Fintech Horror Stories - Represent, Represent...(CFPB vs BOA Part 2)
An endless loop of attempts to present payment, accompanied by endless NSF fees.
Welcome back to another edition of Fintech Horror Stories. As most of our focus this week was on earnings and the launch of FedNow and we've accordingly bombarded your feeds with posts focusing on those topics, we'll keep things relatively light here as we head into the weekend. As promised, in this edition we'll return to looking at the CFPB leaving its mark on Bank of America this past month with two consent orders. We looked at the first consent order last week which focused on cash offers and issues in disclosures along with how the offers were delivered (or not). The second consent order has to do with "junk fees," a term that has been popularized by the Biden administration issuing a series of recent executive orders, although the more accurate phrasing would probably be excessive fees.
So what happened? Digging into the consent order, it appears that BOA had some issue with its NSF fee processing beginning in September 2018. Normally, a customer writes a check, attempts to make a payment from the account, initiates an ACH, or makes another attempt to withdraw funds from the account. In the event that there aren't enough funds available, an NSF fee is assessed from the paying customer's bank/financial institution. Technically, the institution has the right to define how NSF fees work - including amount and frequency - with the primary expectation from the regulator being that this is all disclosed in the institution's terms and conditions for the product in question.
This leads to the topic of re-presentment. This is a practice used by many companies' payment platforms when faced with an NSF scenario. Specifically, if an attempt to withdraw funds results in an NSF, the company's platform/infrastructure/system is programmed to try to pull funds again within 24 hours (while taking the NSF fee for the trouble). However, the issue is when the funding institution (in this case, BOA) promises in its terms and conditions that it will only charge one NSF fee per transaction. It's important to note that this limit of only charging one fee isn't required per se, but if the bank has committed to it in their terms and conditions, then they must to follow this in practice. Some banks will make sure that as they update their terms, they have a process to update their system behavior along with the disclosures/text. It appears that for whatever reason, BOA isn't one of those banks (or alternatively, they are and for whatever reason this update was missed).
Charging one NSF fee is debatable (just how much does it actually inconvenience a bank when funds aren't available? - in a recent update, a separate regulator (FDIC) notes that many banks have eliminated NSF fees altogether). However, charging multiple NSF fees for the same event seems punitive - essentially, rather than gauge from the consumer what's going on, the bank will just charge fees and potentially create overdraft (negative) balances, with the extreme scenario of sending the account to collections, something that we typically associate with lending products. This is where the CFPB has gotten involved.
In the grand scheme of things, this is a drop in the bucket for BOA, but it also sends a message to smaller institutions (this issue of bad behavior in re-presentment is more common than one would think). The CFPB does note that this issue has been resolved by BOA (presumably with the system updating to align with the practice in their terms and disclosures). However, the amount of refunds has not been disclosed and presumably, there's going to need to be a lookback which will dig into those scenarios where customers were sent to collections, all because of these excessive NSFs, and perhaps other spinoff issues as well.
The biggest takeaway of all this is to make sure that system behavior is aligned with disclosures, and that if you make a disclosure/promise in your product's terms and conditions, you actually follow that in practice. Sounds easy, but isn't always the case.
An interesting observation to close this out - here's the updated terms and conditions as of May 2023:
You'll notice that instead of just saying that "we will not charge you an overdraft item fee on a resubmission," full stop, they lean into the technical nature of the resubmission/representment process and have decided to absolve themselves of any responsibility if the transaction isn't actually labeled as a resubmission, which BOA says is the responsibility of the merchant or payee or party attempting to withdraw funds from the account. In the terms above, they make the statement "we have no control over how merchants label their ACH submissions or resubmissions." While this might be true, I find it extremely hard to believe that if there was a merchant/withdrawing party that didn't label resubmission transactions, BOA couldn't just trigger some sort of a review queue or update their logic to waive the NSF fee where the same amount is requested twice within a 24 hour period (aka lean on the side of favoring the consumer - we're only talking about $10 after all). Instead, it seems here that they are really working at the margins to hold onto this fee after all.
In closing, I predict that this isn't the end of the saga; given that BOA has had 4 CFPB consent orders in the last two years, I'd expect this (or some other issue) to be followed up on and potentially tackled from a UDAAP perspective. Stay tuned!