Banking Industry Challenges FDIC Declaration Regarding Non-Sufficient Funds Fees

We have our eyes on litigation before the 8^th Circuit seeking to vacate the Federal Deposit Insurance Corporation’s (“FDIC”) declaration that inadequately disclosed or alerted non-sufficient funds fees arising from the re-presentment of the same unpaid transaction constitute an unfair or deceptive trade practice in violation of the Federal Trade Commission Act. On July 25, 2024, the Minnesota Bankers Association and Lake Central Bank appealed a dismissal of litigation challenging a declaration made by the FDIC related to fees charged by banks for non-sufficient funds transactions. 

The Minnesota Bankers Association challenges the declaration asserting that the declaration failed to comply with the procedural requirements of the Administrative Procedure Act (“APA”), and that the FDIC lacks authority to define unfair or deceptive trade practices and therefore exceeded its enforcement authority.  Bankers groups from across the nation have filed Amicus Briefs supporting the position asserted by the Minnesota Bankers Association.

Re-Presentment of Non-Sufficient Funds Fees and the FDIC Declaration

The heart of the litigation pursued by the Minnesota Bankers Association relates to how banks deal with notifying consumers regarding fees related to non-sufficient funds.  Specifically, how banks deal with notifying and charging consumers when a merchant resubmits an attempted charge which the bank has already rejected because the consumer’s account lacks sufficient funds to pay the charge.

A core issue of the litigation is determining whether banks must bear the cost of installing systems that monitor the conduct of merchants such that a re-presentment of a transaction by a merchant could be identified. Generally, a bank system would likely only process each transaction submitted to it without processing the details of each transaction to allow a duplicative transaction to be caught before attempting to satisfy the transaction from the consumer’s funds.

On June 16, 2023, the FDIC issued Financial Institutions Letter 32, which it considers issuance of supervisory guidance to banking institutions to make them aware of compliance risks associated with assessing multiple nonsufficient funds fees from the same unpaid transaction.  Letter 32 included the FDIC’s guidance of when banks would be expected to take corrective action.

Letter 32 identifies the circumstances where the FDIC deems a financial institution’s disclosures, regarding re-presentment of non-sufficient funds fees, to constitute unfair or deceptive practices.  Letter 32 specifically identifies unfair or deceptive practices as including: (1) a failure to disclose the possibility of multiple fees for a single transaction submitted by a merchant multiple times; (2) failing to detail the maximum number of fees that can be charged in connection with a single transaction; (3) failing to ensure a consumer has the ability to effectively avoid multiple fees for re-presented charges; and (4) a number of other practices.

Minnesota Bankers Association’s Challenges to Letter 32

The banking industry alleges that Letter 32 constitutes a final agency action under the APA, which did not comply with the notice and comment requirements of the APA; the District Court dismissed the action, in part, because it found Letter 32 did not constitute a final action.  The Minnesota Bankers Association cites to Letter 32’s mandatory terms, the fact that it binds FDIC examiners, creates safe harbors for banks, and expands the definition of what constitutes an unfair or deceptive practice under the Federal Trade Commission Act.

The banking industry also alleges that its member institutions will suffer substantive injuries because of increased costs associated with implementing systems that address the notice to consumers issues outlined in Letter 32; the District Court found no redressable injury because banks are obligated not to engage in deceptive and unfair practices.   

Amicus Briefs in Support of the Minnesota Bankers Association

The American Bankers Association (“ABA”) filed an Amicus Brief in support of the Minnesota Bankers Association on behalf of itself, its members, and 44 state bankers associations.  The ABA’s brief argues that Letter 32 constitutes an unauthorized agency action because the FDIC lacks authority to determine what constitutes unfair or deceptive trade practices in addition to arguing Letter 32 constitutes a final agency action.

The Missouri Bankers Association filed its own Amicus Brief in support of the Minnesota Bankers Association.  The Missouri Bankers Association contends: (1) Letter 32 is a legislative rule because it defines unfair or deceptive practices with specificity; (2) the FDIC lacked congressional authority to issue Letter 32; (3) the FDIC failed to conduct requisite notice and comment rulemaking in issuing Letter 32; and (4) the Letter is subject to immediate judicial review.

Additionally, an Amicus Brief was filed by the Electronic Funds Transfer provider, ITS, Inc., for one of the banks named as a Plaintiff in the initial action. ITS, Inc.’s brief details the financial burden created by attempting to comply with the guidance provided by Letter 32.