In a March 29, 2011, conference call that reportedly involved more than 4,000 listeners, Federal Deposit Insurance Corporation representatives clarified the agency’s Final Overdraft Payment Supervisory Guidance (FIL 81-2010), addressed in a prior legal alert.
In the call, the FDIC backed away from some of the most extreme aspects of the Guidance. Important clarifications included the following:
- The FDIC representatives repeatedly stressed that the Guidance applies only to automated overdraft programs, involving predetermined and formula-driven overdraft decision-making, not to ad hoc programs. Additionally, they confirmed that the Guidance applies solely to consumer and not business accounts.
- They also emphasized that banks need not suspend or discontinue overdraft privileges for customers who exceed six overdraft fees in a rolling 12-month period. Rather, banks must undertake “meaningful and effective” steps to ensure that customers are aware of any available overdraft alternatives, such as links to other accounts, overdraft lines of credit, or short-term loans, and that consumers have a reasonable mechanism for pursuing such options. Banks may communicate with customers who trigger the six-occurrence threshold in person or by phone, mail, or electronic communication. They are not required to suspend overdraft privileges before contacting customers, are not required to continue contacting customers who express a desire to be free of such contacts, and are not required to terminate overdrafting for customers who repeatedly incur high levels of overdrafts.
- The FDIC representatives suggested that a daily cap of three overdraft fees or, somewhat less helpfully, “$X” of overdraft fees might be appropriate. They also recommended restricting overdraft fees to the dollar amount of overdrafts and eschewing fees for de minimus overdrafts, perhaps overdrafts of less than $10.
- The FDIC representatives expressed concern about high-to-low posting order but advised that use of high-to-low posting was not a per se violation of the Guidelines or the law.
- They noted that each fee constitutes a separate overdraft occurrence, even if additional fees are charged on the same day. Accordingly, a customer can trigger the six-occurrence threshold in a single day or other short period of time.
The FDIC expects to post an overdraft Q&A by the end of the week. (We expect to send another legal alert.) Additionally, the FDIC invited further questions, which can be submitted at [email protected]. Questions the FDIC has not answered to date—but should—include the following:
- The FDIC representatives expressed the view that most consumers who frequently overdraft have available to them lower-cost options. What is the basis for this view? How should banks deal with customers who do not qualify for lower-cost options?
- The FDIC representatives promoted on the call the FDIC’s small-dollar loan program. However, for customers who do not qualify for credit at a 36 percent APR, can and should banks provide costlier credit options, such as short-term loans at higher effective rates, including substantially higher rates? Will banks that offer such credit be subject to regulatory criticism and pressure?
- The FDIC advised that it has engaged in extensive examiner training regarding the Guidance, including two nationwide interactive training sessions. Will examiner training materials and guidance be made publicly available and, if so, how and when?
- What formal and informal enforcement actions has the FDIC taken to date with respect to bank overdraft practices? What steps is the FDIC taking to ensure consistency of enforcement policy? What recourse is available to banks who believe or suspect that they are victims of selective enforcement in this area?
In light of the FDIC Guidance, the avalanche of overdraft fee litigation and the general ferment surrounding overdraft practices, all financial institutions, not just state non-member banks, should promptly undertake a “soup-to-nuts” review of their practices in this area. These reviews should cover fee triggers, levels, and limitations; posting order; customer communications; and arbitration, among other matters. We have counseled and are counseling a number of banks in these matters, and have represented and are representing a number of banks defending overdraft fee class actions. In fact, we have prevailed in overdraft fee cases on four separate occasions, including two cases that were the subject of prior legal alerts—“Ballard Spahr Client Compels Individual Arbitration of Debit Card Overdraft Fee Claims” and “Third Circuit Affirms Dismissal of Class Action Challenge to Bank’s ‘High-to-Low’ Debit Card Processing Policy.”