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UDAAP issue for banks that batch process, don\'t operate in real time

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By Roger Beverage
OBA President & CEO

Thanks to my colleagues in Kansas and Minnesota, I've recently learned about an issue that alarms me just a bit. It comes out of the FDIC's regional office in Kansas City and directly affects state-chartered, non-member banks in that region. My concern is the issue may soon spread to other regions (like Dallas) and to other federal prudential banking regulators.

Here's the situation, as I understand it. A bank does not operate its ATM and debit card network system "online" or in real time. Rather, as many banks do, it "batch processes" those debit card transactions at the end of the business day.

Under these circumstances, transactions for customers who have "opted in" to the bank's overdraft program are treated in the same manner as they are for customers who have "opted out" of the program, i.e., the debit card transaction is honored and is cleared for the merchant. Moreover, the "difference" in treatment is that those who have "opted in" are charged an overdraft fee and those who have "opted out" are not.

The FDIC's Regional Office in Kansas City has determined that, under these circumstances, the bank has committed an unfair and deceptive practice. The rationale for this conclusion is there is no tangible benefit for the debit card customer who has "opted in" compared to the customer who has "opted out" of a bank's overdraft program and the result is the same for each: both transactions are "cleared" and the merchant is "paid." Indeed, the customer who has "opted in" actually faces harsher circumstances (having to pay the overdraft fee) when compared to the customer who has "opted out."

This is a real "gotcha" circumstance. The bank has done everything it needed to do to in accordance with Reg. E. Even so, when the bank is not operating in "real time" the result for both types of customers is the same. Thus, charging an overdraft fee, even though the debit card customer has "opted in" to the bank's overdraft program, is deemed to be "unfair and deceptive" by the Kansas City FDIC office. The remedy has been to require the offending banks to simply return the overdraft charges, but because it's deemed a UDAAP violation, it could be a lot worse down the road.

The FDIC is planning to issue a Financial Institution Letter addressing this issue sometime soon, but I haven't seen it yet. The letter will likely direct banks to take corrective action immediately by refunding overdraft fees and ceasing to charge such fees going forward.

It's clear that batch processing issues should have been addressed in the changes that were made to Regulation E. Banks that have followed the new rules and used the safe harbor language should not be punished for consequences that were unforeseen by them and the regulators. With the interpretation that the UDAAP law is violated, small banks that do not have real time processing are being disproportionately impacted.

There are tons of questions surrounding this interpretation out of the Kansas City FDIC office, not the least of which is where does the new Consumer Financial Protection Bureau fit in to this picture? I don't have a clue, except to say the Kansas City office thinks it has full authority to enforce the Federal Trade Commission Act as it has been applied to banks.

Thanks to the Kansas and Minnesota Bankers Associations for calling this issue to my attention. We'll be working on a solution for banks in conjunction with the American Bankers Association and our colleagues. Stay tuned.