8th Circuit rejects challenge to bank fee guidance from FDIC

The 8th U.S. Circuit Court of Appeals has rejected a challenge by Minnesota bankers to the FDIC’s guidance regarding banks charging recurring fees when transactions are declined. It concluded that the matter was not yet ripe for the court to review.

In August 2022, the FDIC issued Financial Institutions Letter 40-2022, “Supervisory Guidance on Multiple Re-Presentment NSF Fees” (“FIL 40”), addressing multiple nonsufficient funds (NSF) fees from re-presented transactions. Re-presentment occurs when a merchant resubmits a previously declined debit from a consumer’s account after insufficient funds caused the initial rejection. The FDIC noted that, in some cases, charging multiple NSF fees for the same transaction could potentially violate banking regulations.

To reduce risk, the FDIC recommended that institutions either eliminate such fees or limit charges to one per transaction. The guidance also instructed institutions identifying issues with NSF fees to take corrective action, including providing full restitution, updating fee disclosures, and revising account agreements for current and new customers.

In June 2023, the FDIC issued FIL 32-2023, clarifying that institutions would not be required to conduct a lookback review unless substantial consumer harm was likely, while still mandating corrective action where needed. FIL 32 warns covered financial institutions that charge multiple NSF fees for re-presented transactions could violate Section 5 of the Federal Trade Commission Act (FTC Act).

The Minnesota Bankers Association, representing 281 commercial banks, trust companies, and savings associations in Minnesota, challenged the guidance, claiming it “is a legislative rule promulgated without adherence to essential administrative procedures.”

On July 20, 2023, the group filed suit in federal court seeking declaratory and injunctive relief. They argued that Financial Institutions Letter 32-2023 was issued without the required notice-and-comment period under the Administrative Procedure Act (APA), constituted arbitrary and capricious agency action, exceeded the FDIC’s statutory authority in defining unfair or deceptive practices under the FTC Act, and violated FDIC regulations prohibiting enforcement based solely on supervisory guidance.

The FDIC fought back, moving to dismiss all counts. It argued that the plaintiffs did not have standing and that the letter was not a binding legislative rule. Ultimately, the U.S. District Court for the District of Minnesota dismissed the complaint.

The FDIC argued that the plaintiffs’ claimed injuries could not be remedied by a favorable ruling. While the plaintiffs contended that vacating the letter would relieve them from monitoring policies on multiple re-presentment fees or updating disclosures, the district court disagreed, noting they remain bound by prohibitions on deceptive and unfair practices. The court also rejected the claim that the guidance was binding, noting that the letter outlines conduct that could violate the law depending on circumstances, but does not automatically render multiple re-presentment fees unlawful.

The Minnesota Bankers Association, represented by David Marshall, shareholder at Fredrikson & Byron, claimed that the FDIC was attempting to argue that it was not putting forth a rule with FIL-32, but was simply repeating the representations and obligations set forth in the FTC Act. He noted that the FTC Act was silent on these issues, and that there was not a single reference in Section 5.

“The logical extension of the FDIC’s argument is that it can pronounce obligations and legal consequences, and then simply take the position that those obligations and consequences are embedded somewhere in Section 5, even though they’re not called out,” Marshall stated. “And that would allow the FDIC to pronounce obligations with respect to regulated entities without following the APA in any way, shape, or form.”

Michael Morelli, senior attorney at FDIC, acknowledged that it did not have rulemaking authority under the FTC Act.

“The question then boils down to whether there is a statement from the FDIC that is practically binding on the bank that is not a rule. Our position is that this is not practically binding,” Morelli stated. Morelli maintained it would not be reasonable for a bank to interpret FIL-32 as having that effect.

The appellate panel affirmed the district court’s ruling that the claims were not justiciable, but did so on alternative grounds. It concluded that the claims were not ripe for judicial review because it was not a final agency action.

“FIL 32 neither orders a covered institution to take specific action nor declares any particular practice unlawful,” wrote Chief Judge Steven Colloton. “FIL 32 merely advises covered institutions about how the FDIC approaches potential violations during examinations and what the institutions can do to reduce their risk of violating the law.”

Also on the appellate panel were Judge Steven Grasz, who wrote a concurring opinion, and Judge Ralph R. Erickson.