Compliance Journal May 2023
Special Focus Recent Agency Guidance Reflect Upcoming Examination Focus Over the past several weeks, agencies have released guidance that identifies activities which are expected to be the focus of upcoming compliance examinations. Compliance officers need know how each guidance may impact their institution in anticipation of examiner questions and review. Each guidance relates to activities the respective federal banking regulatory agency believes violate Section 1036(a)(1) (B) of the Dodd-Frank Act (Dodd-Frank UDAAP) and Section 5 of the Federal Trade Commission Act (FTC UDAP), which prohibits unfair or deceptive acts or practices (UDAP). The agencies use the same standards in determining whether the identified act or practice is unfair under the respective statutes. In particular, an act or practice is unfair when it (1) causes or is likely to cause substantial injury to consumers, (2) cannot be reasonably avoided by consumers, and (3) is not outweighed by countervailing benefits to consumers or to competition. In each guidance, the agencies provide their analysis of how the identified acts are unfair, how the components of Dodd-Frank UDAAP and FTC UDAP are met, and what financial institutions should consider to avoid a potential UDAAP/UDAP violation. FDIC: Supervisory Guidance on Charging Overdraft Fees for Authorize Positive, Settle Negative Transactions On April 26, 2023, the Federal Deposit Insurance Corporation (FDIC) issued guidance to ensure that supervised institutions are aware of the consumer compliance risks associated with charging an overdraft fee on a transaction that was authorized against a positive balance but settled against a negative balance, a practice FDIC refers to as “authorize positive, settle negative” (APSN). FDIC previously identified concerns with APSN in its June 2019 Consumer Compliance Supervisory Highlights. The guidance expands on the 2019 Supervisory Highlights article by discussing FDIC’s concerns with both the available and ledger balance methods used by financial institutions when assessing overdraft fees. The guidance also clarifies that disclosures describing transaction processing may not mitigate the concerns. Background FDIC recognizes that overdraft programs, transaction clearing, and settlement processes are complex. In the case of APSN transactions, which involve consumers being assessed overdraft fees for transactions where they had sufficient account balances at the time the transactions were initiated, it may not be possible for consumers to determine when fees will be assessed and how they may be avoided. Financial institutions’ processing systems generally use either a ledger balance method or an available balance method, including for the purpose of assessing overdraft-related fees. A ledger balance method calculates the account balance based only on transactions settled during the relevant period and does not take into account authorization holds. The method typically correlates to the balance reflected on a consumer’s periodic statement. An available balance method calculates the account balance based on authorized (but not settled) transactions the financial institution is obligated to pay under contractual or other obligations, as well as settled transactions and pending deposits. The available balance is generally the amount of money/funds the consumer can access because it accounts for any pending debit or credit transactions. The balance typically correlates to the balance accessible to consumers