Weekly RoundUp
April 27, 2023

Overdraft Protection Programs: Risk Management Practices

In this Weekly Roundup Issue. The Office of the Comptroller of the Currency (OCC) issued guidance concerning overdraft protection programs; the Securities and Exchange Commission (SEC) published standards of conduct for Broker-Dealers and Investment Advisers; the Federal Deposit Insurance Corporation’s (FDIC) Board of Directors met in open session to discuss the Semiannual Update of the DIF Restoration Plan; the Financial Stability and Oversight Council (FSOC) issued, for public comment, the proposed analytic framework for financial stability risks and proposed guidance on nonbank financial company determinations; the Consumer Finance Protection Bureau (CFPB) issued an advisory opinion on time-barred debts and commits to protecting consumers from artificial intelligence (AI) risk in joint statement with federal partners.

Regulatory Developments

Overdraft Protection Programs: Risk Management Practices 

On April 26, the OCC issued guidance in OCC Bulletin 2013-12, “Overdraft Protection Programs: Risk Management Practices,” to national banks and others subject to its jurisdiction highlighting certain overdraft practices that may present a heightened risk of violating section 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices, and Section 1036 of the Consumer Financial Protection Act of 2010, which prohibits unfair, deceptive, or abusive acts or practices.  

Based on examinations conducted by the OCC in recent years, the OCC identified specific practices that may present such heightened risks: (1) so-called “authorize positive, settle negative” practices, in which a bank assesses overdraft fees on debit card transactions that are authorized when a consumer’s available account balance is positive but later post to the account when the available balance is negative, and (2) the assessment of “representment fees,” in which a bank assesses an additional fee each time a third party resubmits the same transaction for payment after the bank has returned the transaction for non-sufficient funds. In some instances, the OCC found that account materials provided to customers were deceptive or misleading, but the OCC noted that even if the disclosures of a bank’s practices are accurate, the practices themselves may be unfair for purposes of Section 5 if consumers are still unlikely to be able to reasonably avoid injury or harm. The OCC also highlighted other practices that may present heightened risk, including high limits or lack of daily limits on the number of fees assessed or the use of sustained overdraft fees in which a bank charges a fixed, periodic fee for failure to cure an overdrawn balance. 

 The bulletin also described certain practices that might help mitigate risks associated with overdraft protection programs, including assisting consumers in avoiding unduly high costs in relation to the face value of the item being presented, the amount of the consumer’s regular deposits and average balances and implementing fees and practices with a reasonable relationship to the risks and costs of providing overdraft protection programs.  

SEC Publishes Bulletin on the Duty of Care Standards for Broker-Dealers and Investment Advisers

On April 20, the SEC published a Staff Bulletin (Bulletin) providing guidance reiterating the Care Obligation of Regulation Best Interest (Reg BI) for broker-dealer and the duty of care enforced under the Investment Advisers Act of 1940 (the IA fiduciary standard) for investment advisers.

The Bulletin includes 20 Q&As covering topics such as understanding the investments or investment strategy recommended by a broker-dealer or investment adviser, understanding the retail investor’s investment profile, considering reasonably available alternatives, and special considerations for complex or risky products. The Bulletin should be read in conjunction with, among other sources, Reg BI and the specific SEC releases discussing Reg BI and the IA fiduciary standard.

FDIC Provides Semiannual Progress Report on DIF Restoration Plan

On April 18, the FDIC released a semiannual update on the Restoration Plan for the agency's Deposit Insurance Fund (DIF). Despite the recent failure of Silicon Valley Bank and Signature Bank, resulting in losses of approximately $22.5 billion, FDIC Chairman Martin J. Gruenberg stated that these losses would not materially impact the timeline for achieving the statutory minimum reserve ratio of 1.35 percent. The reserve ratio is expected to be reached ahead of the September 30, 2028 deadline, and no changes to the Amended Restoration Plan are recommended at this time.

The Federal Deposit Insurance Act mandates that the FDIC adopt a restoration plan when the DIF reserves fall below 1.35 percent of all insured deposits held in FDIC-insured financial institutions. Due to extraordinary deposit growth in 2020, the Fund's reserve ratio fell below the statutory minimum, leading the FDIC to establish a plan to restore the Fund's reserves by September 30, 2028. In 2022, the FDIC Board of Directors approved an amendment to the Restoration Plan, which included a two basis point increase in deposit insurance assessment rates for all insured depository institutions. The new assessment rates took effect in the first quarterly assessment period of 2023.

“The bottom line to today’s update is that even with increased uncertainty in the banking industry and the recent failure of two large banks, [FDIC] staff project that the losses from the two failures are not expected to have a material effect on the projected timeline for reaching the statutory minimum reserve ratio of 1.35 percent. The reserve ratio is expected to reach the minimum ahead of the statutory deadline of September 30, 2028, and staff recommend no changes to the Amended Restoration Plan at this time.” 

- Martin J. Gruenberg, Chairman, FDIC Board of Directors, on the Restoration Plan Semiannual Update

FSOC Issues for Public Comment Proposed Analytic Framework for Financial Stability Risks and Proposed Guidance on Nonbank Financial Company Determinations

On April 21, the FSOC voted to issue, for public comment, a proposed analytical framework to help provide greater transparency to the general public about the role the Council plays in identifying, assessing and addressing risks to financial stability, regardless of whether the risks originate from firms or activities.

In addition, the FSOC unanimously voted to issue for public comment, proposed interpretive guidance on how the FSOC will designate nonbank financial companies for supervision under the Board of Governors of the Federal Reserve System. This proposed guidance would replace current guidance, but would continue to provide “strong processes, including significant two-way engagement with companies under review.” The FSOC further provided that the newly proposed framework would “minimize administrative burdens on companies under review while providing ample opportunities to be heard and to understand the FSOC’s analyses.” The proposals will be available for comment 60 days following publication in the Federal Register, which is expected on Friday, April 28, 2023.

CFPB Issues Advisory Opinion on Time-Barred Debts

On April 26, the CFPB issued an advisory opinion, accompanied by a blog post and prepared remarks by Director Rohit Chopra, affirming that debt collectors subject to the Fair Debt Collection Practices Act (FDCPA) and its implementing regulation are prohibited from suing or threatening to sue, including bringing state foreclosure actions, to collect time-barred debt (i.e., a debt whose statute of limitations has expired), even if the debt collector does not know that the debt is time barred. 

CFPB Commits to Protecting Consumers from AI Risk in Joint Statement with Federal Partners

On April 25, accompanied by prepared remarks by Director Rohit Chopra, the CFPB joined the Federal Trade Commission (FTC), the U.S. Equal Employment Opportunity Commission (EEOC), and the Civil Rights Division of the United States Department of Justice (DOJ) in issuing a joint statement, outlining its commitment to the core principles of fairness, equality, and justice in enforcing its respective laws and regulations and rooting out discrimination caused by any tool or system that enables unlawful decision making, including emerging automated systems and artificial intelligence. This statement follows on other initiatives by the CFPB to ensure advanced technologies do not violate consumer rights, including a circular on black box algorithms and an interpretive rule on digital marketing, among others. The CFPB communicated its intention to continue monitoring the development and use of automated systems, including AI-marketed technology, and working closely with the FTC, EEOC, and DOJ to enforce federal consumer financial protection laws, regardless of whether legal violations occur through traditional means or advanced technologies. The CFPB will also be issuing a white paper this spring discussing the current chatbot market and the technology’s limitations, its integration by financial institutions, and ways the CFPB is already seeing chatbots interfere with consumers’ ability to interact with financial institutions.

CFPB Deems Merchant Cash Advances to Be “Credit” Under ECOA

The CFPB’s adopting release for its small business data collection and reporting rule goes beyond that rule by including a discussion deeming merchant cash advances to be “credit” more generally for purposes of the Equal Credit Opportunity Act.

Learn more about this update in a recent client alert.

Enforcement and Litigation Updates

CFPB Appeals District Court’s Dismissal of Nonbank Redlining Action

On April 3, the CFPB filed a notice to appeal a district court’s decision to dismiss its complaint against a nonbank mortgage lender and its owner for allegedly violating the Equal Credit Opportunity Act (ECOA). Relying on the language of ECOA’s implementing regulation, 12 C.F.R. 1102.4(b) (Regulation B), the CFPB based its allegations on statements the nonbank lender purportedly directed toward “prospective applicants.” In dismissing the complaint, the district court rejected the CFPB’s Regulation B and found that the unambiguous language of ECOA only applied to “applicants.” 

The decision to appeal the district court ruling is a significant step in the CFPB’s efforts to expand the applicability of ECOA and its prohibitions on redlining, and the complaint marked the first redlining enforcement action taken by the CFPB against a nonbank lender.

Read more about this update in more detail on Goodwin’s Consumer Finance Insights blog.

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