On March 2, an international bank agreed to pay $30 million to settle allegations that it changed the order in which customers’ debit transactions cleared in order to generate additional overdraft fees. According to the plaintiffs, the bank engaged in a practice known as “high-to-low” posting, whereby a bank orders transactions from the largest to the smallest dollar amount before posting them to the customer’s account. The bank also charged a $35 fee for each overdraft, regardless of the amount of the transaction. The plaintiffs allege that, when combined, these practices increased the number of overdraft fees paid by some customers because processing the largest charges first depleted their funds more quickly and increased the total number of transactions that failed to clear. The bank appropriately defended its practices, contending, among other things, that the claims were preempted by the National Bank Act and barred by the Uniform Commercial Code, and that the deposit agreement provided for discretion to order transactions. The settlement is scheduled to face a fairness hearing and final approval by the court.
OCC Revises Guidance Regarding Consumer Protection Requirements to Overdraft Lines and Protection Services
As previously reported in our March 11 Special Alert Update, on March 6, 2015, the OCC issued its revised “Deposit-Related Credit” booklet (“DRC booklet”) of the Comptroller’s Handbook, which replaced the “Deposit-Related Consumer Credit” booklet issued on February 11, 2015 (previously covered in this Special Alert). While the new booklet covers the same products – check credit (overdraft lines of credit, cash reserves, and special drafts), overdraft protection services, and deposit advances – the OCC made significant amendments to scale back the provisions of the prior version. Specifically, the new DRC booklet no longer contains supervisory principles that could be read to require that banks provide substantive consumer protections that are not currently required by the applicable consumer protection regulations. Read more…
On an appeal of five putative class actions alleging the unlawful charging of overdraft fees on consumer checking accounts, On February 10, the U.S. Court of Appeals for the Eleventh Circuit vacated a lower court order holding that the defendant’s waiver of its right to compel arbitration with the named plaintiffs precludes the Bank from compelling arbitration with any unnamed members of the putative classes. In re Checking Account Overdraft Litigation, No. 13-12082 (11th Cir. Feb. 10, 2015). The panel held that the lower court lacked jurisdiction to resolve the question. Additionally, it held that the named plaintiffs lacked standing, under Article III of the U.S. Constitution, to advance claims on behalf of those unnamed putative class members, who—in the absence of class certification—have “no justiciable controversy” with the Bank.
On February 20, the OCC announced that it would be removing the “Deposited-Related Consumer Credit” booklet, originally issued on February 11, from its website. The OCC’s February 11 booklet seemingly required banks to change overdraft protection services, however the agency has since stated that the booklet was not intended to establish new policy. According to the OCC’s website, the agency will “[revise] the booklet to clarify and restate the existing law, rules, and policy.” When the OCC releases its amended version of the booklet, we will update the February 16 Special Alert to reflect the agency’s modifications.
On January 6, a large national bank filed a motion to dismiss a suit alleging it charged improper overdraft fees. Filed last year in the Central District of California, the suit claims the bank violated federal and state laws – the EFTA and California’s unfair competition law – by posting customers’ larger debit transactions first, causing customer accounts to deplete faster resulting in more overdraft fees. In its motion, the bank claims it voluntarily stopped charging overdraft fees for one-time debit card transactions and most ATM withdrawals prior to the effective date of the amended regulations. The bank also argues that state law claims regarding good faith practices are preempted by the federal National Banking Act (NBA). The matter is scheduled to be heard on March 3. Stanionis et al v. Bank of America, No. 14-cv-2222
On July 31, the CFPB released its latest assessment of overdraft data it has collected from large banks. The report provides the following summary findings:
- Overdraft and non-sufficient funds (NSF) fees constitute the majority of the total checking account fees that consumers incur. For opted-in consumers, overdraft and NSF fees account for about 75% of their total checking account fees and average over $250 per year.
- Most overdraft fees are paid by a small fraction of bank customers—8% of customers incur nearly 75% of all overdraft fees.
- Opted-in accounts are three times as likely to have more than 10 overdrafts per year as accounts that are not opted in. And opted-in accounts have seven times as many overdrafts that result in fees as accounts that are not opted in.
- Transactions that lead to overdrafts tend to be small—for debit card transactions, the median amount that leads to an overdraft fee is $24 and the median amount of a transaction that leads to an overdraft fee for all types of debits is $50.
- Most consumers who overdraft bring their accounts positive quickly.
- Younger customers tend to overdraft more than older customers.
Updated CFPB Rulemaking Agenda Adds Auto Finance Larger Participant Rule, Updates Timelines For Other Rules
The CFPB recently released its latest rulemaking agenda, which lists for the first time a larger participant rule that would define the size of nonbank auto finance companies subject to the CFPB’s supervisory authority. The CFPB anticipates proposing a rule no sooner than August 2014. Stakeholders will have an opportunity to comment, and a final rule likely would not be issued until sometime in 2015. The CFPB anticipates finalizing its rule for larger participants in the international money transfer market in September 2014. In addition, the agenda pushes back the timeline for the anticipated prepaid card proposed rule from May 2014 to June 2014. The CFPB has been testing potential prepaid card disclosures.
The agenda does not provide timelines for proposed rules related to payday lending, debt collection, or overdraft products, but the CFPB states that additional prerule activities for each of those topics will continue through September 2014, December 2014, and February 2015, respectively. The CFPB substantially extended the timeline for overdraft products; it previously anticipated continuing prerule activities through July 2014. While “prerule activities” is not a defined term, it could include conducting a small business review panel for some or all of those topics. Such panels focus on the impact of anticipated regulations on small entities, but the CFPB typically makes the small business panel materials public, which provides an advance look at the potential direction for a proposed rule.
The agenda does not include a rulemaking implementing the small business fair lending data reporting requirements in the Dodd-Frank Act, though the CFPB previously has indicated it could consider those issues in connection with its HMDA rulemaking. Prerule activities related to the HMDA rule are ongoing.
On April 15, Georgia Governor Nathan Deal signed HB 824, which amends state law to clarify that certain banking fees are not “interest” subject to the state’s usury cap applicable to state-chartered institutions. Specifically, the bill carves out from the definition of “interest” the following: overdraft and nonsufficient funds, delinquency or default charges, returned payment charges, stop payment charges, or automated teller machine charges, and any other charge agreed upon in a written agreement governing a deposit, share, or other account. The legislation was crafted to codify and expand a declaratory order issued by the state banking commissioner following a March 2013 Georgia Court of Appeals holding that Georgia law in some situations could allow overdraft fees to be considered interest. Plaintiffs in the case had sued a state bank claiming that its overdraft fees amounted to an interest rate that far exceeded the state’s usury cap. The changes made by HB 824 took effect immediately.
On March 5, the U.S. District Court for the Eastern District of New York held that the named plaintiffs lack standing to bring claims in a multidistrict class action alleging illegal overdraft practices by a national bank. In re HSBC Bank, USA, N.A., Debit Card Overdraft Fee Litigation, No. 13-md-2451, 2014 WL 868827 (E.D.N.Y. Mar. 5, 2014). The three consolidated actions are similar to numerous actions filed against national banks across the country in which bank customers have alleged, generally, that banks 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. On the bank’s motion to dismiss in this case, the court held that the named plaintiffs never lived or conducted business in 10 of the 12 states where the allegations arose and therefore lacked standing under the applicable state statutes giving rise to the claims. The court added that if the plaintiffs sought to add representatives from the other states, it would be difficult for the court to adjudicate the claims given the discrepancies between state laws. The court dismissed numerous claims under the laws of the two remaining states (California and New York), but allowed the plaintiffs breach of implied covenant and good faith and fair dealing claims under both New York and California law, and claims under California’s Unfair Competition Law and False Advertising Law, to proceed.
On January 28, the House Financial Services Committee held a lengthy hearing with CFPB Director Richard Cordray in connection with the CFPB’s November 2013 Semi-Annual Report to Congress, which covers the period April 1, 2013 through September 30, 2013. The hearing came a day after the Committee launched a CFPB-like “Tell Your Story” feature through which it is seeking information from consumers and business owners about how the CFPB has impacted them or their customers. The Committee has provided an online submission form and also will take stories by telephone. Mr. Cordray’s prepared statement provided a general recap of the CFPB’s recent activities and focused on the mortgage rules and their implementation. It also specifically highlighted the CFPB’s concerns with the student loan servicing market.
The question and answer session centered on the implementation and impact of the CFPB’s mortgage rules, as well as the CFPB’s activities with regard to auto finance, HMDA, credit reporting, student lending, and other topics. Committee members also questioned Mr. Cordray on the CFPB’s collection and use of consumer data, particularly credit card account data, and the costs of the CFPB’s building construction/rehabilitation.
Mortgage Rule Implementation / Impact
Generally, Director Cordray pushed back against charges that the mortgage rules, in particular the ATR/QM rule, are inflexible and will limit credit availability. He urged members to wait for data before judging the impacts, and he suggested that much of the concerns being raised are “unreasoned and irrational,” resulting from smaller institutions that are unaware of the CFPB’s adjustments to the QM rule. He stated that he has personally called many small banks and has learned they are just not aware of the rule’s flexibility. He repeatedly stated that the rules can be amended, and that the CFPB will be closely monitoring market data.
The impact of the mortgage rules on the availability of credit for manufactured homes was a major topic throughout the hearing, On the substance of the issue, which was raised by Reps. Pearce (R-NM), Fincher (R-TN), Clay (D-MO), Sewell (D-AL), and others, Director Cordray explained that in his understanding, the concerns from the manufactured housing industry began with earlier changes in the HOEPA rule that resulted in a retreat from manufacture home lending. He stated that industry overreacted and now lenders are coming back into the market. Mr. Cordray has met personally with many lenders on this issue and will continue to do so while monitoring the market for actual impacts, as opposed to the “doomsday scenarios that are easy to speculate on in a room like this.” Still, he committed to work on this issue with manufacturers and lenders, as well as committee members. Read more…
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 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 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.