Using a third-party collector for overdrawn account

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Question:

My question is related to checking accounts that go into the negative and are facing potential charge off. I am looking to see what the rules and regulations are in regard to sending negative checking accounts (depending on the amount) to a third-party collector. Is this allowed? I cannot find anything anywhere stating that it is allowed.

Answer:

State law may affect your ability to collect charged-off deposit accounts. Whether or not bank fees are part of the overdraft balance could be an issue. I suggest you ask local legal counsel for some guidance and both that question and whether there is any impediment on placing these accounts with a third-party collector. Also, be aware that the bank will be responsible for ensuring that the collector doesn't violate federal or state regulations on debt collections.

There are also potential considerations under UDAAP (Unfair, Deceptive, or Abusive Acts or Practices) that you should keep in mind in your evaluation. It is important to understand why the account went into a negative balance, and whether the customer had been clearly informed about your practices, including the potential that a checking account could go to collections.

For example, if the negative balance resulted from an APSN (authorize positive, settle negative) transaction, and/or from unanticipated overdraft fees or NSF fees, then you may have a UDAAP concern if you pursue collections. See for example the CFPB Circular 2022-06: Unanticipated Overdraft Fee Assessment Practices, and the big Regions case, where Regions paid $191 million for overdraft practices involving APSN transactions found to be in violation of UDAAP.

See also the CFPB Supervisory Highlights Junk Fee Special Edition, Issue 33, Fall, 2023, for an extensive discussion of these concerns in the “Deposit” section. On page 9, there is a specific UDAAP discussion relating to “Account closure and charge-offs attributable to overdraft transactions and overdraft-related fees.”

The bottom line – carefully explore whether there are any fees associated with the negative balance, and if so, consider UDAAP. Additionally, there could also be UDAAP concerns if there was not adequate notice that the checking account could go to collections. The latter might be avoided by ensuring that a notice be sent to the overdrawn customer stating that the bank may refer the overdraft balance to a third-party collector if the customer does not bring the balance to zero within a stated number of days.