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Financial Services Law Insights and Observations

District Court denies bank’s motion to dismiss class action regarding overdrafts

Courts Class Action Overdraft Regulation E EFTA State Issues Disclosures CFPB

Courts

On August 23, the U.S. District Court for the District of Connecticut denied a motion to dismiss a putative class action case, in which the plaintiff alleged that a national bank’s (defendant) overdraft opt-in notice failed to satisfy Regulation E of the Electronic Funds Transfer Act (EFTA), and that the bank’s assessment of overdraft fees in light of such failure violated the Connecticut Unfair Trade Practices Act (CUFTA). The plaintiff alleged that she and other members of the putative class “opted into [the defendant’s] overdraft program for debit card and ATM transactions,” and were charged overdraft fees on an “available” balance policy multiple times. However, the defendant’s opt-in disclosure agreement states that an overdraft only happens “when you do not have enough money in your account to cover a transaction, but we pay it anyway,” which is a description of the “actual” balance of an account. Accordingly, the defendant “charge[d] overdraft fees even at times when there [was] a sufficient amount of money in a consumer’s account.” The plaintiff alleged that the defendant continued this system with knowledge of EFTA’s requirements and “that its opt-in agreement did not provide an accurate, clear, and easily understandable definition of an overdraft.”

In its motion to dismiss, the defendant argued that the plaintiff failed to state a claim alleging violations of the EFTA because, among other things: (i) when the opt-in agreement is considered together with other documents provided to the customer upon opening an account, the policies are clearly explained; and (ii) the defendant is shielded from liability under the safe harbor provisions of the EFTA, because the opt-in language utilized is identical to the CFPB’s model form. The defendant also argued that it complied with Regulation E, “because the opt-in notice it used, when read together with an ‘Account Agreement’ and ‘Overdraft Disclosure’ it says were provided to [the plaintiff] when she opened her account, made clear that it would charge overdraft fees when her ‘available balance’ fell below zero.”

The court found that the defendant’s argument regarding compliance with Regulation E “relies on documents that are not attached to, incorporated in, or otherwise ‘integral’ to the complaint” and that Regulation E requires that the notice itself be a “segregated” document, which utilizes “clear and readily understandable” language. The court also ruled that though the defendant utilized language from the CFPB model form, the plaintiff plausibly alleges that use of the form was not “an appropriate model” since the language did not disclose the defendants overdraft program in a “clear and readily understandable” manner.

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