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On June 13, the FDIC released a new publication, Consumer Compliance Supervisory Highlights, intended to provide information and observations related to the FDIC’s consumer compliance supervision activities in 2018. Specifically, the report covers approximately 1,200 consumer compliance examinations conducted by the FDIC in 2018. Overall, the FDIC noted that, “supervised institutions demonstrated strong and effective management of consumer compliance responsibilities.” The report identifies some of the most salient compliance issues identified by the FDIC during 2018, including (i) overdraft programs, which were found to be potentially unfair or deceptive when an institution used an “available balance method,” sometimes resulting in more overdraft fees than were appropriate because the institution assessed a fee when the transaction did not overdraw the account; (ii) RESPA anti-kickback violations, which concerned payments “disguised as above-market payments for lead generation, marketing services, and office space or desk rentals” or as marketing and advertising agreements; and (iii) Regulation E, where certain institutions were found to have incorrectly calculated consumer liability for unauthorized transfers, failed to resolve errors properly, or discouraged consumers from filing error resolution requests. The report also covers issues with skip-a-payment loan programs and the calculation of finance charges and disclosures related to lines of credit.
District court approves final settlement resolving breach of contract and conversion claims related to debit card overdraft fees
On May 28, the U.S. District Court for the Southern District of California granted final approval to a roughly $24.5 million settlement resolving class action allegations that a credit union unfairly charged optional overdraft protection fees on certain debit card transactions. In 2017, the plaintiffs challenged the credit union’s practices, alleging breaches of contract, covenant of good faith and fair dealing, and conversion. Specifically, the plaintiffs challenged whether the language in the accountholder agreements prohibited the credit union from assessing and collecting optional overdraft protection fees on certain debit card transactions that were authorized against positive available account balances. In 2018, the court granted in part and denied in part the credit union’s motion to dismiss, allowing the plaintiffs’ breach of contract and conversion claims to proceed. The parties entered into settlement discussions, and reached an agreement. Under the terms of the settlement, the credit union will provide $24.5 million in relief to class members, along with approximately $6.1 million in attorneys’ fees. However, the court denied a request to reimburse plaintiffs’ expert witness for work completed after the settlement agreement was preliminary approved last year, stating “as a matter of awarding funds from the [s]ettlement [f]und, the [c]ourt cannot find reasonable the $109,100.00 price tag for an exercise that appears to post-date the preliminary approval order and which merely confirmed what the parties already understood to be the class’s potential recovery.”
On May 13, the CFPB announced a plan to review its regulations under Section 610 of the Regulatory Flexibility Act (RFA), which specifies that agencies should review certain rules within 10 years of their publication, consider the rules’ effect on small businesses, and invite public comment on each rule undergoing the review. The announcement notes that RFA requires an agency to consider multiple factors when reviewing a rule, including (i) whether there is a continued need for the rule; (ii) the complexity of the rule; (iii) whether the rule overlaps, duplicates, or conflicts with federal, state, or other rules; and (iv) the degree to which factors, such as technology and economic conditions, have changed the relevant market since the rule was evaluated. Comments will be due within 60 days of the plan’s publication in the Federal Register.
The CFPB also announced that its first RFA review will be of the 2009 Overdraft Rule (Rule), which was originally issued by the Federal Reserve Board and limits the ability of financial institutions to assess overdraft fees for ATM and one-time debit card transactions that overdraw consumers’ accounts. The Bureau is seeking public comment on the economic impact of the Rule on small entities, including requesting feedback on topics such as (i) the impacts of the reporting, recordkeeping, and other compliance requirements of the Rule; and (ii) how the Bureau could reduce the costs associated with the Rule for small entities. Comments on the economic impact of the Rule will be due within 45 days of publication in the Federal Register.
On April 8, the U.S. Court of Appeals for the 10th Circuit affirmed a lower court’s dismissal of a consumer’s suit arising out of overdraft fees charged by an Arkansas-based bank. The consumer alleged, among other things, that the bank breached its Electronic Fund Transfer Agreement (EFT Agreement) by failing to provide accurate, real-time account balance information online, which caused her to “incur unexpected overdraft fees.” According to the opinion, the consumer claimed that she frequently relied on her online account balance when making purchases, and that the bank’s alleged debiting practices—such as “batching by transaction type,” processing transactions out of chronological order, and “failing to show real-time balance information online [or] intra-bank transfers instantaneously”—sometimes caused her to pay insufficient funds and overdraft fees. The consumer filed suit asserting claims for “actual fraud; constructive fraud; false representation/deceit; breach of fiduciary duty; breach of contract (namely, the EFT Agreement) . . . breach of the implied covenant of good faith and fair dealing; and unjust enrichment.” The consumer appealed following a dismissal of all claims by the district court. In 2017, the 10th Circuit reversed and remanded the dismissal of the breach of contract claim, and affirmed the dismissal of the other claims. The district court granted summary judgment to the bank, determining that the EFT Agreement promised accuracy only to posted amounts and not to pending or unprocessed transactions.
On appeal, the 10th Circuit agreed with the district court, holding that the plain language of the EFT Agreement only promised accuracy of posted amounts, and authorized the bank to collect overdraft fees on insufficient funds items even if an ATM card or check card transaction “was preauthorized based on sufficient funds in the account at the time of withdrawal, transfer or purchase.” Moreover, the court noted that the EFT Agreement specifically stated that there was a 7:00 p.m. cut-off for transfers to be posted. Therefore, it was clear that the bank was not “contractually obligated to make intra-bank transfers instantaneously.” Furthermore, the court pointed out that the consumer failed to provide evidence demonstrating that the bank provided inaccurate balances.
On March 26, the U.S. Court of Appeals for the 1st Circuit affirmed a district court’s decision to dismiss putative class action allegations that a bank charged usurious interest rates on its overdraft products, finding that the bank’s “Sustained Overdraft Fees” are not interest under the National Bank Act (NBA). The plaintiff filed a lawsuit against the bank in 2017, alleging that sustained overdraft fees should be considered interest charges subject to Rhode Island’s interest rate cap of 21 percent, and that because the alleged annual interest rates exceeded the cap, the fees violated the NBA. The district court, however, dismissed the case, ruling that the sustained overdraft fees were service charges, not interest charges.
On appeal, the split three-judge panel held that, because the sustained overdraft fees did not constitute interest payments under the NBA and the OCC’s regulations interpreting the NBA, the class challenges cannot move forward. The panel stated that the agency’s interpretation in its 2007 Interpretive Letter is due “a measure of deference.” The panel found the agency’s interpretation persuasive because “[f]lat excess overdraft fees (1) arise from the terms of a bank’s deposit account agreement with its customers, (2) are connected to deposit account services, (3) lack the hallmarks of an extension of credit, and (4) do not operate like conventional interest charges.”
In dissent, Judge Lipez noted that, while the OCC interpretive letter laid out a clear case for overdraft fees as service, not interest charges, it was silent on the question of “Sustained Overdraft Fees.” He wrote that “[s]ilence, however, is not guidance, and we would thus need to infer a ruling on a debated issue from between the lines of the Letter.” Furthermore, he could “not see how we can defer to an interpretation that the OCC never clearly made on an issue that it previously described as complex and fact-specific.”
On January 31, the U.S. District Court for the Southern District of New York granted final approval and class certification to a $22 million settlement resolving class action allegations that a national bank improperly charged overdraft fees on “one-time, non-recurring” transactions made with a ride-sharing company. The court found that the bank mischaracterized these one-time charges as recurring transactions, which allowed the bank to charge overdraft fees of $35. Prior to the court’s approval of the settlement, 12 state Attorneys General sent a letter to the court arguing that the agreement’s release of liability to the ride-sharing company was inequitable. The court found, however, that the release “does not compromise the fairness, reasonableness, and adequacy of the settlement,” where, among other things, plaintiffs’ counsel investigated the viability of claims against the ride-sharing company and concluded that litigation against the company could present problems for the proposed class and for individual recovery. The $22 million settlement constitutes 80 percent of all revenues charged by the bank as a result of the overdraft fees. The court also approved $5.5 million in attorneys’ fees and $50,000 in costs.
On November 8, the U.S. District Court for the District of Massachusetts granted in part and denied in part a credit union’s motion to dismiss a putative class action challenging the institution’s overdraft practices. As summarized in the order, the plaintiff alleged the credit union improperly charged overdraft fees when the “available balance” of her account, which was calculated by deducting pending debits and deposit holds, was insufficient to cover a transaction, even though the “actual” or ledger balance would have covered the transaction. The plaintiff brought multiple claims against the credit union, including breach of contract and Electronic Funds Transfers Act (EFTA) claims.
The credit union moved to dismiss arguing, in part, that the relevant account agreements referenced the “available balance” method for overdraft purposes and that the term is a “well-known bank term that has long been understood to mean the money in an account minus holds placed on funds to account for uncollected deposits and for pending debit transaction.”
The court disagreed, concluding that “available balance” is not a defined term, is ambiguous, and therefore its meaning presents a factual dispute that cannot be resolved on a motion to dismiss. The court allowed, however, the EFTA claim to proceed only for violations that occurred within one year of the complaint filing.
On November 1, the Arizona Attorney General announced the approval of two more participants in the state’s fintech sandbox program. The first company, which is based in New York, will test a savings and credit product, enabling Arizona consumers to obtain a small line of credit aimed at providing overdraft protection. If a consumer agrees to a repayment plan recommended by the company’s proprietary technology, the APR may be as low at 12 percent; if a consumer adopts a different repayment plan, the line of credit will have a standard APR of 15.99 percent. The company intends to report transactions under the payment plan to national credit bureaus to enable the building of credit histories. The second company, an Arizona-based non-profit, will test a lending product using proprietary blockchain technology, which has an APR cap of 20 percent.
As previously covered by InfoBytes, the Arizona governor signed legislation in March creating the first state sandbox program for companies to test innovative financial products or services without certain regulatory requirements. In October, the Attorney General announced the first sandbox participant, a mobile platform company (InfoBytes coverage available here).
Court approves final class action settlement; previously ruled that extended overdrawn balance charge fees are “interest” under National Bank Act
On August 31, the U.S. District Court for the Southern District of California granted final approval to a class action settlement, resolving a suit alleging that a national bank’s overdraft fees exceeded the maximum interest rate permitted by the National Bank Act (NBA). According to the order, the settlement ends a putative class action concerning the bank’s practice of charging a $35 “extended overdrawn balance charge” fee (EOBCs) on deposit accounts that remained overdrawn for more than five days when funds were advanced to honor an overdrawn check. Class members argued that the fee amounted to interest and—when taken into account as a percentage of an account holder’s negative balance—exceeded the NBA’s allowable interest rate. The bank countered, stating that “EOBCs were not ‘interest’ and therefore cannot trigger the NBA.” A 2016 order denying the bank’s motion to dismiss, which departed from several other district courts on this issue, found that “covering an overdraft check is an ‘extension of credit’” and therefore overdraft fees can be considered interest under the NBA. The bank appealed the decision to the 9th Circuit in April 2017, but reached a settlement last October with class members.
Under the terms of the approved settlement, the bank will refrain from charging extended overdraft fees for five years—retroactive to December 31, 2017—unless the U.S. Supreme Court “expressly holds that EOBCs or their equivalent do not constitute interest under the NBA.” The bank also will provide $37.5 million in relief to certain class members who paid at least one EOBC and were not provided a refund or a charge-off, and will provide at least $29.1 million in debt reduction for class members whose overdrawn accounts were closed by the bank while they still had an outstanding balance as a result of one or more EOBCs applied during the class period. The bank also will pay attorneys’ fees.
On July 26, the Federal Reserve Board released its inaugural Consumer Compliance Supervision Bulletin (Bulletin) to share information about the agency’s supervisory observations and other noteworthy developments related to consumer protection, and provide practical steps for banking organizations to consider when addressing consumer compliance risk. The first Bulletin focuses on fair lending issues related to the practice of redlining and outlines key risk factors the Fed considers in its review, such as (i) whether a bank’s Community Reinvestment Act (CRA) assessment areas inappropriately exclude minority census tracts; (ii) whether a bank’s Home Mortgage Disclosure Act or CRA lending data show “statistically significant disparities in majority minority census tracts when compared with similar lenders”; or (iii) whether the bank’s branches, loan production offices, or marketing strategies appear to exclude majority minority census tracts. Practical steps for mitigating redlining risk are also provided. The Bulletin also discusses fair lending risk related to mortgage pricing discrimination against minority borrowers, small dollar loan pricing that discriminates against minorities and women, disability discrimination, and maternity leave discrimination.
The Bulletin additionally addresses unfair or deceptive acts or practices risks related to overdrafts, misrepresentations made by loan officers, and the marketing of student financial products and services. The Bulletin also highlights regulatory and policy developments related to the Federal Financial Institutions Examination Council’s updated Uniform Interagency Consumer Compliance Rating System along with recent changes to the Military Lending Act.
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- Sasha Leonhardt and John B. Williams to discuss "Privacy" at the National Association of Federally-Insured Credit Unions Summer Regulatory Compliance School
- Warren W. Traiger to discuss "CRA modernization" at the National Association of Industrial Bankers and the Utah Association of Financial Services Annual Convention
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- Brandy A. Hood to discuss "RESPA Section 8/referrals: How do you stay compliant?" at the New England Mortgage Bankers Conference
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions and CMPs" at the ACAMS AML & Financial Crime Conference
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