Friday, April 19, 2019

FDIC Reaches Settlement on Overdraft Fees

Posted by Tom August 21, 2012 1:01pm

Photo Credit: David Castillo Dominici

The Federal Deposit Insurance Corporation (“FDIC”) sent out a release on August 8, 2012, stating that it has reached financial settlement terms with a Bank and its affiliate over alleged violations of the Federal Trade Commission Act (“FTC Act”).

The Bancorp Bank, and its affiliate,  Higher One Inc. have signed off on Consent orders and agreed to pay back almost 11 million dollars in compensation to approximately 60,000 student  customers.  The companies are also liable for significant civil penalties.

The FDIC concluded through the course of its examinations, that Higher One operated its student debit card account program (thus, the impact directly on student borrowers) with The Bancorp Bank in violation of Section 5; more specifically, claiming the institutions utilized “unfair and deceptive” practices for this particular group of customers. The Regulators determined that the banks were in violation of the FTA by doing the following:

  1. Charging student account holders multiple Nonsufficient Fund (“NSF”) fees from a single merchant transaction
  2. Allowing these accounts to remain in overdrawn status over long periods of time; thus, allowing NSF fees to continue accruing
  3. Collecting the fees from subsequent deposits to the students' accounts; typically, funds for tuition and other college expenses.

The Bancorp Bank, who as the issuer of debit card, was ultimately responsible to ensure that its affiliate was in compliance with all applicable laws, and thus, was held equally liable for the violations.

The letter goes on to state that the program in question has to be completely revised and that the bank and its affiliate need to operate greater oversight in their programs and advertising.

Two important things jump out at me as a result of this news publication:

  • The FDIC, and by proxy, all the other regulatory bodies are taking the issue of overdraft and NSF fees far more seriously than in the past. While it may be a great source of revenue for a community bank, it is also a greater risk now to invite regulatory scrutiny in regards to overdraft transactions. While your institution may not have the exact same product or set up as The Bancorp Bank, it almost certainly deals with overdrafts (and chronically overdrawn accounts) on a daily basis. In light of this and recent proposals by the CFPB in regards to capping overdraft fees, it may be time to give your Overdraft Policy some scrutiny.  Focus should be emphasized on fees (and waiver thereof), approval authority, and above all else, monitoring of these accounts as to not cause a “pyramid” effect to multiple charges.  Training on applicable consumer protection laws periodically never hurts, either.
  • The Regulators are determining “unfair and deceptive” acts from transactions that on the surface, may seem innocuous to most.  Especially at risk appears to be dealings that involve third party vendors and lack of oversight regarding their activities as they can enact transactions on your behalf.  Proper due diligence of Third Parties does not end with the initial partnership. Periodic compliance monitoring on the part of the bank regarding Third Party transactions is a must or a bank can find itself in a similar situation, being an “unknowing” participant in a regulatory violation.

Above all, keep a firm handle on internal controls regarding fees and fee waivers, from any source.  Waiving fees for one (or a group) and charging for another may be good business practice in some cases, but also can be perceived as discriminatory in others.


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