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District Court grants bank a MSJ in overdraft fee class action case
On April 16, the U.S. District Court for the Eastern District of Michigan entered an opinion and order granting defendant bank’s motion for summary judgment in an overdraft fee-related consumer class action. In this case, plaintiffs claimed that defendant breached its account agreements in connection with two related but distinct practices that the plaintiffs claimed were inconsistent with their account agreement. The first practice involved the assessment of overdraft fees on transactions that were initially authorized with a positive balance but settled at a time when the account had a negative balance, labeled Authorize Positive, Purportedly Settle Negative transactions (APPSN). The second practice imposed insufficient fund (NSF) fees each time the same item was re-presented by a merchant and declined by the bank due to a lack of funds. The complaint alleged a breach of contract and conversion against the bank based on these two fee practices.
In a previous order in 2021, the court denied defendant’s motion to dismiss as to plaintiff’s breach of contract claim but granted dismissal as to plaintiff’s conversion claim. In denying the motion to dismiss the breach of contract of claim, the court determined the account agreement was ambiguous as to the overdraft fees since it was unclear whether defendant would assess overdraft fees at the time of a debit's authorization or at the time of its settlement. The court held that the account agreement was similarly ambiguous as to the NSF fees, since the agreement’s language lent itself to multiple reasonable interpretations of the meaning of “item.”
In the current opinion, the court held that the language of the updated disclosure guide provided to the plaintiff removed the perceived ambiguity in the contractual language, finding that plaintiff’s interpretation was “unreasonable because it contradict[ed] the language of the [a]greement as a whole, including the updated disclosure guide.” The court explained that the updated disclosures made it clear that customers could still incur an overdraft fee if their balance goes negative before a debit authorization hold would be lifted and the actual transaction settled, despite having a positive balance at the time the hold was placed. The court highlighted that the new disclosure guide included a practical example demonstrating the impact of a temporary debit authorization hold on an account’s available balance.
Further, the court noted that even if the agreement was ambiguous, plaintiff would still be unsuccessful in pursuing her breach of contract claim because it had been established that she did not actually read the specific contract terms in question. The court noted, under Michigan law, there cannot be a factual question as to the meaning of a contract where one party had not read the contract to form a different understanding of the contract. The court applied a similar analysis to dismiss the allegations relating to the NSF fees. Finally, the court held that plaintiff failed to demonstrate a genuine issue of material fact regarding her claim of breach of an implied covenant of good faith and fair dealing because the applicable fees were contemplated by the parties’ agreement.
Seventeen State Attorneys General comment on CFPB overdraft proposal
State attorneys general (AGs) from 17 states recently sent a letter to the CFPB endorsing its proposed rule to amend TILA. The 17 states included New York as principal, California, Colorado, Connecticut, Delaware, the District of Columbia, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, North Carolina, Oregon, Pennsylvania, and Washington. As previously covered by InfoBytes, the proposed amendments would treat overdraft credits as loans, which would make them subject to consumer protections.
The AGs argued that the historical basis for excluding overdraft fees from TILA protections would be obsolete due to how the fees are assessed, the high fee amount, and the large number of overdraft transactions. The AGs wrote that closing the loophole would protect consumers by providing customers with disclosures so they can better understand the cost and enable them to comparison shop. The AGs supported a benchmark fee of $3, which is the lowest fee amount proposed by the CFPB, and argued that even a $6 fee would “undercount the volume of transactions generating a fee post-enactment” of the proposed rule. Finally, the AGs urged the CFPB to extend the proposed rule to both “very large financial institutions” (those with more than $10 billion in assets) and small financial institutions.
House Financial Services Committee holds a hearing to address the “moving target” of CFPB’s recent actions
On March 7, the House Committee on Financial Services held a hearing entitled, “Politicized Financial Regulation and its Impact on Consumer Credit and Community Development” to discuss recent actions and proposals, like mandated fee caps and government price fixing, by federal financial regulatory agencies. During the hearing, Congressman Barr (R-KY) criticized recent regulatory actions by federal authorities, particularly the Biden Administration and the CFPB, which he saw as politically-motivated interventions in the financial sector. He expressed concern over the implementation of fee caps and price controls, like the CFPB’s new rule on credit card late fees (covered by InfoBytes here), which he believed could impact consumer access to credit and competition. Barr argued that these regulations served political interests rather than protecting consumers, dismissing the concept of "junk fees" as undefined and hypocritical as the CFPB charges fees itself. Barr also discussed the need for clear standards in enforcement actions under UDAAP to provide certainty to financial institutions and foster a more inclusive market. He criticized other regulatory proposals, such as the Community Reinvestment Act final rule and the new certification process for the Community Development Financial Institutions Fund, for potentially overreaching into the operations of financial institutions.
Barr contended the timing of the CFPB's most recent rule announcement, which was close to President Biden's State of the Union address, alleged a political agenda rather than an independent regulatory action. A witness policy analyst also shared that using financial regulation for political gain can negatively impact consumer credit. The analyst addressed the CFPB’s recent actions against overdraft fees and cited a May 2023 CFPB report which noted that revenue from overdraft and insufficient fund fees in the fourth quarter of 2022 was $1.5 billion lower than in the fourth quarter of 2019 and that many banks have already adjusted their overdraft practices––making the Bureau’s proposals unwarranted. Witnesses also argued how smaller banks and credit unions do not boast the same revenue nor goals as some larger banks, and that regulations should not be a “one size fits all” model.
California Attorney General warns small banks and credit unions on fees
On February 22, California State Attorney General, Rob Bonta, issued a letter to small banks and credit unions cautioning that overdraft and returned deposited item fees may infringe upon California’s Unfair Competition Law (UCL) and the CFPA. The letter, directed at institutions in California with assets under $10 billion, highlighted concerns that such fees disproportionately burden low-income and minority consumers. Bonta emphasized that these fees often catch consumers off guard, leading to significant financial strain, and urged the financial institutions in California to comply with state and federal laws by eliminating such practices.
The letter underscores how overdraft and returned deposited item fees can harm consumers, and potentially constitute unfair acts against them. Bonta also pointed out how overdraft fees cannot be reasonably anticipated due to the complexities of transaction processing, making it challenging for consumers to make informed financial decisions. Furthermore, the letter warned that imposition of returned deposited item fees, which are charges by financial institutions when a consumer deposits a check that bounces (due to an issue with the check originator such as insufficient funds or a stop payment order), is likely an unfair business practice in violation of the UCL and CFPA because consumers are usually unable to reasonably avoid the fee.
This action by the California Attorney General is notable for its focus on smaller financial institutions that were expressly excluded from the CFPB’s proposed rule last month on overdraft fees (previously covered by InfoBytes here); however, the action is broadly consistent with the CFPB’s guidance on returned deposited item fees (also covered by InfoBytes here).
CFPB reports on consumers’ experience with overdraft, NSF fees
On December 19, the CFPB released a report titled Overdraft and Nonsufficient Fund Fees: Insights from the Making Ends Meet Survey and Consumer Credit Panel, a report providing insight into consumers’ experience with overdraft/NSF activity. The CFPB stated that the report is based on data from the 2023 Making Ends Meet survey (covered by InfoBytes here) and the CFPB’s Consumer Credit Panel. Among other findings, the report found that roughly a quarter of consumers reside in households that were charged an overdraft or NSF fee in the past year. The report additionally found that 43 percent of consumers charged an overdraft fee were surprised by their most recent account overdraft, while only 22 percent expected it. The report noted that this trend is more pronounced among those who experience infrequent overdrafts (15 percent) as opposed to those who have been charged multiple overdraft fees (56 percent).
The CFPB additionally highlighted most households incurring overdraft and NSF fees have available credit on a credit card, adding that “among consumers in households charged 0, 1-3, 4-10, and more than 10 overdraft fees in the past year, the shares with no credit available on a credit card are 19 percent, 32 percent, 38 percent, and 49 percent, respectively.”
CFPB reports on consumers’ experience with overdraft, NSF fees
On December 19, the CFPB released a report titled Overdraft and Nonsufficient Fund Fees: Insights from the Making Ends Meet Survey and Consumer Credit Panel, a report providing insight into consumers’ experience with overdraft/NSF activity. The CFPB stated that the report is based on data from the 2023 Making Ends Meet survey (covered by InfoBytes here) and the CFPB’s Consumer Credit Panel. Among other findings, the report found that roughly a quarter of consumers reside in households that were charged an overdraft or NSF fee in the past year. The report additionally found that 43 percent of consumers charged an overdraft fee were surprised by their most recent account overdraft, while only 22 percent expected it. The report noted that this trend is more pronounced among those who experience infrequent overdrafts (15 percent) as opposed to those who have been charged multiple overdraft fees (56 percent).
The CFPB additionally highlighted most households incurring overdraft and NSF fees have available credit on a credit card, adding that “among consumers in households charged 0, 1-3, 4-10, and more than 10 overdraft fees in the past year, the shares with no credit available on a credit card are 19 percent, 32 percent, 38 percent, and 49 percent, respectively.”
CFPB orders bank to pay $6.2 million; alleges overdraft fees violate CFPA, EFTA
On December 7, the CFPB announced a consent order against a Virginia-based bank, alleging it engaged in deceptive acts and practices and failed to comply with Regulation E. According to the CFPB, the bank did not comply with Regulation E because it did not provide appropriate written disclosures before enrolling customers in its overdraft service and imposing overdraft fees. The CFPB alleged that under the bank’s procedures, branch employees would provide oral disclosures and obtain oral consent but did not provide customers with the required written consent form under Regulation E until the end of the account-opening process. According to the CFPB, while the bank changed its practices partway through the period covered by the consent order, the disclosures it provided were still inadequate. The bank allegedly “requested that new customers orally specify their enrollment decision before providing them with adequate written notice describing the [opt-in] service,” which thereby allegedly breached the Electronic Fund Transfer Act.
The CFPB also alleged the bank committed deceptive actions or practices when marketing opt-in overdraft services to consumers via telephone. Specifically, the CFPB alleged that the bank did not provide its customer service representatives with a script, which resulted in representatives failing to clearly differentiate between transactions covered by the bank’s standard versus its opt-in overdraft protection service. The CFPB asserted that these statements qualified as “representations and omissions of key information were likely to mislead consumers,” and that as a result, the Bank did not comply with the CFPA and Regulation E.
The consent order imposes a $1.2 million civil money penalty and requires the bank to refund at least $5 million to affected consumers. The consent order also requires the bank to obtain a new overdraft enrollment decision from affected consumers before charging overdraft fees. Moreover, the bank must also create and implement a comprehensive compliance plan to ensure its overdraft program complies with all applicable laws. Finally, the consent order requires the bank to monitor compliance, maintain records, and inform the CFPB of any changes or developments that could impact its compliance responsibilities in the consent order.
CFPB reports decline in NSF fees by depository financial institutions, saving consumers billions
On October 11, the CFPB’s Offices of Consumer Populations and Markets announced that through its analysis of a number of depository financial institutions it had determined that the imposition of non-sufficient fund (NSF) fee by these entities were on the decline, saving an estimated $2 billion annually for consumers going forward. Specifically, the CFPB determined that “[n]early two-thirds of banks with over $10 billion in assets have eliminated NSF fees,” “[n]early three-fourths of the banks that earned the most in overdraft/NSF fee revenue in 2021, including 27 of the top 30 earners, have eliminated NSF fees” and “[a]mong credit unions with over $10 billion in assets, 16 of 20 continue to charge NSF fees, including four of the five largest.” It was ultimately determined larger banks have been more likely to eliminate NSF fees. Based on the CFPB’s estimates, for banks “with over $10 billion in assets, 97% of NSF fee revenue has been eliminated.”
NY credit union gets final approval on $2.2M overdraft fee deal
On September 7, the U.S. District Court for the Northern District of New York issued a Final Order approving a more than $2.2 million settlement deal to end a class action over a credit union’s overdraft and insufficient funds fee practices.
The deal includes a $2.1 million settlement fund. After payment of attorneys’ fees to customers’ counsel, 80% of the settlement fund will go to customers who were allegedly charged overdraft fees on debit card transactions that did not overdraw their accounts when the transactions were authorized, and 20% will go to customers who were allegedly hit with multiple insufficient funds fees on a single transaction. In addition, the credit union will forgive, waive and not collect nearly $165,000 in uncollected fees.
On December 7, 2022, plaintiffs filed a putative class action complaint in the United States District Court for the Northern District of New York that consolidated two putative class action cases in which the plaintiffs alleged the credit union’s assessment of more than one insufficient funds fee on a single transaction and assessment of overdraft fees on debit card transactions that did not overdraw the customers’ accounts was a breach of contract, breach of the covenant of good faith and fair dealing, and violative of New York General Business § 349, et seq. Shortly after the actions were consolidated, the parties notified the court that they were working towards a settlement.
Senate Banking Committee holds hearing on account fees
On July 26, the Senate Banking Committee held a hearing regarding “fees and tactics impacting Americans’ wallets” in relation to financial services and the role of the CFPB in addressing harmful fees. Leading the hearing, Senator Raphael Warnock (D-GA), chairman of the committee, explained that some “excessively high” and unclear fees do not serve an economic value, referring to these as “junk fees.” Senator Warnock shared that 1/3 of households that do not use banks cite high fees as their reason for continuing without a bank account. Senator Thom Tillis (R-N.C.) criticized the CFPB’s attempts at avoiding the oversight of the Administrative Procedures Act in the rule-making process by mislabeling its actions. Tillis added that after the 2008 financial crisis, regulators emphasized the importance of overdraft revenue as, “an appropriate tool for ensuring the stability of the bank’s balance sheets.” He then criticized the shift in guidance, as the CFPB looks to reprimand banks who follow “the established prudential standards for the crime of listening to their previous federal regulators.” He also claimed that the Bureau does not have proper jurisdiction, resources, or staff to make such decisions.
Pennsylvania Attorney General Michelle Henry testified about recent enforcement actions she has taken, including a recently filed suit against a Wall Street private equity-owned installment lender, who allegedly charged consumers “junk fees” for low-value or valueless add-on products. Henry also mentioned entering into a settlement relating to a bank charging “junk fees” in connection with auto finance products. Brian Johnson, a financial regulatory compliance specialist and former deputy director of the CFPB, claimed that the agencies and the White House have failed to provide a consistent definition for the “junk fees” that could subject institutions to scrutiny, and criticized the CFPB, saying that it does not follow its own regulations and laws governing how agencies make rules by publishing interpretive rules as policy statements in bulletins. A final topic raised by Senator Tina Smith (D-MN) regarded land contracts and lease-to-purchase or rent-to-own agreements that she claimed can be exploitative towards underserved communities. Smith noted that such contacts are “designed to fail,” noting that more than 80 percent of the time, people lose all their equity because they do not make it to the last payment of the contract.