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Nutter Bank Report: April 2023

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  1. FDIC and OCC Issue Guidance on Authorize Positive, Settle Negative Overdraft Fee Risks
  2. Federal Regulators Revise Guidance on CECL to Reflect Accounting Changes for TDRs
  3. FDIC Publishes Supervisory Guidance on Most Common Consumer Compliance Violations
  4. Federal Financial Regulators Urge Financial Institutions to Complete LIBOR Transition
  5. Other Developments: Deposit Insurance and Securities Transactions

1. FDIC and OCC Issue Guidance on Authorize Positive, Settle Negative Overdraft Fee Risks

The FDIC and the OCC each have issued supervisory guidance on consumer compliance risk exposure related to the assessment of overdraft fees associated with authorize positive, settle negative (APSN) transactions. The agencies’ guidance on risk management practices for overdraft protection programs issued on April 26 explains that overdraft charges arising from APSN transactions may expose a bank to heightened risk of violating prohibitions against unfair, deceptive, or abusive acts or practices (UDAAP), among other risks. APSN transactions occur when debit card transactions are authorized when a customer’s available balance is positive but are later posted to the account when the available balance is negative. The agencies expressed concern that the practice of charging overdraft fees on APSN transactions may put a bank’s customers in a position in which they cannot determine when fees will be assessed and how they may be avoided. The guidance encourages banks to review their overdraft fee practices relating to APSN transactions to ensure that customers are not charged overdraft fees they may not anticipate or be able to avoid. Click here for a copy of the FDIC’s guidance and here for a copy of the OCC’s guidance.

Nutter Notes: The agencies’ guidance also encourages banks to review their account disclosures and terms to ensure that overdraft fee practices are communicated accurately, clearly, and consistently. Whether or not an overdraft fee assessed on an APSN transaction is found to violate consumer protections may depend upon the bank’s disclosures of its overdraft fee practices, according to the OCC’s guidance. The OCC’s guidance also addressed UDAAP risks related to other overdraft practices, such as charging multiple non-sufficient funds (NSF) fees each time a third-party represents the same transaction for payment, charging overdraft or NSF fees with a high limit or without a limit on the number of fees assessed in a single day, and charging a periodic fee for failure to cure a previously overdrawn balance. For example, the OCC’s guidance warns that, even if account disclosures explain that a single check or electronic payment transaction may result in more than one NSF fee, a bank’s practice of assessing representment fees may still be UDAAP violations if customers cannot reasonably avoid them and the other factors for establishing unfairness under applicable law are met.

2. Federal Regulators Revise Guidance on CECL to Reflect Accounting Changes for TDRs

The federal banking agencies along with the NCUA have jointly issued a revised Interagency Policy Statement on Allowances for Credit Losses in response to changes in the accounting guidance for troubled debt restructurings (TDRs) by creditors under U.S. generally accepted accounting principles (GAAP). The revised joint policy statement released on April 21 adjusts the agencies’ guidance to reflect the Financial Accounting Standards Board’s issuance of accounting standard update ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (ASU 2022-02), which eliminates the recognition and measurement accounting guidance for TDRs, according to the joint policy statement. The revised joint policy statement reflects the agencies’ removal of references to TDRs. The revised joint policy statement is effective at the time that each depository institution adopts the CECL methodology. Click here for a copy of the revised joint policy statement.

Nutter Notes:  The joint policy statement also explains that ASU 2022-02 “enhances financial statement disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.” The revised joint policy statement describes the measurement of expected credit losses under the current expected credit losses (CECL) accounting methodology and the accounting for impairment on available-for-sale debt securities. The guidance also addresses the design, documentation, and validation of expected credit loss estimation processes, including applicable internal controls; the maintenance of appropriate allowances for credit losses; the associated responsibilities of boards of directors and management; and how examiners will review allowances for credit losses.

3. FDIC Publishes Supervisory Guidance on Most Common Consumer Compliance Violations

The FDIC has issued supervisory guidance that highlights areas of consumer compliance concern for examiners, including Truth in Lending disclosure requirements, UDAAP violations involving multiple NSF fees for representment of the same transaction, and the Real Estate Settlement Procedures Act (RESPA) anti-kickback rule. The guidance included in the most recent edition of the FDIC’s Consumer Compliance Supervisory Highlights, released on April 5, provides an overview of the most frequently cited consumer protection violations cited by examiners during 2022. The guidance describes UDAAP violations resulting from the practice of charging multiple NSF fees for the same represented transaction as among the top regulatory areas of concern cited for violations. According to the guidance, this violation was cited most frequently when a bank charged multiple NSF fees for the representment of the same transaction and the bank’s customer disclosures did not fully or clearly describe the bank’s representment practice and did not explain how the same unpaid transaction might result in multiple NSF fees. Click here for a copy of the guidance.

Nutter Notes:  Another significant consumer compliance issue identified by examiners involves arrangements for the referral of mortgage loan business in violation of the RESPA anti-kickback rule, which prohibits the giving and accepting of any thing of value under an agreement or understanding to referring consumers to a particular provider for mortgage loans or other settlement services. The FDIC’s supervisory guidance described an arrangement in which a bank contracted with a third party that identified and contacted consumers to steer them to apply for a mortgage loan from the bank. According to the guidance, this process sometimes “involved the third party calling identified consumers and then directly connecting and introducing them to a specific mortgage representative on the phone,” often referred to as a “warm transfer.” Other referral activities found to have violated the RESPA anti-kickback rule include the “operation of a digital platform that purported to rank lender options based on neutral criteria but where the participating lenders merely rotated in the top spot.” The guidance emphasized that while payments for providing simple leads for possible mortgage loan business are permissible, activities that involve affirmatively influencing a consumer to select a particular lender risk violating the RESPA anti-kickback rule.

4. Federal Financial Regulators Urge Financial Institutions to Complete LIBOR Transition

The federal banking agencies in conjunction with the NCUA, CFPB, and state bank and state credit union regulators issued a joint statement to remind banks and other financial institutions that U.S. dollar (USD) London Inter-Bank Offered Rate (LIBOR) panels will end on June 30, 2023. The joint statement released on April 26 also reiterates the agencies’ expectations that financial institutions with USD LIBOR exposure should complete their transition of remaining LIBOR contracts as soon as practicable. Specifically, the agencies expect financial institutions to have taken all necessary steps to transition away from LIBOR by June 30, 2023, according to the joint statement. The joint statement emphasizes that “safe–and–sound practices include conducting the due diligence necessary to ensure that alternative rate selections are appropriate for the institution’s products, risk profile, risk management capabilities, customer and funding needs, and operational capabilities.” The joint statement recommends that financial institutions should understand how any replacement rate is constructed and to be mindful of any fragilities associated with that rate and the markets that underlie it as part of their due diligence. Click here for a copy of the joint statement.

Nutter Notes: The joint statement also reminds financial institutions that Congress enacted the Adjustable Interest Rate (LIBOR) Act (LIBOR Act) to provide a replacement rate solution for so–called “tough legacy contracts”—those that reference USD LIBOR and will not mature by June 30, 2023, but do not contain terms that provide for the use of a clearly defined and practicable replacement benchmark rate for LIBOR. The Federal Reserve also has issued a regulation that implements the LIBOR Act. The Federal Reserve’s rule provides benchmark replacement rates based on SOFR (Secured Overnight Financing Rate) for contracts governed by U.S. law that reference the overnight and one-, three-, six-, and 12-month tenors of LIBOR. The rule restates certain safe harbor protections contained in the LIBOR Act for selection or use of the replacement benchmark rate based on SOFR under the rule and clarifies who would be considered a “determining person” able to choose to use the replacement benchmark rate under a contract covered by the rule.

5. Other Developments: Deposit Insurance and Securities Transactions

  • FDIC Provides Update on How Recent Bank Failures Have Affected the Deposit Insurance Fund

In a semi-annual update released on April 18, the FDIC estimated the cost to the Deposit Insurance Fund (DIF) for two bank failures earlier this year to be approximately $22.5 billion, of which approximately $19.2 billion was attributable to the cost of covering uninsured deposits pursuant to systemic risk determinations. The FDIC noted that federal law requires it to recover the estimated $19.2 billion through special assessments, which the FDIC expects to initiate through notice-and-comment rulemaking in May. Click here for a copy of the semi-annual update on the DIF restoration plan.

Nutter Notes: The FDIC stated that “the remaining $3.3 billion in losses will directly impact the DIF balance and is not expected to have a material effect on the projected timeline for reaching the statutory minimum reserve ratio” under the restoration plan adopted by the FDIC on September 15, 2020. In a related statement, FDIC Board Chairman Martin J. Gruenberg noted that extraordinary growth in insured deposits during the first half of 2020, which resulted from the COVID-19 pandemic, caused the DIF reserve ratio to decline below the statutory minimum of 1.35%. On September 15, 2020, the FDIC Board adopted a restoration plan to restore the DIF to at least 1.35% within eight years.

  • FDIC Announces Regulatory Changes to Securities Transaction Settlement Cycle

The FDIC issued guidance on April 27 about the SEC’s amendments to its rules that will shorten the standard settlement cycle for most broker–dealer transactions, which will also apply to banks under an FDIC rule. The SEC’s amendments will shorten the standard settlement cycle for most broker–dealer transactions from two business days after the trade date to one business day after the trade date, with a compliance date of May 28, 2024. Click here for a copy of the FDIC’s announcement.

Nutter Notes:  The FDIC explained that, for many banks, most of the changes needed to implement the shortened settlement cycle will have been completed by third–party industry custodians, systems and service providers, and broker–dealers, including both broker–dealers through which banks trade for themselves or on behalf of their fiduciary and custody accounts, and broker–dealers providing retail securities brokerage services directly to bank customers.

Nutter Bank Report
Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP.  Chambers and Partners, the international law firm rating service, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation.  Visit the U.S. rankings at (include link).  The Nutter Bank Report is edited by Matthew D. Hanaghan.  Assistance in the preparation of this issue was provided by Heather F. Merton.  The information in this publication is not legal advice.  For further information, contact:

Kenneth F. Ehrlich

Tel: (617) 439-2989

Matthew D. Hanaghan

Tel: (617) 439-2583

Michael K. Krebs

Tel: (617) 439-2288


This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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