POS UDAAP FRB newsletter

Has anyone read the new FRB publication which includes a UDAP issue charging an OD for a POS transaction that when it hard posts causes an OD because other items cleared while it was still pending? How do your Banks handle the posting of those transactions? (Paragraph below for reference)

Example -

$100 in account
POS - $75 (memo posts immediately)
Check comes in for $50 prior to hard posting.
When POS posts the day later it brings their account negative so they get charge an OD (for those that have opted in).

I don't see how this could cause an issue as either the check they wrote beforehand or the POS would cause the account to go negative regardless of posting order, etc. Any thoughts or insight on this issue?

FRB Newsletter:
For example, the Federal Reserve has cited an unfair or deceptive practice based on a certain overdraft processing methodology applied to point of sale (POS), signature-based transactions. In effect, the UDAP violation occurred when a bank imposed overdraft fees on POS transactions based on insufficient funds in the account’s available balance at the time of posting, even though the bank had previously authorized the transaction based on sufficient funds in the account’s available balance when the consumer entered into the transaction. There can be a delay of one to a few days between the authorizing and posting of a POS transaction, during which time the account’s available balance may have decreased and the POS transaction could exceed the account’s available balance at the time of posting. Charging an overdraft fee on the POS transaction in this circumstance was found to violate section 5 of the FTC Act.

I'm dealing with this now because I have an exam in 4th Q and they sent a worksheet with that very example. It becomes an issue if a bank pays and charges based on available balance versus ledger/actual balance. Their reasoning is if a Bank pays on available balance and a transaction soft posts, the customer thought they had enough at that time but when other items clear and then the transaction hard posts and overdraws an account with a fee, they customer didn't have the change to prevent the fee, that's what I've been told by FRB.

Should say chance to prevent fee, BOL doesn't let me edit comments.

So the issue would be more if they have multiple signature based POS transactions where a consumer has the pending POS transactions since the Bank would have no idea a check is posting the next day (or as long as the system is including the check that would be posting the day of the POS transaction that it has been considered in their balance)?

I'm not 100% sure to be honest so I don't want to provide incorrect info on an example, especially regarding UDAAP. When questioned by the FRB if we pay on available or actual, I was erroneously told available. Examiner said more of a concern to examiners then actual. She then sent me the scenario you mention above and we had to say how many fees the customer would receive. It was after it was more than one and I freaked out and went back and forth with our core provider and Ops did I find out we actually pay on ledger/actual balance and the customer would've only received on fee in the Fed's example and feel better about the process.

Understood and thanks for your insight!

One of the concerns when UDAP are involved is that the bank's disclosures and explanations of how overdraft fees are triggered (Regulation DD, §1030.4(b)(4)) doesn't jibe with the way the bank actually does things. Comment 4(b)(4)-5 offers wording that might be deemed acceptable in your disclosures, but it doesn't explain how a POS transaction might be posted a day or more after it's approved, resulting in an overdraft because intervening items have posted.

Of course, if there's been no §1005.17 opt-in, the fee can't be imposed when that POS transaction hits the account, anyhow. When the opt-in is solicited is the ideal time, IMHO, to inform the consumer about the effect of delayed POS postings and intervening items.

If the U.S. payments systems are finally upgraded to eliminate the delay in POS transaction posting, this problem should go away.

Thanks for the reply John, always appreciate additional feedback. I believe in this case the issue was around the Outlook Live webinar and the UDAP issues identified by some of those Bank in the treatment of Available vs. Ledger; which directly speaks to your feedback on the posting issues and disclosing correctly. In particular there is a slide about the treatment of a POS transaction and then a check that posts during the time delay and how it caused a consumer additional harm by the it posted increasing the OD fee unfairly.

https://consumercomplianceoutlook.org/ou...nce-discussion/

Thanks!

Available Balance at Posting
•Bank uses “available balance” to determine whether to assess overdraft fees
•Sufficient funds are in the available balance when the signature-based debit transaction is authorized
•Bank reduces the available balance by the authorized transaction
•Subsequent transactions further reduce the available balance (some may be assessed overdraft fees)
•Bank assesses an overdraft fee on the authorized transaction when it posts because there are insufficient funds in the available balance at posting

Unfair Practice: Assessing an overdraft fee based on the available balance at the time a transaction is posted when there were sufficient funds in the available balance to cover the transaction when it was authorized.

If that is unfair, then a lot of banks have some serious processing issues to deal with for those customers that have opted-in without properly disclosing what balance on which they are going to pay checks and other debits when there has been a preauthorized POS. Plus how can you distinguish a pre-authorized signature based debit from a hold placed by a hotel or car rental agency that may or may not ever post?

I knew of a bank at one time that triggered OD fees using available balances, including balances that had been decremented due to pending, not posted, POS debits. So, the consumer made a $50 purchase against a $60 available balance, reducing that balance to $10. A check for $50 posts that evening, overdrawing the available balance by $40 and generating a $25 OD fee, reducing the balance further to ($65.00). Then the POS posted the next day, freeing the $50 "hold" but triggering another $25 OD fee, putting the account at ($90.00).

If actual balances had been used, the check would not have triggered an OD fee. Assuming a Reg E opt-in, the POS debit would, but the customer would have been only $65 in the hole, rather than $90.

If there had been no Reg E opt-in, use of the available balance for triggering OD fees would have put the consumer at $65 OD at the end of the scenario (no fee when the POS debit posted). Use of actual balance and no opt-in would have left the customer overdrawn $40.

I think John's example was more the potential issue. I was looking at slide 21 (the one after your slide 20 reference) thinking it was showing two overdraft fees (one on the check and one on the POS in the available balance example); which is what sounded like more of the concern.

Looking at it again, I see that the example (slide 21) only reflects the OD on the POS in the Ledger example or the Check in the Available example. That seems like a stretch to say it's a UDAP issue in the scenario as something was going to cause the consumer to be overdrawn (whether it was the check or the POS).

I would like to bring this issue back up. There has been discussion here because of a revision in the core system and how this is handled. If we properly disclose how the fees are assessed, is it ok to charge the overdraft fees if a POS was authorized on available funds but when the transaction actually posts, other transactions have posted and the POS causes an overdraft? Looking at the slides from the Outlook webinar, I wasn't sure if it's considered UDAAP even if disclosed properly. Slide 6 seems to indicate if properly disclosed, it is not a violation to assess the fee, however, slide 20 seems to indicate charging a fee in these situations is a UDAAP violation no matter if disclosed. Maybe I'm reading more into that than is there.

Thanks for your input!!!

There is a class action law suit against a credit union for this very issue. I would recommend checking with your regulator.

Since it's a UDAP question, it's not going to be answered by looking at a rule. It's subjective (UDAP is in the eye of the beholder) and court decisions are throwing minimal light on the question so far. But I agree that many (if not most) of the UDAP enforcement actions have hinged on incomplete or misleading disclosures.

I should add here that technical compliance with a disclosure regulation doesn't guarantee you will avoid allegations of UDAP. And one of the most dangerous disclosure rules is found in Regulation DD section 1030.4(b)(4): "The amount of any fee that may be imposed in connection with the account (or an explanation of how the fee will be determined) and the conditions under which the fee may be imposed,"

and the commentary relating to disclosure of overdraft fees (comment 4(b)(4)-5: "Fees for overdrawing an account. Under § 1030.4(b)(4) of this part, institutions must disclose the conditions under which a fee may be imposed. In satisfying this requirement institutions must specify the categories of transactions for which an overdraft fee may be imposed. An exhaustive list of transactions is not required. It is sufficient for an institution to state that the fee applies to overdrafts “created by check, in-person withdrawal, ATM withdrawal, or other electronic means,” as applicable. Disclosing a fee “for overdraft items” would not be sufficient."

The reason the comment is dangerous is that it leads you believe that that is all you need to say. It doesn't say, for example, that you need to explain what you consider to be an overdraft (ledger balance vs. available balance) and how that balance can be affected by other items or pending items.

Slide 6 was in the OCC's section of the presentation, and apparently the concern was disclosures vs. practices as we have discussed in the last couple of posts here.

But slide 21 is in the Fed's section of the webinar, and the Fed spokesperson, Ducie Le, said that the "unfair practice" is "assessing an overdraft fee based on the available balance at the time the transaction is posted when there were sufficient funds in the available balance to cover the transaction when it was authorized."

Some of this issue will be ironed out when this country moves to faster payments, if the credit card networks on which these delayed-posting POS transactions are handled get on the bandwagon to make these transactions work more like PIN-based debits that ride the ATM networks.