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Financial Services Law Insights and Observations

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

    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.

    Courts Class Action Overdraft Regulation E EFTA State Issues Disclosures CFPB

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  • New York limits overdraft practices for state-chartered banks

    State Issues

    On August 20, the New York governor signed S1465, which requires New York-chartered banks to either process checks in the order they are received or from the smallest to largest dollar amount for each business day’s transactions in order to help curb overdraft fees. The act also provides that while banks may dishonor checks for insufficient funds, they must make payments on any subsequent smaller transactions that may be covered by funds in the account. Under current law, if a check is presented that exceeds the available funds, the check is dishonored, as are all subsequent checks received by the bank, even if the account has sufficient funds to honor one or more of the smaller, subsequent checks. Banks are also required to disclose in writing to consumers the order in which checks are drawn at the time an account is opened and before any change is made to such policy. The act takes effect January 1.

    State Issues State Legislation Overdraft Consumer Finance

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  • CFPB highlights consumer complaints related to pandemic response

    Federal Issues

    On July 1, the CFPB released a new bulletin analyzing consumer complaints and responses related to actions taken by Congress or the Bureau to provide relief for consumers impacted by the Covid-19 pandemic. The bulletin expands upon the Bureau’s 2020 Consumer Response Annual report (covered by InfoBytes here) and specifically focuses on consumer complaints related to: (i) suspended monthly federal student loan payments; (ii) Economic Impact Payments (EIPs); and (iii) the Bureau’s interim final rule supporting the CDC’s eviction moratorium. With respect to student loans, the bulletin noted a significant decrease in federal student loan complaints following the suspension of payments, but identified complaints related to potential customer service issues concerning repayment options or available relief and discussed servicers’ ability to respond timely to complaints. With respect to EIPs, the bulletin discussed complaints about overdraft fees charged to consumers after advances made by financial institutions to allow consumers access to all of their EIP funds were reversed, and highlighted steps taken by institutions to refund these fees. According to the bulletin, consumers who received EIPs via prepaid debit cards also reported issues accessing funds, while some consumers claimed their accounts were locked following the second and third disbursements. The bulletin also described the various types of consumer complaints related to the eviction moratorium, including complaints related to collection activities and credit reporting.

    Federal Issues CFPB Consumer Complaints Covid-19 Overdraft Student Lending Evictions Consumer Finance

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  • 11th Circuit: Class members must arbitrate overdraft suits

    Courts

    On April 7, the U.S. Court of Appeals for the Eleventh Circuit upheld a district court’s ruling compelling individual arbitration in five separate putative class action suits concerning allegations that a national bank’s overdraft practices violated the covenant of good faith and fair dealing. The opinion does not address plaintiffs’ claims concerning the bank’s alleged overdraft practices, but rather reviews the enforceability of arbitration clauses contained in account agreements between plaintiffs and the bank (or its predecessor), which require individual, non-class arbitration of consumer account-related disputes. The plaintiffs appealed a ruling by the U.S. District Court for the Southern District of Florida that the account agreements “delegate[] to the arbitrator all questions of arbitrability, including Plaintiffs’ challenge to the enforceability of the arbitration clause,” and that it is up to the arbitrator, and not the court, to determine whether the parties are required to arbitrate. According to the plaintiffs, the arbitration clause is illusory and/or unconscionable and therefore unenforceable. They challenged, among other things, that “the incorporation of the [American Arbitration Association] (AAA) rules cannot overcome the plain language of the delegation clause,” which the plaintiffs argued limited delegation of gateway issues to those related to a disagreement about the meaning of the arbitration agreement or whether a disagreement is a “dispute” subject to binding arbitration.”

    The appellate court disagreed, concluding that nothing in the account agreement with the bank “explicitly excludes or contradicts” anything included in the AAA rules, and that it has repeatedly held that an agreement that incorporates “AAA rules with language providing that ‘the arbitrator shall have the power to rule on his or her own jurisdiction,’” shows “a clear and unmistakable intent that the arbitrator should decide all questions of arbitrability.” Moreover, the 11th Circuit found no inconsistency in the account agreement’s language, holding that when “[r]ead together, we view the incorporation and delegation clause as ‘mutually reinforcing methods of delegation.’” With respect to the predecessor bank’s agreement, which does not contain a delegation provision, the appellate court ultimately determined that the arbitration clause was neither illusory and/or unconscionable.

    Courts Appellate Eleventh Circuit Arbitration Overdraft Class Action

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  • Michigan regulator urges institutions to protect stimulus payments from overdrafts, fees

    State Issues

    On March 15, the Michigan Department of Insurance and Financial Services issued a bulletin “strongly” encouraging financial institutions to protect payments made to customers under the American Rescue Plan from overdrafts and fees. The bulletin further instructs that if a financial institution’s system automatically applies such a payment to a preexisting overdraft, the institution should reverse the application of the direct payment as promptly as possible.

    State Issues Covid-19 Michigan Bank Compliance Overdraft Financial Institutions

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  • Court approves $9.7 million overdraft fee settlement

    Courts

    On February 25, the U.S. District Court for the Northern District of New York approved a roughly $9.7 million class action settlement resolving claims that a New York credit union improperly assessed banking fees, including overdraft fees, when members had sufficient funds in their checking accounts to pay for the transactions presented for payment. The plaintiffs also alleged, among other things, that the credit union (i) improperly charged fees on a variety of transactions for members who did not opt-in to the credit union’s protection programs; (ii) assessed fees in instances where there was no contractual basis to assess the fees; (iii) transferred money from members’ savings accounts into checking accounts to avoid negative balances and resulting fees, but still imposed the fee; and (iv) violated the terms of its contracts and various laws by imposing non-sufficient funds fees more than once on the same transaction. The settlement requires the credit union to pay approximately $5.85 million into a settlement fund, plus nearly $2.53 million in attorneys’ fees, $168,030 in costs, and $15,000 service awards to each of the three named plaintiffs. The settlement amount also includes the value of the policy changes to be made by the credit union.

    Courts Credit Union Settlement Overdraft Class Action State Issues

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  • Online bank reaches settlement with customers over service disruption

    Courts

    On October 28, the U.S. District Court for the Northern District of California issued an order granting preliminary approval of a putative class action settlement concerning allegations that an online bank’s service disruption prevented customers from accessing their account, including through card purchases and ATM withdrawals. The plaintiffs also claimed that after the service disruption, “some customers reported incorrect account balances and unauthorized charges.” The plaintiffs alleged, among other things, claims for negligence, unjust enrichment, breaches of contract and fiduciary duty, conversion, and violations of several state laws. Following a series of settlement negotiations, the parties entered into an amended settlement identifying the settlement class as “[a]ll consumers who attempted to and were unable to access or utilize the functions of their accounts with [the defendant], as confirmed by a failed transaction or locked card as recorded in [the defendant]’s business records, beginning on October 16, 2019 through October 19, 2019, as a result of the Service Disruption.” Under the settlement, tier one customers who are unable or choose not to provide documentation substantiating their alleged losses can receive up to $25 for verified claims. Tier two customers who can show “‘reasonable documentation’ to substantiate their loss” can receive their verified loss, up to $750. The defendant has agreed to set aside $4 million to cover tier one claims and $1.5 million to cover tier two claims. The defendant is also required to make a minimum payment of $1.5 million in addition to the nearly $6 million it already paid to active customers in connection with the service disruption in the form of $10 “courtesy” payments, as well as credits the defendant issued to customers “who incurred ‘certain transaction fees’” during the service disruption.

    Courts Fees Overdraft Class Action Settlement State Issues

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  • Parties file unopposed settlement requiring credit union to pay $16 million to resolve insufficient funds fee lawsuit

    Courts

    On October 21, class members filed an unopposed motion for preliminary approval of a class action settlement in the U.S. District Court for the Eastern District of Virginia, which would—if approved—require a national credit union to establish a $16 million common fund, pay all settlement administration costs, and modify its account agreement policy to clarify how it assesses insufficient funds fees. The named plaintiff filed a lawsuit against the credit union alleging that its fee-assessment practices for insufficient funds violated her agreement with the credit union. According to the named plaintiff, the credit union charged multiple $29 insufficient funds fees (NSF fees) per transaction, even though she argued her contract only permitted the credit union to charge one NSF fee per transaction, “regardless of how many times the merchant re-presents the debit item or check for payment.” The credit union, however, denied that its NSF fee assessment practices violated the law or were in breach of member contracts. While the court originally dismissed the suit for failure to state a claim, on appeal, the U.S. Court of Appeals for the Fourth Circuit stayed further proceedings to allow the parties to mediate an agreement. If approved, class members will not be required to file claims to receive settlement benefits.

    Courts Fees Overdraft Class Action Settlement

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  • Federal Reserve Board extends temporary actions on intraday credit availability

    Federal Issues

    On October 1, the Federal Reserve Board extended certain temporary actions that are designed to increase the availability of intraday credit to mitigate the impact of Covid-19.  The temporary actions were previously announced on April 23 (previously covered here), and include: (1) suspending uncollateralized intraday credit limits and waiving overdraft fees for eligible institutions; (2) permitting a streamlined procedure to request collateralized intraday credit; and (3) suspending two collections of information that are used to calculate net debit caps.  The actions are extended to March 31, 2021.

    Federal Issues Covid-19 Federal Reserve FRB Consumer Credit Overdraft Fees Debit Cards

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  • CFPB reaches $122 million settlement with national bank to resolve overdraft violations

    Federal Issues

    On August 20, the CFPB announced a settlement with a national bank, resolving allegations that the bank violated the EFTA, CFPA, and FCRA through the marketing and sale of its optional overdraft service. According to the consent order, the bank violated the EFTA and Regulation E by enrolling customers who orally consented to the bank’s optional overdraft program without first providing the customers with written notice, and subsequently charged those customers overdraft fees. The bank also allegedly engaged in abusive practices by, among other things, (i) requiring new customers to sign its optional overdraft notice with the “enrolled” option pre-checked without first providing written notice or, in certain instances, without mentioning the optional overdraft service to the customer at all; (ii) enrolling new customers in the optional overdraft service without requesting their oral enrollment decision; and (iii) deliberately obscuring, or attempting to obscure, the overdraft notice “to prevent a new customer’s review of their pre-marked ‘enrolled’ status” in the optional overdraft service. The CFPB also asserted the bank engaged in deceptive practices by marketing the optional overdraft service as a “free” service or benefit, downplaying the associated fees and disclosures, and by suggesting that the overdraft service was a “‘feature’ or ‘package’ that ‘comes with’ all new consumer-checking accounts, rather than as an option that new customers must opt in to.” However, the bank actually charged customers $35 for each overdraft transaction paid through the service, the CFPB alleged.

    With respect to the alleged FCRA and Regulation V furnishing violations, the CFPB claimed the bank failed to establish and implement policies and procedures concerning the accuracy and integrity of the consumer-account information it furnished to two nationwide specialty consumer reporting agencies (NSCRAs). The bank also allegedly failed to implement policies or procedures for investigating customer disputes related to the furnished information, failed to timely investigate certain indirect customer disputes concerning its furnishing to one of the NSCRAs, and instructed customers who called to dispute furnished information to contact the NSCRA instead of submitting a direct dispute to the bank.

    Under the terms of the consent order, the bank is required to provide approximately $97 million in restitution to roughly 1.42 million consumers and pay a $25 million civil money penalty. The bank has also agreed to (i) correct its optional overdraft service enrollment practices; (ii) stop using pre-marked overdraft notices to obtain affirmative consent from customers; (iii) provide current customers who have remained enrolled in the optional overdraft service with enrollment status details and instructions on how to unenroll from the service; and (iv) establish policies and procedures designed to ensure its furnishing practices comply with the FCRA.

    Federal Issues CFPB Enforcement Overdraft EFTA CFPA FCRA UDAAP Credit Furnishing

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