2025 Risk Series: Consumer Compliance & Overdraft Practices

The Regulatory Risks

Consumer compliance remains a top priority for regulators, with a heightened focus on overdraft practices, unfair fees, and transparency in consumer banking. Community banks that fail to adhere to fair lending principles, provide clear disclosures, or implement compliant overdraft programs face significant enforcement risk, including fines, restitution orders, and reputational damage.

Recent regulatory efforts at both federal and state levels have sought to limit NSF and overdraft fees, with proposals for fee caps, enhanced disclosure requirements, and restrictions on multiple fees for the same transaction. The CFPB, NCUA, and several state agencies have taken steps to scrutinize these practices, increasing compliance expectations for financial institutions.  While the new administration has halted the CFPB's attempts for now, other federal and state regulatory bodies continue to advance policy and regulations.

Example Enforcement Actions

• Piermont Bank (2024):  FDIC Consent Order for violations of Regulation E and deficiencies in internal controls and third-party risk management related to consumer protection laws.

• Bank of America (2023):  Fined $60 million by the OCC for unfair overdraft practices, including charging customers multiple NSF and overdraft fees for the same transaction without clear disclosure.

• First Niagara Bank (2016):  Fined $2 million by the OCC for deceptive overdraft practices, including failing to disclose how overdraft fees were calculated, leading to unexpected charges for customers.

Key Risks to Address Now

• Overdraft Fee Practices:  Banks must ensure overdraft programs comply with consumer protection laws, avoiding unfair or deceptive practices.

• Regulation E & UDAAP Compliance:  Failure to obtain proper opt-in consent for overdraft services can lead to enforcement actions and fines.

• Fee Transparency & Disclosure:  Inadequate disclosures on fee structures and transaction posting order can mislead consumers and violate regulatory requirements.

• Consumer Complaint Management: Weak complaint resolution processes can increase regulatory scrutiny and erode customer trust.

Strategies to Strengthen Compliance & Overdraft Practices

• Review Overdraft Program Policies

  • Ensure fee structures align with regulatory expectations and avoid unfair or deceptive practices.

  • Provide clear and comprehensive disclosures to customers.

• Enhance Consumer Compliance Frameworks

  • Conduct periodic reviews of Regulation E and UDAAP compliance.

  • Strengthen internal monitoring and testing of overdraft programs.

• Improve Customer Communication & Transparency

  • Clearly explain overdraft fees, opt-in requirements, and posting order impacts.

  • Provide proactive alerts and disclosures to help customers manage their accounts.

• Strengthen Complaint Management & Resolution

  • Implement robust tracking and resolution processes for consumer complaints, ensuring adequate records retention policies meeting regulatory expectations.

  • Regularly analyze complaint trends to identify potential compliance risks.

Take Action Now

Community banks must proactively manage consumer compliance risks and overdraft practices to protect against regulatory enforcement actions and fines. By implementing transparent fee structures, strengthening compliance programs, and improving customer communication, banks can mitigate risks and navigate regulatory scrutiny.

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Stay tuned for the next edition in our blog series:  "Fair Lending & UDAAP Compliance."