually, review the settings for “good funds” in your core processor and run tests and/or evaluation of live transactions to ensure that the core processor is waiving fees for debit card transactions authorized on “good funds,” correctly.
The CFPB determined that Overdraft Fees assessed by financial institutions on transactions that a consumer would not reasonably anticipate are likely unfair. Unanticipated fees occur when an item is authorized on a positive balance (“good funds”) and then a fee is assessed when the transaction settles.
Unfortunately, the CFPB has not made a Rule requiring core processors to implement the functionality needed to avoid assessing a fee on an item authorized on “good funds.” Furthermore, without a such regulatory mandate, some core processors may delay the development of the module (or patch), which removes the regulatory risk.
Transparent communication about how fees are assessed and clarifying language has continued to be part of JMFA’s recommendations. Over the years, we have proactively assisted community banks and credit unions with addressing the issues highlighted within the bureau’s guidance. We have provided them with key recommendations for the Authorize Positive/Settle Negative functionality and how to properly assess fees and disclose the use of Available Balance and Ledger Balance.
To learn more about how to ensure your overdraft program earns a clean bill of health from examiners and account holders alike, contact your local JMFA representative.
ABOUT THE AUTHOR
Cheryl Lawson 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, the experts in delivering consumer-friendly overdraft solutions and has earned the trust of the financial services industry by providing effective recommendations and data-driven results for decades. To address your evolving needs and answer pressing questions on overdraft compliance and best practices for delivering more value to your account holders, contact the experts at JMFA.