When a customer with multiple deposit accounts overdraws Account # 1, we charge an insufficient funds fee and place a hold for the amount of the overdraft on Account # 2. If the customer writes a separate check that draws against Account # 2, and the amount of the check draws against the funds that we have on hold, we charge an unavailable funds fee. Our account agreements permit us to place the hold and charge the fees. We also provide notice to the customer when the funds are held and before we charge the unavailable funds fee. Are you aware of any guidance as to whether this practice is deceptive or otherwise a UDAAP violation?

We believe this practice should pass a UDAAP analysis, and also that the unavailable funds fee should not be considered a second overdraft fee for the same overdraft, even though it is indirectly related to the initial overdraft, for which an overdraft fee already has been charged. The facts are that: (1) both the hold and the unavailable funds fee are expressly provided for in Account # 2's agreement, (2) you provided notice to the customer that a hold was placed on the funds in Account # 2, (3) you provided an additional notice that the hold would result in an unavailable funds fee if the customer attempted to draw on the held funds, and (4) the customer went ahead and tried to draw on the funds in Account # 2 anyway.

We do think this practice has marginal potential for somebody raising a UDAAP question. Unfortunately, the application of UDAAP principles can be highly subjective and susceptible to different biases, and there typically are no bright line tests.

Here, for example, charging two fees that are directly and indirectly related to the same overdraft might be argued to be tantamount to assessing two overdraft fees on the same transaction. However, the second fee is not an “overdraft” fee, which is characterized by Regulation E as “a fee or charge on a consumer's account . . . for paying a transaction . . . when the consumer has insufficient or unavailable funds in the account.” The insufficient funds fee charged in this case was not for the payment of a transaction. Rather, what occurred here is that your bank invoked a twice-disclosed contract term when the customer knowingly tried to draw on the held funds in Account # 2.

As for guidance, we recommend that you review the UDAAP section in the CFPB's Supervision and Examination Manual, which provides “general guidance on the principles of unfairness, deception or abuse . . . [and] identifying unfair, deceptive or abusive practices . . . ,” along with some examples. In addition, you may wish to consult with your bank's counsel for a more in-depth analysis of any risks entailed by the practice described in your question.

For resources related to our guidance, please see:

CFPB Supervision and Examination Manual, UDAAP Section (“These examination procedures provide general guidance on: The principles of unfairness, deception, and abuse in the context of offering and providing consumer financial products and services; Assessing the risk that an institution’s practices may be unfair, deceptive, or abusive; Identifying unfair, deceptive or abusive acts or practices (including by providing examples of potentially unfair or deceptive acts and practices); and Understanding the interplay between unfair, deceptive, or abusive acts or practices and other consumer protection statutes.”)

Regulation E, 12 CFR 1005.17 (Requirements for overdraft services. “For purposes of this section, the term ‘overdraft service’ means a service under which a financial institution assesses a fee or charge on a consumer's account held by the institution for paying a transaction (including a check or other item) when the consumer has insufficient or unavailable funds in the account.”)