Skip to main content
Menu Icon
Close

InfoBytes Blog

Financial Services Law Insights and Observations

Filter

Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.

  • Hsu discusses bank overdraft reform

    Federal Issues

    On December 8, acting Comptroller of the Currency Michael J. Hsu spoke before the Consumer Federation of America’s 34th Annual Financial Services Conference. His remarks centered on reforming bank overdraft programs to “empower and promote financial health” of consumers. Quoting a recent Brookings Institution publication, Hsu noted, “The existing system is regressive (reverse Robin Hood), creating structural barriers and elevating costs to those on the lower end of the income spectrum, while simultaneously showering benefits to those on the upper end.” To eliminate this “regressive system,” Hsu noted that banking deposit account services need to be structured “so that they improve customers’ financial capabilities and are priced to be low to no cost.” According to Hsu, Bank On’s approach, which sets a “baseline standard for safe, affordable, and appropriate accounts that meet the needs of low-income consumers, particularly those outside of the financial mainstream,” appears to be a natural solution for decreasing the population of unbanked individuals and eliminating overdraft fees. However, Hsu also acknowledged that “limiting overdrafts may limit the financial capacity for those who need it most.”

    Hsu identified several product features “that could be modified or recalibrated to support financial health” and laid out specific recommendations on the heels of the OCC’s staff review of bank overdraft programs, which he noted already align with the overdraft efforts by many banks, including (i) requiring consumers to opt in to overdrafts; (ii) providing an overdraft “grace period” prior to assessing a fee; (iii) allowing negative balances without triggering an overdraft fee; (iv) offering access to real-time account balance information and alerts; and (v) linking checking accounts to another account for overdraft protection, among others. 

    Federal Issues OCC Overdraft Bank Regulatory Consumer Finance

  • District Court denies EFTA safe harbor in overdraft class action

    Courts

    On November 8, the U.S. District Court for the District of New Hampshire denied a credit union’s motion to dismiss claims concerning its overdraft fees and policies. Plaintiffs filed a putative class action alleging that the defendant failed to properly disclose how it assessed overdrafts in violation of EFTA and implementing Regulation E. According to the plaintiffs, the defendant’s overdraft fee opt-in disclosure did not provide a “clear and readily understandable” explanation of the meaning of “enough money,” nor did it specify whether overdrafts are calculated based on the actual balance or the available balance. The defendant moved to dismiss, arguing that the opt-in disclosure should be read in conjunction with a separate membership agreement that outlines the account terms and discloses the defendant’s use of the “available balance” method to determine when an account is overdrawn. The defendant further contended that it did not violate Regulation E and that it qualifies for EFTA’s safe harbor provision. The court disagreed, ruling that the plaintiffs had plausibly alleged a violation of Regulation E, as it requires the opt-in disclosure to be “segregated from all other information.” Among other things, the court stated that “[c]ountless courts examining virtually identical language have agreed” that language similar to the phrase “enough money” can plausibly amount to a violation of Regulation E’s “clear and readily understandable” explanation of overdraft fees.

    With respect to defendant’s safe harbor claim, the court observed that EFTA may provide safe harbor to banks using an appropriate CFPB model clause (15 U.S.C. § 1693m(d)(2)) or a disclosure form “substantially similar” to the Bureau’s Model Form A-9, which states “[a]n overdraft occurs when you do not have enough money in your account to cover a transaction, but we pay it anyway.” The court agreed, however, with the reasoning of several courts that using language identical to that in the A-9 does not necessarily provide safe harbor defeating plaintiffs’ claims where, as here, the plaintiffs “have plausibly stated a claim that the clause from Model Form A-9 was not ‘appropriate’ because the language did not describe [defendant’s] overdraft policy in a ‘clear and readily understandable’ way.”

    Courts EFTA Overdraft Safe Harbor Regulation E Fees Class Action Disclosures CFPB Consumer Finance

  • House fintech task force examines buy now/pay later industry

    Federal Issues

    On November 2, the House Financial Services Committee’s Task Force on Financial Technology held a hearing titled “Buy Now, Pay More Later? Investigating Risks and Benefits of BNPL and Other Emerging Fintech Cash Flow Products,” urging regulators to examine the BNPL industry. The committee memorandum highlighted the rise in consumers products offered by fintechs, such as BNPL, earned wage access, and overdraft avoidance products, and warned that while these products may help consumers manage their personal cash flow, they also have the potential to create unsustainable levels of debt. FSC staff noted that many lending disclosure requirements, including those under TILA, may not apply to several of these products, thus creating concerns regarding consumers’ understanding of the associated risks. Pointing out that payments made on many of these products are not reported to credit bureaus, FSC staff raised the issue of whether consumers are missing out on opportunities to build credit.

    The task force heard from several industry witnesses who discussed, among other things, current federal and state consumer protection regulations that apply to BNPL products. One witness stressed the importance of “balanced and thoughtful regulation” that benefits consumers and merchants using these new payment solutions, and noted that the industry is actively working with credit bureaus on ways to share repayment data. House Financial Services Chair Maxine Waters (D-CA) also urged the CFPB to “look[ ] deeply” at these emerging products to gain a better understanding of how they may impact low- and moderate-income consumers and borrowers of color. Representative Blaine Luetkemeyer (R-MO) noted, however, that these products “allow[] people to purchase products, [and] pay for them in a timely manner as they can afford them.” Representative Warren Davidson (R-OH) agreed, stressing that policymakers need to “avoid punishing new products for not fitting within regulatory buckets that were already built” and “should avoid overly impairing consumer choices on how they spend money.”

    Federal Issues House Financial Services Committee CFPB Buy Now Pay Later Earned Wage Access Overdraft Consumer Finance Disclosures TILA Credit Report Consumer Lending Fintech

  • California authorizes prepaid accounts to accept publicly administered funds provided no overdraft fees

    State Issues

    On October 5, the California governor signed SB 497, which, among other things, amends the definition of a “qualifying account” use for the purposes of depositing certain publicly administered funds. The amendment eliminates prepaid card accounts from the definition of “qualifying account,” and instead authorizes “a prepaid account or a demand deposit or savings account offered by or through an entity other than an insured depository financial institution, as specified, that is not attached to an automatic credit or overdraft feature, unless the credit or overdraft feature has no fee, charge, or cost, or it complies with the requirements for consumer credit under the federal Truth in Lending Act.” Specifically, persons or entities that are not insured depository financial institutions but who offer, maintain, or manage non-“qualifying accounts” are prohibited from soliciting, accepting, or facilitating the direct deposit of the publicly administered funds into the accounts.

    State Issues State Legislation California Consumer Finance Overdraft Prepaid Cards TILA

  • 5th Circuit: Extended overdraft charges are not interest

    Courts

    On September 29, the U.S. Court of Appeals for the Fifth Circuit held that the daily fees imposed on a consumer who failed to timely pay an overdraft were deposit-account service charges, not interest, and thus not subject to usury limits. The plaintiff allegedly overdrew her account and her bank paid the overdraft. The bank began charging a daily fee after the plaintiff did not repay the overdraft within five business days (called an “Extended Overdraft Charge”), which the plaintiff argued constituted interest on an extension of credit and was usurious in violation of the National Bank Act (NBA). In dismissing the plaintiff’s complaint for failure to state a claim, the district court reasoned that the bank does not make a loan to a customer when it covers the customer’s overdraft, and therefore the NBA’s limitations on interest charges do not apply. On appeal, the appellate court sided with the district court and deferred to the interpretation of the OCC that the fees at issue were not “interest” under the law. The court found the OCC’s interpretation to be reasonable and otherwise entitled to Auer deference, and on that basis affirmed.

    Courts Fifth Circuit Appellate National Bank Act Fees OCC Overdraft Usury Bank Regulatory

  • 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

  • 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

  • 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

  • 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

  • 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

Pages

Upcoming Events