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Michigan regulator encourages financial institutions to avoid offsetting CARES Act stimulus payments
On May 14, the Michigan Department of Insurance and Financial Services issued a bulletin “strongly” urging Michigan financial institutions not to access CARES Act stimulus payments to satisfy overdrafts or to exercise any right of offset against the funds without the agreement of the customer or member. The regulator also “strongly” urged financial institutions not to use CARES Act stimulus payments for ATM, late payment, overdraft, or other fees.
Connecticut regulator urges institutions not to use CARES Act checks to satisfy debt
On April 16, the Connecticut Department of Banking issued a letter to all Connecticut financial institutions, “strongly” urging them not to use stimulus payments to satisfy overdrafts and not to exercise any right of offset against other debts for 30 days after the payment is received without express consumer consent. If an institution’s systems automatically use the payment to satisfy an overdraft, the department urged reversing the transaction as soon as possible.
District court dismisses class action overdraft fee claims
On March 31, the U.S. District Court for the Northern District of Illinois dismissed proposed class action overdraft fee claims brought against a national bank and the national bank’s parent company. The plaintiff argued that the bank unfairly charged him overdraft fees for debit transactions he made using two separate merchant debit cards (known as “decoupled debit cards”) that linked to his bank account. The plaintiff contended that because the bank’s contract language stated it would not charge overdraft fees on “non-recurring” debit transactions, this language should control despite the fact that the decoupled debit cards were not issued by the bank. The plaintiff brought multiple claims against the bank, including “breach of contract, breach of the covenant of good faith and fair dealing, unconscionability, conversion, and unjust enrichment.” The bank moved to dismiss for failure to state a claim.
The court first dismissed all claims brought against the national bank’s parent company, saying that the plaintiff combined and conflated the two entities. The court then dismissed with prejudice the plaintiff’s claims against the national bank for breach of the implied covenant of good faith and fair dealing, conversion, and unjust enrichment. The court also dismissed, but without prejudice, the claims against the national bank for breach of contract and unconscionability, although the court noted that the bank’s contract language “only applies to debit cards or access devices that were issued by [the bank], unlike the decoupled debit cards at issue here.”
Illinois Department of Financial Regulation issues guidance to Illinois banks and credit unions
On March 30, the Illinois Department of Financial Regulation, Division of Banking and Division of Financial Institutions, issued guidance to Illinois banks and credit unions regarding support for consumers and businesses impacted by Covid-19. Illinois banks and credit unions are encouraged to use their capital and liquidity buffers as they respond to financial challenges resulting from the Covid-19 pandemic, such as to lend and undertake other supportive actions in a safe and sound manner. Illinois banks and credit unions also are encouraged to: (i) provide affected borrowers with payment accommodations to work through short-term setbacks; (ii) respond to borrowers from industry sectors particularly vulnerable to the volatility of the current economic environment; and (iii) work with small businesses, hourly workers, and independent contractors that have less financial flexibility to weather the economic decline.
The guidance further encourages Illinois banks and credit unions to assist affected borrowers by, among other things, waiving certain fees (e.g., ATM fees, overdraft fees, late fees), increasing ATM daily cash withdrawal limits, increasing credit card limits for creditworthy borrowers, and providing new loans on favorable terms. Prudent efforts to help consumers and businesses will not be subject to examiner criticism.
OCC issues Comptroller’s Handbook booklet updating deposit-related credit guidance
On March 12, the OCC issued Bulletin 2020-14 announcing the revision of the Deposit-Related Credit booklet of the Comptroller’s Handbook that was issued in September 2018. The revised booklet provides guidance for OCC examiners in connection with the examination and supervision of national banks, federal savings associations, and federal branches and agencies of foreign banking organizations that provide small-dollar, unsecured credit products and services such as check credit, overdraft protection, and deposit advance products. The revised booklet includes, among other things, (i) updated guidance following the rescission of OCC Bulletin 2018-28, Deposit-Related Credit: Updated Comptroller’s Handbook Booklet Advance Products (previously covered by InfoBytes here); (ii) changes to OCC issuances, laws, and regulations made since the last booklet; (iii) information explaining the applicability of references to covered savings associations; and (iv) clarifying edits regarding supervisory guidance and sound risk management practices. An appendix containing a sample request letter is also included.
National bank settles overdraft fee MDL
On January 24, the U.S. District Court for the District of South Carolina entered final judgment for the approval of a $43 million settlement between a national bank and consumers to resolve multidistrict litigation (MDL) concerning overdraft charges. According to the settlement, since 2013, several groups of consumers have filed putative class action complaints against the bank in multiple jurisdictions alleging improper assessment and collection of overdraft fees, including claims that class members incurred overdraft fees as a result of the bank’s alleged practice of assessing fees based on an account’s available balance rather than its ledger balance. Other claims include allegations that the bank assessed overdraft fees for an ATM or one-time debit card transaction, assessed sustained overdraft fees, or assessed overdraft fees on ride-sharing transactions. In 2015 the Judicial Panel for Multi-District Litigation consolidated the actions for pretrial purposes.
In 2018, as previously covered by InfoBytes, the court dismissed one of the complaints in the MDL action, which alleged that the bank’s $20 overdraft fee is an interest charge on credit and therefore exceeds usury limits under the National Bank Act (NBA). The court noted that it had previously rejected a materially identical usury claim in December 2015 and that no new evidence or authority had been brought to light that would change its decision. In addition, the court concluded that “the law is still clear that sustained overdraft fees are not interest, and that assessing such fees cannot violate the usury provision of the NBA.” In 2019, the parties agreed to settle the action in its entirety, without any admission of liability by the bank. Under the terms of the settlement agreement, six classes of consumers will receive payouts or overdraft fee forgiveness, which will include $27 million “in the form of reductions to the outstanding balances of [class members] whose accounts were closed with amounts owed to the [bank].”
11th Circuit reverses dismissal of EFTA action alleging inadequate overdraft notice, denies EFTA safe harbor defense
On August 27, the U.S. Court of Appeals for the 11th Circuit reversed the dismissal of a consumer’s action against her credit union, in which the consumer alleged the credit union used the wrong balance calculation method to impose overdraft fees. According to the opinion, the consumer filed suit against the credit union for using an “available balance” calculation method to impose overdraft fees on her account when the credit union allegedly agreed to use the “ledger balance” method at the time of account opening, in violation of the Electronic Fund Transfer Act (EFTA) and various state law contract claims. The district court dismissed the action, concluding that the agreements “unambiguously permitted [the credit union] to assess overdraft fees using the available balance calculation.”
On appeal, the 11th Circuit disagreed with the district court’s interpretation of the agreements. The court noted that while the opt-in overdraft agreement used by the credit union is based on Regulation E’s (the EFTA’s implementing regulation) Model Form A-9, the model does not address which account balance calculation method is used to determine whether a transaction results in an overdraft. The language chosen by the credit union, according to the appellate court, is “ambiguous because it could describe either the available or the ledger balance calculation method for unsettled debits” and therefore, does not describe the calculation in a “clear and readily understandable way” as required by Regulation E. Because the language was ambiguous, the consumer did not have the opportunity to affirmatively consent to the overdraft service. Moreover, the appellate court concluded that the credit union was not protected under the EFTA’s safe harbor because it used the Model Form A-9 text. Specifically, the appellate court reasoned that the “safe-harbor provision insulates financial institutions from EFTA claims based on the means by which the institution has communicated its overdraft policy,” but does not provide a shield from allegations of inadequacy. Because the consumer argued that the credit union violated the EFTA due to its failure to prove enough information to allow for affirmative consent, the safe-harbor provision does not preclude liability.
District Court compels arbitration for most class action overdraft claims
On August 23, the U.S. District Court for the Northern District of California held that a portion of a class action suit alleging a bank improperly assessed overdraft fees must proceed to arbitration. According to the opinion, a consumer filed the class action complaint alleging the bank charged multiple non-sufficient funds fees for the same credit card payment transaction, in violation of the contract between the bank and the consumer. The class action alleged claims for breach of contract, or, in the alternative, unjust enrichment, as well as a claim for violating the California Business & Professions Code and a claim for violating the California Consumer Legal Remedies Act. The bank moved to compel arbitration of all the claims based on an arbitration clause contained in the customer deposit agreement. The court concluded that the claims for breach of contract and unjust enrichment are covered by the arbitration clause in the deposit agreement and therefore compelled arbitration. As for the injunctive relief the consumer sought under the California state statutory claims, the consumer argued that the court should apply the California Supreme Court decision in McGill v. Citibank, N.A (covered by a Buckley Special Alert here), which held that a waiver of the plaintiff’s substantive right to seek public injunctive relief is not enforceable, and that “Texas law is contrary to a fundamental policy of California.” The court determined that because Texas does not have a “rule comparable to McGill and because California has a materially greater interest than Texas,” California law applies to the injunctive relief claims and therefore, the claims “must be litigated and not arbitrated.” However, to the extent the consumer sought monetary relief under the state statutory claims, those claims must be arbitrated.
NYDFS announces multistate investigation of payroll advance industry
On August 6, NYDFS announced it is leading a multistate investigation into the payroll advance industry based on allegations of unlawful online lending. According to NYDFS, the investigation will focus on whether companies are violating state banking laws, including usury limits, licensing laws, and other applicable laws regulating payday lending. NYDFS alleges that some companies appear to collect unlawful interest rates disguised as “tips” as well as monthly membership and/or excessive additional fees, and may collect improper overdraft charges.
In addition to New York, other states in the investigation include: Connecticut, Illinois, Maryland, New Jersey, North Caroline, North Dakota, Oklahoma, Puerto Rico, South Carolina, South Dakota, and Texas.
FDIC issues first Consumer Compliance Supervisory Highlights
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.