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Financial Services Law Insights and Observations


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  • 2nd Circuit requires second look at “design and content” of online user agreement


    On September 14, the U.S. Court of Appeals for the Second Circuit reversed a district court’s order denying a credit union’s motion to compel arbitration in a case involving the “unique question” of “whether and how to address incorporation by reference in web-based contracts under New York law.” The plaintiff claimed that the credit union wrongfully assessed and collected overdraft and insufficient funds fees on checking accounts that were not actually overdrawn. After the credit union moved to compel arbitration pursuant to a mandatory arbitration clause and class action waiver provision contained in the account agreement, the plaintiff argued that she was not bound by these provisions because they were not included in the original agreement and the credit union did not notify her when it added them to the agreement. According to the credit union, the plaintiff was on inquiry notice of the modified agreement because she separately agreed to an internet banking agreement that incorporated the modified account agreement by reference, and because the modified account agreement was published on the credit union’s website, which the plaintiff used for online banking. The district court disagreed, finding, among other things, that the hyperlink and language related to the account agreement appeared to be “buried” in the internet banking agreement.

    On appeal, the 2nd Circuit held that the district court “erred in engaging in the inquiry notice analysis, which requires an examination of the ‘design and content’ of the webpage, without reviewing the actual screenshots of the web-based contract.” Recognizing that the internet banking agreement was a “clickwrap” or a “scrollwrap” agreement, the appellate court explained that it has “consistently upheld such agreements because the user has affirmatively assented to the terms of the agreement by clicking ‘I agree’ or similar language.” While the plaintiff did not dispute that she signed up for internet banking, this did not end the court’s analysis; according to the 2nd Circuit, when addressing questions concerning digital contract formation, “courts also evaluate visual evidence that demonstrates ‘whether a website user has actual or constructive notice of the conditions.’” The credit union did not provide evidence showing how the internet banking agreement was presented to users—thereby preventing the district court from assessing whether the relevant language and hyperlink were clear and conspicuous. The 2nd Circuit, therefore, instructed the district court to consider on remand the design and content of the internet banking agreement “as it was presented to users” to determine whether the plaintiff agreed to its terms, and to assess whether the account agreements are “clearly identified and available to the users” based on applicable precedents regarding inquiry notice of terms in web-based contracts.

    Courts State Issues Appellate Second Circuit Arbitration Overdraft Fees Consumer Finance New York Class Action

  • Republicans take issue with CFPB agenda

    Federal Issues

    On September 12, several Republican senators sent a letter to CFPB Director Rohit Chopra expressing concerns that the Bureau is again pursuing “a radical and highly-politicized agenda unbounded by statutory limits.” In particular, the letter took issue with recent Bureau reports on the use of overdraft fees (covered by InfoBytes here and here), calling the agency’s actions a “relentless smear campaign” against banks. “Charging fees that customers chose to pay should not be disturbing or illegal, and yet, the CFPB appears to have developed a particular disdain for banks charging their customers for services, pejoratively calling overdraft protection ‘junk fees,’” the letter stated. Additionally, the letter claimed that the Bureau is changing its rules in order to publish previously confidential information about financial institutions to make it easier to threaten them with reputational harm (covered by InfoBytes here), without affording the financial institution the similar ability to, for example, disclose the existence of a CFPB examination. Among other things, the new procedural rule establishes a disclosure mechanism intended to increase transparency of the Bureau’s risk-determination process that will exempt final decisions and orders by the CFPB director from being considered confidential supervisory information, allowing the Bureau to publish the decisions on their website. According to the senators, the rule requires nonbanks to keep confidential information relating to a decision issued by the Bureau, including facts that could question the decision or raise procedural concerns. “The one-sided nature of the CFPB’s rule change gives the agency the ability to publicly tarnish an institution’s name without affording the firm the power to defend itself,” the letter said. The letter also decries a recent change to the agency’s rules of adjudication to make it more difficult for companies to defend themselves against novel enforcement theories by bypassing an administrative law judge and permitting the director to rule directly on the validity of the legal basis for the enforcement action.

    Federal Issues U.S. Senate Agency Rule-Making & Guidance CFPB Supervision Nonbank Nonbank Supervision Overdraft Fees Consumer Finance Examination Fintech

  • CFPB fines fintech for algorithm-induced overdraft charges

    Federal Issues

    On August 10, the CFPB announced a consent order against a California-based fintech company for allegedly using an algorithm that caused consumers to be charged overdrafts on their checking accounts when using the company’s personal finance-management app. According to the Bureau, the app promotes automated savings with a proprietary algorithm, which analyzes consumers’ checking-account data to determine when and how much to save for each consumer. The app then automatically transfers funds from consumers’ checking accounts to accounts held in the company’s name. The Bureau asserted, however, that the company engaged in deceptive acts or practices in violation of the CFPA by (i) causing consumers’ checking accounts to incur overdraft charges from their banks even though it guaranteed no overdrafts and represented that its app never transferred more than a consumer could afford; (ii) representing that it would reimburse overdraft charges (the Bureau claims the company has received nearly 70,000 overdraft-reimbursement requests since 2017); and (iii) keeping interest that should have gone to consumers even though it told consumers it would not keep any interest earned on consumer funds. Under the terms of the consent order, the company is required to provide consumer redress for overdraft charges that it previously denied and must pay a $2.7 million civil penalty.

    Federal Issues CFPB Enforcement Consumer Finance Fintech Algorithms Overdraft Deceptive UDAAP CFPA

  • CFPB reports on banks’ overdraft fee practices

    Federal Issues

    On July 20, the CFPB published a blog post examining banks’ overdraft and non-sufficient fund fees (NSF) fees practices since the publication of their report “Overdraft/NSF Fee Reliance Since 2015 – Evidence from Bank Call Reports” in December 2021. According to the blog post, the Bureau relied on additional data from the call report from the last three available quarters – the third quarter of 2021 through the first quarter of 2022. The December 2021 report used aggregate Call Report data from 2015 to 2021 from banks with assets of over $1 billion to examine the evolution of banks’ reliance on overdraft and NSF fees. The report found a lower reliance by banks on overdraft and NSF fees during the pandemic and continuing into 2021, which the Bureau said “reflects the relatively larger continued shortfall of overdraft and NSF fees in relation to their pre-pandemic volumes compared to the shortfall in maintenance and ATM fees.” While reliance on overdraft and NSF fees varied considerably among banks, the report noted that these fees represented close to two-thirds of banks’ reported fee revenue and were generally stable over time for any given bank.

    According to the July 20 blog post, the Bureau found that the recent increase in overdraft revenue is greatest among small and midsize banks. However, the data shows that overall overdraft revenue stopped its decline and reversed somewhat, and ended up 20.1 percent below the corresponding 2019 levels. The CFPB also noted that revenues from other listed fees, such as account maintenance and ATM fees, has increased since 2020, especially at banks that experienced the largest declines in overdraft/NSF fee revenues.

    Federal Issues CFPB Consumer Finance Overdraft Fees

  • NYDFS to study overdraft fees

    State Issues

    On July 15, New York’s governor signed S9348, directing the superintendent of NYDFS to conduct a study of overdraft fees in the state. (See also NYDFS press release here.) The study will examine, among other things: (i) the total amount of overdraft fees paid in the state; (ii) the geographical distribution of these fees; (iii) whether certain communities have higher rates of overdraft fees than others and the possible reason for such high rates; (iv) “the percentage of overdraft fees reduced through direct or indirect negotiation”; and (v) the enumeration of consumer rights related to overdraft fee negotiations. The results of the study are to be delivered within one year to the governor, the temporary president of the senate, and the speaker of the assembly. The act is effective immediately.

    State Issues State Legislation New York Overdraft NYDFS Consumer Finance State Regulators

  • NYDFS issues overdraft and NSF fee guidance

    State Issues

    On July 12, NYDFS issued guidance in an industry letter to regulated banking institutions, calling into question bank practices that can cause consumers to receive multiple overdraft and non-sufficient funds (NSF) fees from a single transaction. The industry letter identifies three specific types of fee practices as unfair or deceptive:

    • Charging overdraft fees for “authorize positive, settle negative” transactions, where consumers are charged an overdraft fee even if they have sufficient money in their account when a bank approves a transaction, but the balance is negative when the payment is settled. Per NYDFS, imposing an overdraft fee in this situation is unfair because, among other things, consumers “have no control over or involvement in” when or how their debit transactions get settled.
    • Charging “double fees” to consumers for a failed overdraft protection plan transfer, which occurs when a bank goes to transfer money from one deposit account to another deposit account to cover an overdraft transaction, but the first account lacks sufficient funds to cover the overdraft. Per NYDFS, double fees injure consumers “by imposing fees for a transfer that provides no value to the consumer and is not reasonably avoidable by consumers, who have no reason to expect that they will be charged a fee for an overdraft protection transfer that does not in fact protect them against an overdraft.”
    • Charging NSF representment fees when a merchant tries several times to process a transaction that is deemed an overdraft and the bank charges a fee for each blocked representment without adequate disclosure. Banks that currently charge multiple NSF fees should “make clear, conspicuous, and regular disclosure to consumers that they may be charged more than one NSF fee for the same attempted debit transaction,” NYDFS stated. Additionally, banks are advised to consider other steps to mitigate the risk that consumers are charged multiple NSF fees, including limiting time periods for when multiple NSF fees may be charged, performing periodic manual reviews to identify instances of multiple NSF Fees, and offering refunds to affected consumers. NYDFS “ultimately expects [i]nstitutions will not charge more than one NSF fee per transaction, regardless of how many times that transaction is presented for payment,” the industry letter said.

    NYDFS informed regulated entities that it will evaluate whether they “are engaged in deceptive or unfair practices with respect to overdraft and NSF fees in future Consumer Compliance and Fair Lending examinations.”

    State Issues State Regulators NYDFS Consumer Finance New York Overdraft NSF Fees Unfair Deceptive

  • CFPB shares consumer finance data

    Federal Issues

    On June 15, CFPB Deputy Director Zixta Martinez spoke before the Consumer Federation of America’s 2022 Consumer Assembly addressing recent research by the Bureau on payday loans, rent-a-bank schemes, overdraft and other banking fees, medical debt, and credit reporting. In her remarks, Martinez first discussed the Bureau’s report on consumer use of state payday loan extended payment plans, which she noted is “the first significant piece of research into extended payment plans” (covered by InfoBytes here). She assured advocates raising concerns about “rent-a-banks” that the Bureau shares those concerns and is focused on this issue. Turning to overdraft and other banking fees, Martinez described overdraft programs as “more like a maze than a service,” which often result in complicated charges being imposed on families who can least afford them, driving them into deeper debt. She pointed to the Bureau’s desire “to move toward a market that works for families and honest financial institutions alike,” recognizing positive shifts made by big banks towards reducing or eliminating such fees as well as the Bureau’s commitment to “returning vigorous competition to this market." Finally, Martinez addressed medical debt, noting that many of the “approximately 43 million Americans with $88 billion in allegedly unpaid medical bills on their credit reports” are trapped in a “bureaucratic doom-loop comprised of the healthcare, insurance, debt collection, and credit reporting industries.” To address this issue, Martinez explained that the Bureau is working broadly across the government and with the non-profit sector to ensure that medical debt does not impact job security, housing, or qualification for affordable credit, and is considering whether it is appropriate for such debt to be included on credit reports at all.

    Federal Issues CFPB Consumer Finance Medical Debt Overdraft

  • CFPB examining impact of overdraft programs

    Federal Issues

    On June 16, the CFPB published a blog post outlining recent efforts taken by the agency to collect key metrics concerning the consumer impact of certain supervised institutions’ overdraft and non-sufficient fund (NSF) practices. The Bureau asked more than 20 institutions to provide data on several “consumer-impact metrics,” including: (i) the “[t]otal annual dollar amount consumers receive in overdraft coverage compared to the amount of fees charged”; (ii) the annual amount of overdraft fees charged for each active checking account; (iii) the annual amount of NSF fees charged per active checking account; (iv) “the share of active checking accounts with more than 6 and more than 12 overdraft and/or NSF fees per year”; and (v) the “[s]hare of active checking accounts that are opted into overdraft programs for ATM and one-time debit transactions.” The Bureau stated that it plans to “use this information for further examination and review” and to provide feedback to each institution. The Bureau also plans to “share this information with other regulators,” but will not make the supervisory information public. Additionally, the Bureau noted that while it is “encouraged that some banks and credit unions are competing for consumers’ business by changing their overdraft and NSF programs,” many banks still need to improve their practices.

    Federal Issues CFPB Consumer Finance Overdraft NSF Fees Supervision

  • Chopra testifies at congressional hearings

    Federal Issues

    On April 26, CFPB Director Rohit Chopra testified at a hearing held by the Senate Banking Committee on the CFPB’s most recent semi-annual report to Congress (covered by InfoBytes here). Chopra’s opening remarks focused on key efforts the agency is taking to meet objectives established by Congress, including (i) shifting enforcement resources away from investigating small firms and focusing instead on repeat offenders and large players engaged in large-scale harm; (ii) increasing transparency through the issuance of guidance documents, such as advisory opinions, compliance bulletins, policy statements, and other publications to help entities comply with federal consumer financial laws; (iii) rethinking its approach to regulations, including its work to develop several rules authorized in the CFPA, and placing “a higher premium on simplicity and ‘bright lines’ whenever possible”; (iv) engaging with the business community and meeting with state-based associations to speak directly with community banks and credit unions and engaging with a broad range of other businesses and associations that may be affected by the laws the Bureau administers; (v) promoting greater competition by “lowering barriers to entry and increasing the pool of firms competing for customers based on quality, price, and service”; and (vi) researching issues related to big tech’s influence on consumer payments.

    In his opening statement, Senate Banking Committee Chair Sherrod Brown (D-OH) praised Chopra’s recent efforts related to “junk fees” such as overdraft fees and non-sufficient fund fees, discrimination and bias in the appraisal process, reporting of medical collection debt by the credit reporting agencies, examination authority over non-banks and fintech companies, and crack-down on repeat offenders. However, Ranking Member Patrick Toomey (R-PA) criticized Chopra’s actions and alleged “overreach.” Among other things, Toomey characterized the Bureau’s attempts “to supervise for disparate impact not only in lending, but in all consumer financial services and products” as “unauthorized stealth rulemaking” that “will create tremendous uncertainty among regulated entities.” Toomey also took issue with recent changes to the Bureau’s rules of adjudication, claiming it will “make it easier to engage in regulation by enforcement.”

    During the hearing, committee members discussed topics related to collecting small business lending data, rural banking access, student loan servicing, and whether the Bureau should be subject to the congressional appropriations process. Republican committee members raised concerns over several issues, including significant revisions recently made to the Bureau’s unfair, deceptive, or abusive acts or practices (UDAAP) examination manual that state that any type of discrimination in connection with a consumer financial product or service could be an “unfair” practice (i.e., the CFPB can now bring “unfair” discrimination claims related to non-credit financial products). (Covered by a Buckley Special Alert.) Senator Thom Tillis (R-NC) characterized the new policy as a “wholesale rewrite” of the examination manual that will improperly expand the reach of disparate impact liability and challenged the lack of notice-and-comment for the changes to the UDAAP manual. 

    Conversely, Democratic committee members praised Chopra’s actions and encouraged him to continue pressuring banks to cut excessive overdraft fees and other “junk fees,” as well as strengthen enforcement against repeat offenders. Senator Elizabeth Warren (D-MA) stressed that imposing fines that are less than the profits made from the misconduct will not be enough to persuade large banks to follow the law and asked Chopra to think about other steps regulators might consider to hold large repeat offenders accountable. She referenced her bill, the Corporate Executive Accountability Act, which is designed to hold big bank executives personally liable for the bank’s repeat violations of the law.

    Chopra reiterated the Bureau’s priorities in his April 27 testimony before the House Financial Services Committee. At the hearing, House committee members questioned Chopra on the Bureau’s plans to collect data on small business loans pursuant to Section 1071 of the Dodd-Frank Act, crack down on “junk fees,” and address fair lending concerns with automated valuation models and fraud in payment networks. During the hearing, Chopra told committee members that the Bureau plans to revisit and update older regulations such as the CARD Act to lower credit card fees. “We want to make sure that credit cards are a competitive market . . . [so] I am asking the staff to look at whether we should reopen the Card Act rules that were promulgated by the Federal Reserve Board over 10 years ago . . . to be able to look at some of these older rules we inherited, to determine whether there needs to be any changes,” Chopra said, adding that “late fees are an area that I expect to be one of the questions we solicit input on.”

    Federal Issues CFPB Senate Banking Committee House Financial Services Committee Consumer Finance Dodd-Frank CFPA Credit Cards Overdraft Fees Repeat Offender

  • District Court granted final approval of a $5.7 million class action overdraft fee settlement


    On April 22, the U.S. District Court for the Northern District of New York granted final approval of a $5.7 million class action settlement resolving allegations related to overdraft fees applied to certain bank account transactions. According to plaintiffs’ unopposed motion for preliminary approval, the bank was sued in 2020 for allegedly unfairly assessing and collecting overdraft fees on “Authorize Positive, Purportedly Settle Negative Transactions” (APPSN fees) as well as NSF fees. The bank denied the allegations and moved to dismiss, contending that the relevant account agreements are unambiguous, and that even if there were, “extrinsic evidence resolves the ambiguity in its favor on the whether the fees at issue are permitted.” In August 2021, the parties notified the court that they had reached an agreement. Under the terms of the preliminarily approved settlement, the bank will make a $4.25 million cash payment and will “forgive, waive, and agree not to collect an additional” $1.5 million in uncollected overdraft fees. Class members, defined as all current and former bank customers with consumer checking accounts who were charged a relevant fee between December 4, 2013, and November 30, 2021, will automatically receive their pro rata share of the settlement fund without having to prove they were harmed from the bank’s practices. There are no claim forms, and class members will be determined through the bank’s checking account data. A formula will be used to calculate each class member’s distribution. Under the terms of the settlement approximately $2.9 million will go towards customers who were charged APPSN fees, while roughly $1.3 million will be allocated for customers who were charged retry NSF fees.

    Courts Overdraft Fees Consumer Finance Class Action Settlement


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