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Re-presentment of Unpaid Transactions

Of significance is this issue discussed in detail in the FDIC Consumer Compliance Highlights for March 2022.

Background

Financial institutions commonly charge a non-sufficient funds (NSF) fee when a charge is presented for payment not be covered by the balance in the account. Some financial institutions charged additional NSF fees for the same transaction when a merchant re-presented an automated clearinghouse (ACH) payment or check after the transaction was declined.

Disclosure and fee practices for re-presentments may result in heightened risk of violations of Section 5 of the FTC Act, which covers both business and consumer accounts. Re-presentment practices have been recently referenced by Federal and state regulators, announcements by financial institutions and have also been the subject of a number of class action lawsuits involving financial institutions. These lawsuits generally allege breach of contract due to the omission of key terms related to the assessment of re-presentment fees. Lawsuit settlements have resulted in customer restitution and legal fee reimbursements.

Findings

During 2021, the FDIC identified consumer harm when financial institutions charged multiple NSF fees for the re-presentment of unpaid transactions. Some disclosures and account agreements stated that one NSF fee would be charged “per item” or “per transaction.” These terms were not clearly defined and disclosure forms did not explain that the same transaction might result in multiple NSF fees if re-presented.

The failure to disclose material information to customers about re-presentment practices and fees may be deceptive. This practice may also be unfair if there is the likelihood of substantial injury for customers, if the injury is not reasonably avoidable, and if there is no countervailing benefit to customers or competition. For example, there is risk of unfairness if multiple fees are assessed for the same transaction in a short period of time without sufficient notice or opportunity for consumers to bring their account to a positive balance.

Although class action settlements may result in providing some restitution to customers, the FDIC has determined that, in some instances, the restitution provided did not fully redress the harm caused by the practice. The FDIC required additional restitution.

Mitigating Risk

Various risk-mitigating activities have been taken by institutions to reduce potential risk of consumer harm and avoid potential violations of Section 5 of the FTC Act. These include:

  • Eliminating NSF fees.
  • Declining to charge more than one NSF fee for the same transaction, regardless of whether the item is represented.
    • Disclosing the amount of NSF fees and how such fees will be imposed, including:
    • Information on whether multiple fees may be assessed in connection with a single transaction;
    • The frequency with which such fees can be assessed; and
    • The maximum number of fees that can be assessed in connection with a single transaction.
  • Reviewing customer notification practices related to NSF transactions and the timing of fees to provide the customer with an ability to avoid multiple fees for re-presented items.
  • Conducting a comprehensive review of policies, practices, and disclosures related to re-presentments to ensure the manner in which NSF fees are charged is communicated clearly and consistently.
  • Working with service providers to retain comprehensive records so that re-presented items can be identified.

This may be a good time to review associated practices within your institution.

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