InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
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.
FDIC wins dismissal as defendant in NSF fee challenge
On April 8, the U.S. District Court for the District of Minnesota granted the FDIC’s motion to dismiss in a case brought by a trade association and a commercial bank challenging the FDIC’s guidance related to insufficient fund fees (NSF fees). Specifically, the plaintiffs challenged the FDIC’s Financial Institution Letter 32 (FIL 32) as a “legislative rule promulgated without adherence to essential administrative procedures,” and asked the court to permanently enjoin FIL 32 and declare it invalid. As previously covered by InfoBytes, FIL 32 warned financial institutions against charging customers multiple NSF fees on the same unpaid transaction – something the FDIC stated could be an “unsafe or unsound practice.” The plaintiffs alleged four violations of the Administrative Procedure Act: (i) the FDIC allegedly implemented FIL 32 without the APA’s required notice and comment period; (ii) FIL 32 was an arbitrary and capricious agency action; (iii) the FDIC exceeded its statutory authority by attempting to define an unfair or deceptive act or practice under the FTC Act; and (iv) the FDIC violated its own regulations in releasing FIL 32 since “those regulations prohibit enforcement actions based on supervisory guidance.” The FDIC moved to dismiss all counts, arguing that FIL 32 was not arbitrary and capricious, and that the FDIC acted within its authority. The court agreed that FIL 32 was not a final agency action, that the plaintiffs lacked standing and dismissed the case without prejudice.
CFPB proposes rule making certain NSF fees “abusive”
On January 24, the CFPB released a proposed rule that would identify the charging of non-sufficient funds (NSF) fees on transactions that financial institutions decline instantaneously or near-instantaneously as an “abusive” act or practice. The rule would prohibit financial institutions from charging such fees. The proposed rule defines a “covered transaction” as a consumer’s attempt to withdraw, debit, pay, or transfer funds from their account that is declined instantaneously or near-instantaneously by a “covered financial institution” due to insufficient funds. Further, instantaneously, or near-instantaneously-declined transactions are characterized as transactions that are processed in real-time with “no significant perceptible delay to the consumer when attempting the transaction.” One-time debit card transactions that are not preauthorized, ATM transactions, and certain person-to-person transactions would be covered by the proposed rule. The proposed rule would not cover (i) transactions declined or rejected due to insufficient funds hours or days after a consumer’s attempt; (ii) checks and ACH transactions (given that they are not able to be instantaneously declined); (iii) transactions authorized at first, even if they are later rejected or fail to settle due to insufficient funds. The proposed rule defines “covered financial institution” in line with Regulation E’s definition of “financial institution.”
Although the CFPB noted that currently financial institutions do not typically charge NSF fees on the proposed covered transactions and acknowledged that it was proposing the “rule primarily as a preventive measure,” it expressed concern that financial institutions who do not currently charge NSF fees for “covered transactions” may have an incentive to do so as other regulatory interventions reduce other sources of fee income. Further, the CFPB considered whether its concerns could be addressed through certain disclosures, but declined to pursue that course of action, citing challenges in implementation across diverse payment channels and interfaces. Even if feasible, the CFPB added, such disclosures might be costly and may not fully prevent abusive practices.
Moreover, the proposed rule clarifies the CFPB’s current interpretation of the prohibition on abusive acts or practices and distinguish prior views set forth in the preamble of a separate rule—the CFPB’s 2020 rule rescinding certain provisions of the 2017 Rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans’ (2020 Rescission Rule). Abusive practices are defined to include, among other things, acts or practices that take “unreasonable advantage” of a consumer’s “lack of understanding . . . of the material risks, costs, or conditions” of a consumer product or service. The CFPB proposes to “clarify” its prior interpretation of this prohibition, by articulating its view that a “lack of understanding” need not be “reasonable” to form the predicate of an abusive act or practice. In the CFPB’s view, this distinguishes the abusiveness prohibition from the longstanding prohibition on “unfair” practices, which requires showing that consumers could not “reasonably avoid” consumer injury by, for example, reading disclosures or understanding that a particular transaction would overdraw the balance in their account and result in fees. The Bureau’s current view is that the 2020 Rescission Rule conflated “reasonable avoidability” and “lack of understanding,” contrary to the text and purpose of the abusive conduct prohibition. In addition, the CFPB proposes clarifying that, notwithstanding the 2020 Rescission Rule’s emphasis on the “magnitude” and “likelihood” of harm, the “materiality” requirement pertains to understanding “risks,” not necessarily “costs” or “conditions.” The CFPB explained that a consumer’s lack of understanding of costs does not always align with the analysis of harm likelihood and magnitude, for example, it suffices to demonstrate that a company exploits consumer ignorance about a fee (“cost”) in a specific situation, even if consumers generally understand the “risk” of fees. The CFPB has preliminarily determined that consumers charged NSF fees on covered transactions would “lack understanding of the material risks, costs, or conditions of their account at the time they are initiating covered transactions.”
In the CFPB’s view, financial institutions are taking “unreasonable advantage” of consumers when they impose NSF fees on covered transactions because the financial institution: (i) profits from a transaction but provides no service in return; (ii) chooses to impose NSF fees when instantaneously declining a transaction at no cost or negligible cost is an option; (iii) benefits from negative consumer outcomes caused by their lack of understanding; and (iv) profits from economically “vulnerable” consumers’ lack of understanding or hardship, instead of providing services to alleviate it.
Among other things, the CFPB seeks comments on the proposed parameters of covered transactions, whether the practices identified in the proposed rule are broad enough to address the “potential consumer harms,” and submission of data on covered financial institutions’ cost to decline covered transactions. Comments must be received by March 25. Finally, the CFPB is proposing an effective date of 30 days after publication of the final rule in the Federal Register.
Large bank agrees to proposed settlement agreement; to be decided in February
On November 27, 2023, a large Canadian bank agreed to pay $15.9 million to accountholders in a proposed settlement agreement stemming from a class action suit in which the bank allegedly charged improper non-sufficient fund (NSF) fees. NSF fees are charges by a financial institution when they decline to make a payment from an accountholder’s account after determining the account lacks sufficient funds. Plaintiffs alleged that from February 2, 2019, to November 27, 2023, the bank charged accountholders multiple NSF fees on a single attempted transaction. In the agreement, the bank continues to deny liability. While an agreement has been reached between the two parties, the agreement has yet to be approved by the courts. A hearing has been scheduled for February 13, 2024, in the Ontario Superior Court of Justice to approve the settlement and award the payouts. Accountholders will receive their payouts, “estimated to be in the range of approximately $88 CAD,” deposited directly to their account with the bank. Under the proposed settlement agreement, the representative plaintiff will receive an honorarium of $10,000. As previously covered by InfoBytes, the FDIC warned that supervised financial institutions that charge multiple NSF fees on re-presented unpaid transactions may face increased regulatory scrutiny and litigation risk.
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 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.”
Court orders credit union to pay $5 million to settle overdraft allegations
On June 27, the U.S. District Court for the Northern District of New York granted final approval of a class action settlement, resulting in a defendant credit union paying approximately $5.2 million to settle allegations concerning illegal overdraft/non-sufficient funds (NSF) fees and inadequate disclosure practices. As described in plaintiffs’ unopposed motion for preliminary approval, the defendant was sued in 2020 for violating the EFTA (Regulation E) and New York General Business Law (NY GBL) § 349. According to plaintiffs, defendant charged overdraft fees and NSF fees that were not permitted under its contracts with its members or Regulation E. Plaintiffs’ Regulation E and NY GBL liability theories are premised on the argument that defendant’s “opt-in form did not inform members that these fees were charged under the ‘available balance’ metric, rather than the ‘actual’ or ‘ledger’ balance metric”—a violation of Regulation E and NY GBL § 349. The plaintiffs’ liability theory was that defendant’s “contracts did not authorize charging overdraft fees when the ledger or actual balance was positive.”
Under the terms of the settlement, defendant is required to pay $2 million, for which 25 percent of the settlement fund will be allocated to class members’ Regulation E overdraft fees, 62.5 percent will go to class members’ GBL overdraft fees, and 12.5 percent will be allocated to class members’ breach of contract overdraft fees. Defendant is also required to pay $948,812 in attorney’s fees, plus costs, and $10,000 service awards to the two named plaintiffs. Additionally, the defendant has agreed to change its disclosures and will “forgive and release any claims it may have to collect any at-issue fees which were assessed by [defendant] but not collected and subsequently charged-off, totaling approximately $2,300,000.”
FDIC revises NSF guidance
On June 16, the FDIC updated its Supervisory Guidance on Multiple Re-Presentment NSF Fees to clarify its supervisory approach for addressing violations of law. This new guidance, FIL-32-2023, updates FIL-40-2022 (originally issued last August and covered by InfoBytes here), which warned supervised financial institutions that charging customers multiple non-sufficient funds (NSF) fees on re-presented unpaid transactions may increase regulatory scrutiny and litigation risk. The FDIC noted that since the issuance of FIL-40-2022, the agency has received additional data relating to the amount of consumer harm associated with NSF fees at particular institutions, as well as information regarding extensive, ongoing challenges institutions face to accurately identify re-presented transactions. Consequently, the FDIC made changes to its supervisory guidance to specify that it “does not intended to request an institution to conduct a lookback review absent a likelihood of substantial consumer harm.”
CFPB releases regulatory agenda
The Office of Information and Regulatory Affairs recently released the CFPB’s spring 2023 regulatory agenda. Key rulemaking initiatives that the agency expects to initiate or continue include:
- Overdraft fees. The Bureau is considering whether to engage in pre-rulemaking activity in November to amend Regulation Z with respect to special rules for determining whether overdraft fees are considered finance charges.
- FCRA rulemaking. The Bureau is considering whether to engage in pre-rulemaking activity in November to amend Regulation V, which implements the FCRA. In January, the Bureau issued its annual report covering information gathered by the Bureau regarding certain consumer complaints on the three largest nationwide consumer reporting agencies (CRAs). CFPB Director Rohit Chopra noted that the Bureau “will be exploring new rules to ensure that [the CRAs] are following the law, rather than cutting corners to fuel their profit model.” (Covered by InfoBytes here.)
- Insufficient funds fees. The Bureau is considering whether to engage in pre-rulemaking activity in November regarding non-sufficient fund (NSF) fees. The Bureau commented that while NSF fees have been a significant source of fee revenue for depository institutions, recently some institutions have voluntarily stopped charging such fees.
- Amendments to FIRREA concerning automated valuation models. On June 1, the Bureau issued a joint notice of proposed rulemaking (NPRM) with the Federal Reserve Board, OCC, FDIC, NCUA, and FHFA to develop regulations to implement quality control standards mandated by the Dodd-Frank Act concerning automated valuation models used by mortgage originators and secondary market issuers. (Covered by InfoBytes here.) Previously, the Bureau released a Small Business Regulatory Enforcement Fairness Act (SBREFA) outline and report in February and May 2022 respectively. (Covered by InfoBytes here.)
- Section 1033 rulemaking. Section 1033 of Dodd-Frank provides that covered entities, such as banks, must make available to consumers, upon request, transaction data and other information concerning consumer financial products or services that the consumer obtains from the covered entity. Over the past several years, the Bureau has engaged in a series of rulemaking steps to prescribe standards for this requirement, including the release of a 71-page outline of proposals and alternatives in advance of convening a panel under the SBREFA and the issuance of a final report examining the impact of the Bureau’s proposals to address consumers’ personal financial data rights. (Covered by InfoBytes here.) Proposed rulemaking may be issued in October.
- Property Assessed Clean Energy (PACE) financing. The Bureau issued an NPRM last month to extend TILA’s ability-to-repay requirements to PACE transactions. (Covered by InfoBytes here.) The proposed effective date is at least one year after the final rule is published in the Federal Register (“but no earlier than the October 1 which follows by at least six months Federal Register publication”), with the possibility of a further extension to ensure compliance with a TILA timing requirement.
- Supervision of Larger Participants in Consumer Payment Markets. The Bureau is considering whether to engage in pre-rulemaking activity next month to define larger participants in consumer payment markets and further the scope of the agency’s nonbank supervision program.
- Nonbank registration. The Bureau announced its intention to identify repeat financial law offenders by establishing a database of enforcement actions taken against certain nonbank covered entities. (Covered by InfoBytes here.) The Bureau anticipates issuing a final rule later this year.
- Terms and conditions registry for supervised nonbanks. At the beginning of the year, the Bureau issued an NPRM that would create a public registry of terms and conditions used in non-negotiable, “take it or leave it” nonbank form contracts that “claim to waive or limit consumer rights and protections.” Under the proposal, supervised nonbank companies would be required to report annually to the Bureau on their use of standard-form contract terms that “seek to waive consumer rights or other legal protections or limit the ability of consumers to enforce or exercise their rights” and would appear in a publicly accessible registry. (Covered by InfoBytes here.) The Bureau anticipates issuing a final rule later this year.
- Credit card penalty fees. The Bureau issued an NPRM in February to solicit public feedback on proposed changes to credit card late fees and late payments and card issuers’ revenue and expenses. (Covered by InfoBytes here.) Under the CARD Act rules inherited by the Bureau from the Fed, credit card late fees must be “reasonable and proportional” to the costs incurred by the issuer as a result of a late payment. A final rule may be issued later this year.
- LIBOR transition. In April, the Bureau issued an interim final rule, amending Regulation Z, which implements TILA, to update various provisions related to the LIBOR transition. Effective May 15, the interim final rule further addresses LIBOR’s sunset on June 30, by incorporating references to the SOFR-based replacement—the Fed-selected benchmark replacement for the 12-month LIBOR index—into Regulation Z. (Covered by InfoBytes here.)