October 2022 OBA Legal Briefs

• Concerns about overdrafts and fees grow (Part 2)
• 2022 OK legislative changes
• A Reg O FAQ

Concerns about overdrafts and fees grow — Part 2

By John S. Burnett

In Part 1 of this article, I began a review of the FDIC’s August 18, 2022, “Supervisory Guidance on Multiple Re-Presentment NSF Fees,” issued with FIL-40-2022 (https://www.fdic.gov/news/financial-institution-letters/2022/fil22040.html). I ended Part 1 of that review with a comment summarizing what the Guidance had suggested in the section on Consumer Compliance Risk.

Part 2 of this article starts with a restatement of that closing comment, with some added thoughts.

Comment: Thus far, the Guidance has suggested that banks need to ensure that their disclosures reflect what actually happens in the case of multiple re-presentments for a single transaction, and that something may need to be done about better notifying customers when an item is returned and an NSF is assessed and/or banks may want to consider setting some limit on how many times re-presentments of items derived from the same transaction will trigger another NSF fee.

On the first point — agreement between disclosures and practice —that can be approached from different directions. If a bank is charging an NSF fee for multiple presentments derived from the same transaction, the bank can formulate the right words to relate those facts to its consumer customers. On the other hand, if the bank isn’t disclosing that multiple re-presentments will trigger multiple NSF fees, it may determine a way to detect multiple re-presentments and not charge for more than one. Another possible option could be to stop charging NSF fees altogether so as not to mention them at all in disclosures. Could this be what 16 of the 20 banks included in the CFPB’s report on the top 20 banks by overdraft-related income decided to do?

Let’s move on to the next topic in the Guidance.

Third-Party Risk: The FDIC’s Guidance also expresses the agency’s concerns about risks that can be presented by third-party arrangements with core processors and others who may play significant roles in processing payments, identifying and tracking re-presented items, and assessing NSF fees when items are returned for insufficient funds. If not properly managed, such third-party arrangements can present risks for client financial institutions.

The FDIC expects (as all the regulators do) that financial institutions maintain adequate oversight of third-party actions and appropriate quality control over the products and services provided through third-party arrangements. Institutions are responsible for identifying and controlling such risks to the same extent as if the institution itself were handling the activity.

More succinctly, banks are responsible for what the third parties do for (or to) the bank’s customers. In that regard, banks should review and understand the risks presented by their core processing system settings related to multiple NSF fees, as well as the capabilities of such systems, such as identifying and tracking re-presented items and maintaining data on such transactions.

Litigation Risk: Cases involving Bank of America and the Navy Federal Credit Union are evidence there is litigation risk involved in multiple NSF fee practices. Class action lawsuits may allege breach of contract and raise other claims because of a failure to adequately disclose re-presentment NSF fee practices in bank account disclosures. Some cases have already resulted in substantial settlements, including customer restitution and legal fees.

Risk mitigation

The FDIC encourages banks to review their practices and disclosures concerning charging NSF fees for re-presented transactions. The agency shared these risk-mitigation actions banks have taken to reduce the potential risk of consumer harm and avoid potential violations of law:

• Eliminating NSF fees
• Charging no more than one NSF fee for a transaction, regardless of whether there are re-presentments
• Conducting a comprehensive review of policies, practices, and monitoring activities related to re-presentments and making appropriate changes and clarifications, including providing revised disclosures to all existing and new customers
• Clearly and conspicuously disclosing the amount of NSF fees to customers and when and how such fees will be imposed, including:
  • Information on whether multiple fees may be assessed in connection with a single transaction when a merchant submits the same transaction multiple times for payment
  • The frequency with which such fees can be assessed\o The maximum number of fees that can be assessed in connection with a single transaction
• Reviewing customer notification or alert practices related to NSF transactions and the timing of fees to ensure customers are provided with an ability to effectively avoid multiple fees for re-presented items, including restoring their account balance to a sufficient amount before subsequent NSF fees are assessed

If your bank finds issues …

If your bank reviews its NSF fee practices surrounding multiple re-presentments and finds issues, what does the FDIC expect the bank to do about it?

Doing nothing and waiting for the FDIC to demand action is not an option. The FDIC expects a bank with issues to self-initiate corrective action, to include restitution to affected consumers consistent with the approach described in the Guidance. Such banks should also:

• Promptly correct NSF fee disclosures and account agreements for both existing and new customers, including providing revised disclosures and agreements to all customers
• Consider whether additional risk mitigation practices are needed to reduce potential unfairness risks
• Monitor ongoing activities and customer feedback to ensure full and lasting corrective action

The FDIC’s Supervisory Approach

The Guidance indicates the FDIC intends to take appropriate action to address consumer harm and violations of law. It will focus on identifying re-presentment-related issues and ensuring correction of deficiencies and remediation to harmed customers. They consider such issues serious.

They will recognize a bank’s proactive efforts to self-identify and correct violations. They generally will not cite UDAP violations that have been self-identified and fully corrected before the start of a consumer compliance exam. The FDIC will also consider a bank’s record keeping practices and any challenges a bank may have with retrieving, reviewing, and analyzing re-presentment data, on a case by case basis when evaluating the lookback time period used for customer remediation. But failing to provide restitution for harmed customers when information on re-presentments is reasonably available will not be considered full corrective action.

If examiners find violations of law that have not been self-identified and fully corrected before an exam, the FDIC will consider appropriate supervisory or enforcement actions, which could include civil money penalties and restitution.

In simpler terms, this is not a concern that FDIC-supervised institutions can ignore and hope it goes away.

Is your bank’s overdraft program ‘dynamic’?

The March 2022 edition of the FDIC’s Consumer Compliance Supervisory Highlights includes compliance exam observations concerning automated overdraft programs that have been converted from static to dynamic overdraft limits.

Static limits are usually set at account opening and seldom change. Institutions use limits ranging from $100 to over $1,000 that may vary by account type. Some banks assign the same limit to all customers. Those limits are usually communicated to customers at account opening, in subsequent disclosures (particularly when participating in an overdraft program is delayed for a period after account opening) or through some other method, such as online or mobile banking channels.

Dynamic limits, on the other hand, vary for each customer and may change periodically (daily, weekly, monthly, for example) as a customer’s usage or bank relationship changes. In some cases, a customer’s assigned overdraft limit might be $1,000 one day and reduced to zero within a few days.

Changes are often controlled by an algorithm (a set of system rules) that attempt to manage risk by weighing variables and customer behaviors. Variables involved often include account age, balance, overdraft history, deposit amounts and frequency and other customer relationships with the bank. Algorithms may be adjusted based on policy changes, competition, customer behavior, etc. And, based on examination observations, banks do not always communicate limit changes to their customers.

Failures to communicate: In 2021, the FDIC identified several banks that converted their programs from a static limit to a dynamic limit. Examiners had concerns with how some of the conversions were implemented and cited violations of section 5 of the Federal Trade Commission Act due for deceptive acts or practices. Those institutions failed to disclose enough information about the change to a dynamic limit. Some institutions did not communicate with their customers about the change at all. In many cases, banks failed to disclose some or all of these key changes:

• Replacement of the fixed amount with an overdraft limit that may change and could change as frequently as daily
• Use of a new overdraft limit that may be lower or higher, at times, than the fixed amount to which the customer had become accustomed
• Suspension of the overdraft limit when it falls to zero and how such a change may result in transactions being returned unpaid to merchants/third parties due to insufficient funds.

Those omissions were considered material by the FDIC. They included necessary information customers needed to make informed decisions about how the new dynamic limit program operated. Customers were not able to understand how to avoid fees associated with an overdraft or fees for transactions declined for payment. The FDIC determined that changes without adequate disclosure resulted in consumer harm.

Mitigating risk: As with its guidance to banks concerning assessing NSF fees for multiple re-presentations derived from the same transaction, the FDIC included in the “observations” article on implementation of overdraft program dynamic limits a list of risk-mitigating activities banks can consider to reduce the risk involved in implementing such limits:

• Providing clear and conspicuous information to existing customers so they have advance notice of how the change from a fixed overdraft limit to a dynamic limit will affect them. This is especially important when the bank previously disclosed the amount of the fixed overdraft limit to customers.
• Disclosing changes to overdraft limits in real time to consumers, as these vary, with the opportunity for consumers to adjust their behavior
• Reviewing and revising account opening disclosures or other communications used to inform new customers about the automated overdraft program to avoid engaging in deceptive practices
• Explaining that the dynamic limit is established based on algorithms, or a set of rules, that weigh numerous variables and customer behaviors, how the limit may change (including the frequency of change), and how the limit may be suspended or reduced to zero when eligibility criteria are no longer met
• Training customer service and complaint processing staff to explain the features and terms of the automated overdraft program’s dynamic features. This training should be provided to staff who work with new customers as well as those who work with existing customers.

2022 OK Legislative Changes

By Pauli D. Loeffler

Title 12 O.S. § 1190

Garnishment fee increase

A history of garnishment fees in Oklahoma: Going back as far as 1996, and perhaps even before, a garnishee holding the judgment debtor’s funds was only allowed to deduct a fee in the amount of § 10.00 from funds of the judgment debtor as payment for processing the garnishment. Keep in mind that the Oklahoma statutes require the federally insured depository garnishee to:

• Maintain a garnishment and note the receipt of the garnishment summons
• Mail or deliver the garnishment packet to the judgment debtor
• Segregate funds of the judgment debtor on deposit at the time the garnishment summons is serve
• Determine whether the judgment debtor leases a safe deposit box, and if so, seal the box from entry for 30 days (Banking Code § 1312)
• Respond to the garnishment summons by filling out the Garnishee’s Affidavit/Answer and filing it with the court within 10 business days (days the court issuing the garnishment is open, not the days the bank is open for business
• Provide a copy of the Affidavit/Answer to the creditor’s attorney or the creditor
• Remit a check to the creditor

If the judgment debtor does not have an account or lease a safe deposit box, the garnishee must still comply with the last three bullets and request the $10.00 fee. Law firms whose practice is representing creditors usually are very good about remitting the fee, but some collection firms, creditor’s representing themselves, and attorneys that rarely did collections would ignore the garnishee’s request. The $10.00 fee is pretty paltry, and if the creditor didn’t send the fee upon request, it isn’t efficient to take action against the creditor.

Handling garnishments became even more time and labor intensive with the U.S. Treasury Fiscal Services Garnishment of Accounts Containing Federal Benefit Payments, 31 C.F.R., Part 212 (“the Federal Benefits Rule”} effective May 1, 2011. In addition to requirements of Oklahoma law, the Federal Benefits Rule came with new and more onerous requirements:

• The bank had to determine whether it has an account holder as defined in § 212.3: “Account holder means a natural person against whom a garnishment order is issued and whose name appears in a financial institution’s records as the direct or beneficial owner of an account.” Accounts held by corporations, LLCs, partnerships, limited partnerships, etc., even if they, for some reason, were receiving federal benefits by direct deposits, are not subject to the Federal Benefits Rule. On the other hand, revocable trust accounts and sole proprietorship accounts receiving federal benefits ARE subject to the Federal Benefits Rule.
• The bank had to determine whether a federal benefit payment was paid by direct deposit to an account of an account holder. If so, the bank was required to determine the amount of benefits directly deposited during the lookback period, and
• Establish the amount of protected funds, and
• Provide the Notice to account holder under § 212.7. Under the 2013 revision, If ALL funds ae protected, the notice is not required.

Bankers ask whether Oklahoma has a maximum fee amount that can be charged customers for garnishments. Oklahoma has no limit the bank can charge a customer for a garnishment. The low-end fee is generally $25 while some banks charge two or three times that much particularly for garnishments on commercial accounts. If the amount in the judgment debtor’s account exceeds the judgment, the bank can satisfy its fee, but this is rarely the case. The bank can take the account negative to grab the fee if and when the account receives a deposit.

However, for accounts subject to the Federal Benefits Rule, banks were wholly prohibited from collection of their fee other than from unprotected funds. The bank could not collect under the original 2011 § 212.6 (h), which prohibited the bank from charging or collecting a garnishment fee against a protected amount or collecting a garnishment fee after the date of account review. This was modified in 2013 to allow the bank to “charge or collect a garnishment fee up to five business days after the account review if funds other than a benefit payment are deposited to the account within this period, provided that the fee may not exceed the amount of the non-benefit deposited funds.”

Scatter-gun garnishments

In addition to the garnishment fee remaining the same amount for two decades, banks were receiving more and more garnishments where the judgment debtor never was a customer of the bank. I envisioned the creditor took an Oklahoma map and used a compass to draw a circle around the judgment debtor’s home or place of business and sent garnishments to all banks within a 50-mile radius. OBA and several reputable collection attorneys held discussions regarding a proposed amendment to 12 O.S. § 1171 to require the creditor to exhibit good faith with some factual basis to believe the debtor has or previously had a relationship with the garnishee such as an inquiry, loan or account with the bank from a credit report or checks from the judgment debtor drawn on the bank. The collection attorneys had no objection to increasing the fee and mailing a check with the garnishment summons but did not support language that the service without the check allowed the garnishee to delay attachment of the fund. Their concern was due to their practice of providing the court clerk with the affidavit, garnishment summons, etc., together with a stamped and a pre-addressed envelope for mailing to the garnishee after filing done by the court clerk. If the garnishee claimed the check was not provided, there was no way to determine whether the creditor didn’t include it, the court clerk mislaid it, or it was mislaid by the garnishee.

Amendment clarifying bank’s duties if the fee doesn’t accompany the garnishment

One question I could not confidently answer under the 2016 amendment was: “What does the bank do if the check is NOT provided with the garnishment summons? “My belief was that while it was possible that the bank might misplace the check after receiving the garnishment, the person logging the garnishment should note the details of the check in the log. Further, the creditor was responsible for making sure the check was in the envelope with the garnishment summons, and if the court clerk mislaid it, s/he was the agent for the attorney. While I believed that if the check wasn’t provided, the bank wasn’t required to freeze the judgment debtor’s funds, I cautioned our members that a court could construe the provision differently. The statute effective for garnishments issued on and after November 1, 2022, not only increases the fee to $35.00 but also removes the uncertainty:

2. A judgment creditor shall remit a fee of Thirty-five Dollars ($35.00) as reimbursement for costs incurred in answering a garnishment issued pursuant to subparagraph d of paragraph 2 of subsection B of Section 1171 of this title to garnishees which are federally insured depository institutions. Such fee shall be delivered to the garnishee with the garnishment summons, and the garnishee shall not be required to attach funds of the judgment debtor until such fee is received. Any fee paid to a garnishee pursuant to this paragraph shall be taxed and collected as costs.

This language also works well as far as the Garnishment of Federal Benefit Payments is concerned. No funds of an account holder will be frozen until the check is received. The account review, lookback period, and determination of protected amount will be triggered upon receipt of the check. Further, the mailing or delivery of the garnishment package to the judgment debtor can and probably should be delayed until the check is received. Garnishments are public record, so the judgment debtor may learn of the garnishment before the bank receives the check and freezes the account, but I would not advise the bank to notify the customer until the check is received. The time to file the garnishee’s answer, mail the answer to the creditor or creditor’s attorney, and remit the judgment debtor’s funds to the creditor will be determined by the date the check is received.

I have been in contact with the Administrative Office of the Courts (the AOC), which is responsible for promulgating the Official Garnishment Forms. The revised non-continuing Pre- and Post-Judgment Garnishment forms will clearly state below the signature line: (Pursuant to 12 O.S. § 1190 a judgment creditor must remit a Thirty-five Dollar ($35.00) fee for costs to any federally insured depository institution garnishee. Fee must be delivered with the garnishment summons. Garnishee is not required to attach the funds of the judgment debtor until such fee is received.)
The AOC is responsible for drafting legal forms for use under a number of Oklahoma statutes. and the categories of forms is accessible at this link: https://www.oscn.net/static/forms/AOCforms.asp. The Garnishment Forms required to be used under the various statutes are available at https://www.oscn.net/static/forms/aoc_forms/garnishment.asp and several are available in both Microsoft Word and PDF formats.

The first time I had the pleasure of working with the AOC was in 2011 in making changes to the forms with regard to the Garnishment of Federal Benefit Payments rule. The Federal Benefits Rule flew under the radar of the AOC because it wasn’t a change in state law, but it did require the revision of the garnishment summons and the garnishment Affidavit/Answer. On the other hand, when § 1190 was amended in 2016, the AOC had the revised forms ready to post on the website, removed the old forms on November 1, 2016, the date the amendment became effective, and removed the outdated forms.

Issues to expect

Based on past experience, banks should expect there will be some problems at first with the most recent changes. Banks should not expect garnishment summons issued on and after November 1, 2022, to contain the language on the AOC form. The majority of attorneys keep templates of the forms on their computers. With the 2011 revision to the AOC forms, a fair number of creditors’ attorneys were oblivious to the Federal Benefits Rule and didn’t revise their forms. When § 1190 became effective November 1, 2016, based on emails from OBA members, the OBA Compliance Team learned that some attorneys still hadn’t updated their forms more than five years later. I don’t expect it will be any different this time around. Note that when an outdated garnishment summons is used, the Garnishee’s Affidavit/Answer will likewise be an outdated form. That was an issue with regard to use of the Garnishee’s Affidavit/Answer for garnishments on and after the May 1, 2011, effective date of the Garnishment of Accounts Containing Federal Benefit Payments, so book marking the AOC webpage is a good idea not only for this reason but also when the garnishment packet doesn’t include the Claim for Exemption and Request for Hearing Form.

The majority of garnishments filed by pro se creditors (creditors representing themselves rather than through an attorney) also used the old forms for several months after the AOC issued revised forms in 2011 and again in 2016. Not all court clerks were aware of the changes, and court clerks tend to be a frugal bunch. Most clerks maintain packets of garnishment forms used by pro se creditors. Either to save money, time and labor, or to avoid killing trees, some clerks didn’t print the new forms until they ran out of the old ones. Court clerks are the primary forms source for pro se creditors. There is nothing to prohibit filing an outdated form. Clerks will file it if it is properly captioned, i.e.,  includes the names of the court, the plaintiff, the defendant, the case number, and the filing fee is paid.

Unlike the 2016 amendment to § 1190, the bank doesn’t need to do more than log the garnishment and note that the $35 did not accompany the garnishment Summons. I suggest contacting the creditor’s attorney or creditor and advise of the change to § 1190. If the bank receives the fee, I don’t believe that the creditor/creditor’s attorney needs to file a new or amended affidavit and garnishment summons.

Uniform Consumer Credit Code Amendments Effective November 1, 2022

Title 14A O.S. § 1-106

Effective November 1, 2022, § 1-106 Change in Dollar Amount Used in Certain Sections which includes late fees, $ 3-508A lender’s closing fee, § 3-511, and other sections is amended. The amendment removes § 3-508B loans from subsection (1) of this section. Subsection (2) provides the manner and index for adjustments to amounts under § 3-508B loans. Former Subsection (2) is renumbered as Subsection (3) and covers Sections under Subsection (1). Subsection (3) is renumbered as Subsection (4) and covers Sections under Subsection (2) i.e., § 3-508B. Subsection (4) is renumber Subsection (5), Subsection (5) is renumbered Subsection (6), and Subsection (6) is renumbered Subsection (7).

Title 14A O.S. § 3-508B

Sec. 3-508B provides an alternative method of imposing a finance charge to that provided for Sec. 3-508A loans. Late or deferral fees and convenience fees as well as convenience fees for electronic payments under § 3-508C are permitted, but other fees cannot be imposed. No insurance charges, application fees, documentation fees, processing fees, returned check fees, credit bureau fees, nor any other kind of fee is allowed. No credit insurance, even if it is voluntary, can be sold in connection with in § 3-508B loans. If a lender wants or needs to sell credit insurance or to impose other normal loan charges in connection with a loan, it will have to use § 3-508A instead. Existing loans made under § 3-508B cannot be refinanced as or consolidated with or into § 3-508A loans, nor vice versa. The statute as amended is available on the OBA’s Legal Links web page.

Oklahoma’s Telephone Solicitation Act of 2022 effective November 1, 2022

The June 2022 OBA Legal Briefs has in-depth information on this Act.

Reg O FAQ

By Pauli Loeffler

We often get asked what happens when a borrower becomes an insider or an executive officer of the bank? The Federal Reserve covers this in one of its FAQs:

Q2: When do the requirements of Regulation O apply to extensions of credit to a person that becomes an insider after the member bank made the extension of credit (transition loans)?

A2: Transition loans need not conform to the requirements of Regulation O until such extensions of credit are renewed, revised, or extended, at which time the extensions of credit would be treated as a new extension of credit and therefore subject to all of the requirements of Regulation O. However, transition loans must be counted toward the individual and aggregate lending limits of Regulation O as soon as the borrower becomes an insider.

This same treatment would apply to extensions of credit to a director or principal shareholder that later becomes an executive officer. Such extensions of credit need not conform to the provisions of Regulation O that apply only to executive officers until such extensions of credit are renewed, revised, or extended. However, the amount of any such extensions of credit count toward the quantitative limits for loans to executive officers in section 215.5 of Regulation O as soon as the director or principal shareholder becomes an executive officer.

Many lines of credit by a member bank to an insider must be approved by the bank’s board of directors every 14 months. Each such approval constitutes a new extension of credit. Accordingly, transition loans that are lines of credit generally must conform to the requirements of Regulation O within 14 months of the borrower becoming an insider.

Notwithstanding the general principles noted above, the treatment described here does not apply to extensions of credit made by a member bank in contemplation of the borrower becoming an insider or executive officer. Under such circumstances, the extension of credit should comply with all requirements of Regulation O at the time it is made.