United States: CFPB Takes Action On NSF And O/D Fees

We have known for some time that the CFPB had the topic of overdraft fees on its radar screen. Just this week, the CFPB announced its first Consent Order dealing with that practice. The target was Regions Bank, and the charges and refunds were significant.

The April 28, 2015 Consent Order lays out the facts and the history.

Apparently Regions had two separate product lines that were involved. One was a checking account with what the CFPB described as "linked coverage." By that they meant that the checking account was tied to a separate savings or other account that would be accessed should the checking account overdraw. The second was a Ready Advance Account which was a small-dollar line of credit to be accessed when a related checking account was overdrawn. Advances under this small-dollar line of credit could be paid manually or in installments, or automatically out of the customer's next automatic deposit.

With respect to the linked coverage account, the CFPB found that the Bank, through mid-level managers, had erroneously concluded that such an account was not covered by the opt-in requirements of Regulation E related to overdraft charges for one-time ATM or debit card transactions. As a result, the Bank did not obtain the necessary opt-ins and did charge overdraft fees to the affected accounts. Over a year after the Opt-In Rule's effective date, a mid-level manager concluded that the program did likely violate the Opt-In Rule; however, that determination was not shared with the Bank's Legal Department or Senior Management. Some three months thereafter an attempt was made to stop charging these accounts with over draft fees, but it was subsequently determined that efforts to reprogram the system were inadequate and the overdraft charges continued to be assessed. It was not until some five months later that the Compliance Department brought the situation to the attention of Senior Management. One month later, the Bank self-reported the violation to the CFPB and made a voluntary reimbursement to customers. Almost 200,000 customers were reimbursed a total of nearly $35,000,000. The CFPB later determined that another $13,000,000 was owed to affected customers. Some of those charges had continued as late as 2015.

The CFPB also found that marketing materials used by the Bank had erroneously stated that linked accounts would not be charged overdraft fees. That was found to be a deceptive act or practice.

In connection with the Regions Ready Advance product (the small-dollar line of credit account) an attempt was made to stop the assessment of NSF or overdraft charges when the line was paid with an installment payment or through a subsequent deposit. The programing for that change was flawed; NSF fees were stopped but overdraft fees continued. Later, another programing error occurred that started to charge both NSF and overdraft fees once again on these accounts. The programing later was corrected, but not before the Bank charged at least $1,900,000 in overdraft and NSF fees to these account holders. Similar to the linked accounts, marketing materials for the ready advance program indicated that no NSF or overdraft charges would be assessed. The CFPB again found that to be a deceptive practice.

As a result, the Bank had to make substantial reimbursement to affected customers. It has to remediate its processing systems to assure compliance with Regulation E going forward. In addition, the Bank has to expunge any negative credit reporting regarding customers' deposit or credit accounts, and it must designate an independent contractor to verify the Bank's compliance with the record keeping and reimbursement requirements of the Consent Order.

The Consent Order lasts for five years.

A number of lessons stand out. First, the results of an erroneous conclusion regarding the application of one or more regulations can be very expensive. Second, a prompt and thorough response to a situation, once detected, is absolutely essential. Although never pleasant or easy, Senior Management needs to learn of these problems at the earliest possible moment. Then prompt self-reporting should take place. Finally, the corrective action must work from the beginning.

The CFPB has promised more guidance on overdraft programs. That guidance will likely be shaped by the Regions experience. We will continue to monitor the CFPB's efforts in this area.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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