FDIC-regulated banks preparing for regulatory compliance exams have a critical issue to consider. In August 2022, the FDIC released Supervisory Guidance on Multiple Re-Presentment of NSF (Non-Sufficient Funds) Fees. This guidance instructs institutions to take “full corrective action, including providing restitution to harmed customers” where violations of law have occurred.
Even if your institution is not regulated by the FDIC, we urge you to stay abreast of this issue, as other federal regulators have signaled that overdraft fees are a supervisory priority for them as well. Now’s the time to be proactive, as the risks are serious — you could face regulatory scrutiny, including UDAAP violations and civil monetary fines, open yourself up to class-action lawsuits, and damage your reputation.
What does “full corrective action” mean?
In reviewing the guidance, the phrase “full corrective action” likely stood out to you. For FDIC-regulated banks, examiners expect this action to be taken before your bank’s next regulatory action.
In cases where re-presentment NSF fee issues have been identified, the FDIC guidance directs institutions to do the following:
- “Take full corrective action, including providing restitution to harmed customers, consistent with the restitution approach described in this guidance;
- Promptly correct NSF fee disclosures and account agreements for both existing and new customers, including providing revised disclosures and agreements to all customers;
- Consider whether additional risk mitigation practices are needed to reduce potential unfairness risks; and
- Monitor ongoing activities and customer feedback to ensure full and lasting corrective action.”
The good news is, the guidance acknowledges that “full corrective action” could vary from bank to bank, in part because of core system recordkeeping and reporting. The specific action items could vary slightly from regulator to regulator as well, so it’s best to find out directly from them what they consider to be a violation and how far back you need to look.
How can I mitigate this compliance risk?
Luckily, the starting point here is quite simple: Contact your regulator and ask what they expect from you.
What we’ve heard has varied — a one-year lookback period was suggested by one regulator, another suggested a two-year lookback period, and a third suggested taking a sample from the last year and extrapolating. You could be expected to pay back customers in full for any fees relating to re-presentment of NSFs once you determine how much you owe and to whom. You want to make sure you fully restore funds to your clients, but you also don’t want to over-reimburse fees — another great reason to find out exactly what your regulators want to see.
To determine the solution, you’ll first need to find out how your core processor handles these kinds of overdraft fees, as well as their plan to remediate the issue. Then, design and implement a plan to address the fees in the time period suggested by your exam team. It’s prudent to again reach out to regulators at this point to confirm that they agree with your plan.
Once your plan is confirmed, begin the corrective action process by providing restitution to harmed customers and providing your revised NSF disclosures and account agreements to your entire customer base. As you work through the plan, prepare and maintain documentation so you can demonstrate to regulators that you took action according to their instructions. Moving forward, consider whether additional risk mitigation practices are needed to reduce potential unfairness, and be sure to monitor ongoing activities and customer feedback to ensure full, lasting corrective action.
Take this FDIC guidance seriously
We sometimes see banks wait to remedy an issue until they “get their hand slapped” by regulators. The FDIC has signaled they’re taking this matter very seriously, and it’s not an appropriate time to delay action. As this will be covered on your next regulatory exam and could take significant time and resources to complete, it’s best to get started right away. Whether you choose to work with an outside expert or handle it on your own, the best way to mitigate your risk is to get started as soon as possible.
