On June 11, the CFPB released a white paper with initial findings from its study of bank and credit union overdraft practices. The paper reports that (i) customers who opt-in to overdraft programs pay higher fees and are more likely to have their accounts involuntarily closed, (ii) overdraft practices and costs / closures related to overdraft programs vary widely by institution, and (iii) some policies and practices are not disclosed or are disclosed in a technical manner. The CFPB highlights bank revenue generated by overdraft fees, stating that such fees represent approximately 60 percent of the fee revenue generated by consumer checking accounts, and identifies specific practices the CFPB believes raise questions about whether customers can anticipate or compare the cost of overdrafting, including funds availability and order posting practices. The report is based on a review of institution-level data, and the CFPB plans to review account-level data in order to better understand how differences in bank practices affect customers.
On October 25, the United States District Court for the Northern District of California partially denied a bank’s motion for judgment on the pleadings seeking to dispose of class claims under California’s Unfair Competition Law (UCL) based on allegations that the bank reordered debit card transactions in order to maximize overdraft fees collected in connection with such transactions and misled customers regarding this practice in account agreements and monthly checking account statements. Hawthorne v. Umpqua Bank, No. 11-06700, 2013 WL 5781608 (N.D. Cal. Oct. 25, 2013). Departing from the conclusion reached by two other district courts, the court held that the bank’s debit cards constituted a “service” for purposes of the Consumer Legal Remedies Act (CRLA), which prohibits unfair methods of competition and unfair or deceptive acts and practices so long as the challenged conduct is part of a transaction involving the intended sale or lease of goods or services to a consumer. Two prior district courts had concluded that overdrafts and overdraft fees were not services sold or leased under the CLRA, but the Hawthorne court reached the opposite conclusion relying on the fact that (i) the CLRA is liberally construed and generally applicable to financial institutions and (ii) its determination that classifying debt cards as a service for consumers was consistent with the convenience benefits consumers receive from such cards. The court granted the bank’s motion for judgment on the pleadings with respect to a number of plaintiffs’ other claims, including violation of the unfair prong of the UCL, breach of the implied covenant good faith and fair dealing, breach of contract, and unjust enrichment.
On May 14, the U.S. District Court for the Northern District of California reinstated a prior order enjoining a national bank from engaging in false or misleading representations relating to certain overdraft practices and requiring the bank to pay approximately $203 million in restitution. Gutierrez v. Wells Fargo Bank, N.A., No. 07-05923, 2013 WL 2048030 (C.D. Cal. May 14, 2013). After trial the district court enjoined the bank’s practice of ordering withdrawals from “high-to-low” and ordered the restitution for a class of bank customers who alleged that the bank’s ordering practice was designed to maximize the number of customer overdrafts and related fees and, as such, violated the California Unfair Competition Law (UCL). In December 2012, the U.S. Court of Appeals for the Ninth Circuit vacated the trial court’s order, holding that (i) the bank’s ordering practice is a pricing decision the bank can pursue under federal law, (ii) the National Bank Act preempts the unfair business practices prong of the UCL, and (iii) both the imposition of affirmative disclosure requirements and liability based on failure to disclose are preempted. The appeals court preserved the customers’ claim of affirmative misrepresentations under the fraud prong of the UCL. On remand, the district court held that even though, after the Ninth Circuit’s holding, liability cannot be predicated on the posting method, the result is the same because the harm from the bank’s affirmative misrepresentations is the same. The court explained that it is not penalizing the bank for a federally protected practice, but rather because it violated the fraud prong of the UCL by affirmatively misleading customers about the practice. Further, although the Ninth Circuit order prohibits injunctive relief that requires the bank to use a specific system of posting or make specific disclosures, the court enjoined the bank from making or disseminating any false or misleading representations relating to the posting order of debit card purchases, checks, and ACH transactions.
On April 30, the OCC and the FDIC announced parallel enforcement actions against a national bank and an affiliated state bank to resolve allegations that the institutions violated Section 5 of the FTC Act in their marketing and implementation of overdraft protection programs, checking rewards programs, and stop-payment processes for preauthorized recurring electronic fund transfers. The OCC claims that (i) bank employees failed to disclose technical limitations of the standard overdraft protection practices opt-out, (ii) the bank’s overdraft opt-in notice described fees that the bank did not actually charge, (iii) the bank failed to disclose that it would not transfer funds from a savings account to cover overdrafts in linked checking accounts if the savings account did not have funds to cover the entire overdrawn balance on a given day, even if the available funds would have covered one or more overdrawn items, (iv) the bank failed to disclose technical limitations of its preauthorized recurring electronic funds transfers that prevented it from stopping certain transfers upon customer request, and (v) the bank failed to disclose posting date requirements for its checking reward program. The OCC orders require the bank to pay approximately $2.5 million in restitution and a $5 million civil money penalty. In addition, the bank must (i) appoint an independent compliance committee, (ii) update its compliance risk management systems with appropriate policies and procedures, and (iii) adjust its written compliance risk management policy. The FDIC order requires the state bank to refund customers roughly $1.4 million and pay a $5 million civil penalty.
Ninth Circuit Vacates Restitution Order in Overdraft Ordering Case, Allows State Fraud Claims to Proceed
On December 26, the U.S. Court of Appeals for the Ninth Circuit held that a national bank’s practice of posting payments to checking accounts in a particular order is a federally authorized pricing decision, and that federal law preempts the application of state law to dictate a national bank’s order of posting. Gutierrez v. Wells Fargo Bank, No. 10-16959, 2012 WL 6684748 (9th Cir. Dec. 26, 2012). In this case, after trial the district court enjoined the bank’s practice of ordering withdrawals from “high-to-low” and ordered the bank to pay $203 million in restitution. The court agreed with customers who had sued the bank on behalf of a class that the bank’s ordering practice was designed to maximize the number of customer overdrafts and related fees and as such violated the California Unfair Competition Law (UCL). On appeal, the court held that the bank’s ordering practice is a pricing decision the bank can pursue under federal law, and that the National Bank Act (NBA) preempts the unfair business practices prong of the UCL. The court also held that both the imposition of affirmative disclosure requirements and liability based on failure to disclose are preempted. However, the court held that the NBA does not preempt the customers’ claim of affirmative misrepresentations under the fraudulent prong of the UCL. The court also considered as an issue of first impression the effect of the Supreme Court’s intervening ruling in Concepcion on a judgment on appeal after trial. The court declined to grant arbitration, reasoning that the bank’s post-judgment arbitration request was contrary to its conduct throughout the litigation, and that granting the request would prejudice the plaintiff and frustrate the purposes of the Federal Arbitration Act. The court vacated the district court’s injunction and its $203 million restitution order, and directed the district court to determine appropriate relief on the state fraud claims.
Federal Banking Regulators Issue Supplemental Statement Regarding Borrower and Institution Relief Following Hurricane Sandy
On November 14, the Federal Reserve Board, the OCC, the National Credit Union Administration, and the FDIC supplemented a prior statement on the impact of Hurricane Sandy on customers and the operations of financial institutions. The supplemental guidance identifies activities that could be considered “reasonable and prudent” steps to assist affected customers, including, for example (i) waiving certain fees and penalties, including ATM and overdraft fees, (ii) easing credit limits and terms for new loans, and (iii) offering payment accommodations. The regulators also provide post-storm guidance regarding loan modifications, the Community Reinvestment Act, and customer identification. The guidance largely mirrors guidance issued by the FDIC on November 9, 2012 in Financial Institution Letter FIL-47-2012.
On October 9, the U.S. Supreme Court denied the petitions for writ of certiorari filed by plaintiffs in two cases challenging the overdraft billing practices of certain banks. Hough v. Regions Financial Corp., No. 12-1139, 2012 WL 3097294 (Oct. 9, 2012); Buffington v. SunTrust Banks, Inc., No. 12-146, 2012 WL 3134482 (Oct. 9, 2012). In March, the U.S. Court of Appeals for the Eleventh Circuit issued two separate, but substantively similar, opinions regarding arbitration agreements at issue in the overdraft litigation. Hough v. Regions Financial Corp., No. 11-14317, 2012 WL 686311 (11th Cir. Mar. 5, 2012); Buffington v. SunTrust Banks, Inc., No. 11-14316, 2012 WL 660974 (11th Cir. Mar. 1, 2012). In both cases, based on the Supreme Court’s holding in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), the Eleventh Circuit vacated district court rulings that the banks’ arbitration clauses were substantively unconscionable under Georgia law because they contained a class action waiver. After further proceedings on remand yielded a second appeal, the Eleventh Circuit held that, under Georgia law, an agreement is not unconscionable because it lacks mutuality of remedy. It also rejected the district court’s holding that the clauses were procedurally unconscionable because the contract did not meet the Georgia standard that an agreement must be so one-sided that “’no sane man not acting under a delusion would make [it] and … no honest man would’ participate in the transaction.” The U.S. Supreme Court’s decision not to review the Eleventh Circuit decisions will now require the plaintiffs to arbitrate their claims against the banks.
On May 16, the U.S. District Court for the Southern District of Florida certified a nationwide class of plaintiffs alleging breach of contract, breach of the duty of good faith and fair dealing, unconscionability, unjust enrichment, and violations of state consumer protection statutes with regard to the overdraft practices of a national bank. In re Checking Account Overdraft Litigation, MDL No. 2036, slip op. (S.D. Fla. May 16, 2012). The plaintiffs claim that the bank created a scheme in which it manipulated debit card transactions to increase the number of overdraft fees charged to customers by re-ordering daily transactions from highest to lowest dollar amount, resulting in a higher number of individual overdraft transactions. After a year of class discovery, the court held that the class meets the four prerequisites for certification under Rule 23(a)–numerosity, commonality, typicality, and adequacy. The defendant argued that the claims made by the plaintiffs were similar to questions raised in the Supreme Court’s decision in Walmart v. Dukes, 131 S. Ct. 2541 (2011), where the Court rejected class certification in an employment discrimination suit due to insufficient commonality. The district court disagreed, holding that because the plaintiffs all were subject to the same uniform corporate policy, the reason why each class member was harmed is not at issue, as it was in Dukes. Other bank defendants have faced and continue to face similar allegations in several other suits, including some that have been consolidated with the above action. Several of those defendants have settled, including most recently a $62 million agreement announced on May 11, 2012.