CFPB issues $191 million enforcement action regarding overdraft fees on Authorized Positive-Settle Negative debit card transactions

Today, the Consumer Financial Protection Bureau (CFPB) issued a Consent Order that can be read as designed to prohibit overdraft fees on debit card transactions that are authorized when a customer has a positive Available Balance, but settle into a negative amount – commonly known as Authorized Positive-Settle Negative transactions. 

Background

When making overdraft fee decisions, banks often rely on an account’s Available Balance, which is the most up-to-date measure of funds available to customers based on transactions that are known to the bank.  The Available Balance typically includes the amounts of pending debit card transactions that have not yet posted to the customer’s account.  In many cases, banks will make the decision whether to assess an overdraft fee at the time that a debit card transaction posts or settles to the account, just as they do with checks.  This means that, in the case of a debit card transaction that is authorized with a sufficient Available Balance but later posts to the account (sometimes days later) into a negative balance, banks may charge an overdraft fee for each of those transactions.

Over many years, bank regulators have indicated that this practice of charging overdraft fees on debit card transactions that are authorized with a positive balance but post into a negative balance may be unfair or deceptive, in violation of the federal prohibition against unfair, deceptive or abusive acts or practices (UDAAP).  Today’s Order addresses “surprise” overdraft fees assessed to consumers who allegedly did not understand and could not reasonably avoid the fees, because of “counterintuitive, complex processes” outside of their control.

In a publication issued in 2015, the CFPB appeared to imply that charging overdraft fees on Authorized Positive-Settle Negative transactions may comply with UDAAP if properly disclosed to consumers.  In particular, it stated that it had observed “one or more institutions” where overdraft fees for Authorized Positive-Settle Negative transactions were unfair or deceptive to consumers because the consumers “likely had no reason to anticipate this practice, which was not appropriately disclosed.”  The CFPB even stated that “examiners found that the failure to properly disclose the practice of charging overdraft fees in these circumstances was deceptive.” (Emphasis added.) 

Key takeaways

In today’s Consent Order, the CFPB has now revisited this issue, finding that it was unfair and abusive for the subject of the Order to charge overdraft fees on Authorized Positive-Settle Negative transactions.  In particular, the Order suggests that consumers can be expected to rely on the Available Balance displayed to them by the bank when deciding whether they have sufficient funds to pay a debit card transaction, without taking into account unprocessed transactions that are known to the consumer but not the bank (such as checks that consumers have written but that have not yet posted to the account).  In reaching this conclusion, the CFPB did not cite any agreement with the bank’s customers regarding how overdraft fees would be assessed or reference the bank’s disclosures.  Instead, the CFPB relied on observations made by compliance staff, consumer complaints, and findings by consumer advocacy groups.  This suggests that the CFPB now views this practice as unfair and abusive regardless of whether or how it is disclosed or agreed to by consumers.

Although this action was limited to the conduct of a single bank, the required remedial action makes a statement to all institutions that charge overdraft fees on Authorized Positive-Settle Negative transactions:  Going forward, the CFPB will expect all institutions to avoid engaging in a potential UDAAP “by assessing an overdraft fee on a transaction when the balance used to assess an overdraft fee was sufficient at the time the [b]ank authorized the transaction.”

The Order also appears to be designed to encourage institutions to take prompt action to address their Authorized Positive-Settle Negative practices.  In the Order, the CFPB faulted the subject bank for waiting to change its practice after concerns were raised internally and despite the prior 2015 publication.

In addition to requiring the bank to change its overdraft practices, the Order requires the bank to pay restitution to consumers in the amount of $141 million and pay a Civil Money Penalty of $50 million.

Institutions that charge overdraft fees on “Authorized Positive-Settle Negative” transactions are encouraged to promptly evaluate their practices in light of today’s Consent Order.

For Regulatory and Compliance or Class Action assistance, please get in touch with the authors or your DLA Piper contact.