Overdraft Fees—CFPB and Class Action Lawyers On the Prowl

“Talk is cheap until you hire a lawyer.” Unknown

Our old friends at the federal Consumer Financial Protection Bureau (“CFPB”) have just published a comprehensive study of bank overdraft programs.  It is scholarly, well researched and boring as Hell.  The Report is 72 pages long and is study of a “small set of large banks” within CFPB’s jurisdictional size (over $10 billion in assets).  The study includes NSF fees.  The size of the average overdraft and NSF at the study banks is surprisingly high: $225 for accounts with at least one overdraft. The study also included the effect of the Regulation E amendment of 2009 that required a customer to opt-in for ATM and POS debit card transactions.

Surprisingly, the study came to no conclusions about the methods or procedures used in charging overdraft fees.  But the report ominously warned that the heavy overdraft fees incurred by some customers and “wide variations” among studied institutions merit further analysis.

            The CFPB study confirms that overdraft and NSF fees contribute a significant portion of fee revenue generated by banks.  The CFPB report states that a trade association found that 61% of fee revenue is generated by overdraft and NSF fees on checking accounts at the banks studied.  The fees also account for 37% of the total deposit service charges.  It is little wonder that overdraft and NSF fees are important to banks. 

            The CFPB report is long and detailed and it discusses every facet of bank processing of checks and charges.  However, amid the tedious detail of overdraft operations, the key factor in any overdraft procedure is in what order a customer’s checks and charges are recorded and charged against the customer’s account.  The study reports in detail the ways in which the study banks charge the overdraft and NSF fees.  But in essence the study reports three ways banks can charge checks and ATM/debit card against a customer’s account: (1) charge the largest item first, which has the effect of depleting the customer’s bank account of funds before smaller items are charged; (2) charge the items chronologically, as they occur; and (3) charge the smallest item first—usually done when a bank processes ATM and debit card transactions first.

            However, any bank that charges the largest item first is risking legal and perhaps, long term, regulatory intervention.  Recently class action attorneys have filed lawsuits against most of the nation’s major banks seeking to have the banks repay customers for overdraft fees charged on the largest item first instead of charging items as the occur. The legal theory is that the practice violates unfair trade practice or other similar laws. New Mexico has an Unfair Trade Practices Act, which is almost identical to the uniform act existing in most states. 

Most of the lawsuits have been settled for sizable amounts but many are still subject to approval of the courts hearing the cases.  A list of some of the banks and settlements follows: Bank of America $410 million; Citizens Bank (part of RBS) $137.5 million; J.P. Morgan Chase $110 million; and TD Bank $62 million.  Wells Fargo was ordered to pay $203 million to California customers, but is appealing.  There is also a major class action case pending in Florida against 20 of the nation’s largest banks—including Wells Fargo.  Amusingly, in the Bank of America case some of the class members are complaining that the class action lawyers are profiting to their detriment—and many of them complain that they are getting much less than the overdraft fees charged to them.  In the settlements the banks have agreed to cease the practice of charging the larger items first and move to a chronological basis.

Class action lawyers are looking for clients to sue other big national or regional banks. Other than big banks already sued in other states, it is unlikely that many (if any) New Mexico bank is large enough to merit a class action lawyer’s target bottom line—although I usually have been proven wrong in predicting the behavior of my fellow attorneys. 

            Word comes from the ABA that the Uniform Law Commission, drafter of the Uniform Commercial Code, is working on a model “Home Foreclosure Protection Act”.  It is still in debate stages, but it reportedly has broad mediation provisions and other sections that will materially change the rights of the parties in foreclosure actions.  Should it materialize in its present radical form, it still has to pass the legislatures of the various states.  However, it would make the task of changing the foreclosure process easier for those who oppose the present system. 

            In the wake of the leak of the NSA secrets, I was tempted to cover the increasing risks that all business has of damaging hacking and intrusion and the insurance solutions, if any.  But that will wait.

Do good.

MARSHALL G MARTIN

Comeau, Maldegen, Templeman & Indall, LLP

505-228-8506 (cell)

505-982-4611

The Most Powerful Agency in Government?

“All things are subject to interpretation whichever interpretation prevails at a given time is a function of power and not truth.”  Friedrich Nietzsche

In 1933 President Roosevelt established the NRA (National Recovery Administration) as part of his “100 days” to get the U.S. out of the depression. Its symbol was a blue eagle.   It had vast powers over business, markets and labor.  Among other things it instituted a system of industrial codes for key industries and labor, farmers and businesses.  It attempted to abolish child labor, instituted minimum wages in coded industries. It promoted a system of price stabilization which effectively leads to cartels and price fixing.  It had approximately 5000 business practices that were prohibited and administrative orders numbering over 3000.   In 1935 the U.S. Supreme Court declared the NRA unconstitutional, in a case involving a chicken farmer, Schechter Poultry Corp. v. U.S.    Some referred to the holding as “the sick chicken killed the blue eagle.”

Has the Consumer Financial Protection Bureau (“CFPB”) inherited the NRA mantle of the “most powerful agency in government”?  With the I.R.S. hobbled by scandal, arguably the CFPB is the most powerful agency in the U.S. government.  Some key factors support this view:  (1) it is not subject to budget control or oversight by the Congress, and is financed by having access up to 12% of the Federal Reserve Board’s total operating budget; (2) its rulings and regulations are not subject to any monitoring and can only be overturned by a vote of 2/3 of the members of the Financial Stability Oversight Council and only if the CFPB’s actions would put the “safety and soundness  of the United States banking system or the stability of the financial system of the United States at risk.”; and (3) its director has a five year term and can only be removed by the President  “for cause”.  The Financial Stability Oversight Council is made up of the Secretary of Treasury and most regulatory agencies of the federal government, 10 in number, including the Director of the CFPB.

With extremely limited exceptions, most of the consumer financial functions of the Federal Reserve, OCC, OTS [gone now], FDIC and NCUA were transferred to the CFPB.  Neither the Federal Reserve nor any listed agency can overrule the CFPB. Because of CFPB’s jurisdiction over the alphabet soup of consumer law (RESPA, SAFE Act, Truth in Lending, etc.) CFPB has issued more than 25 guidance and regulation documents and more are coming almost every day.  Mortgages and mortgage servicing are under CFPB’s jurisdiction and news comes out almost every day on some new development or exemption.  CFPB does not have direct or supervisory jurisdiction over banks or credit unions that are smaller than $10 billion in assets.  However, the responsible regulator (usually FDIC) must coordinate with the Bureau and may recommend action if there are material violations of consumer laws.  CFPB can also use its regulatory and supervisory authority over “covered persons”, which do not have to be financial services.  For example, in the last few days the CFPB asserted jurisdiction over AIG, the large insurance giant, on the basis that it was a key player in the economy and engaged in consumer services.  CFPB has also drawn a bead on credit reporting agencies and issued a report on private student loans. 

Most New Mexico banks and credit unions will have immediate and direct contact with CFPB in the mortgage industry.  A bank or credit union mortgage compliance officer who does not subscribe to the CFPB periodic internet releases is risking his or her institution’s regulatory well-being.  The Bureau’s Supervision and Examination Manual is also available on line at the Bureau’s website.   

Is there a “sick chicken” on the horizon?  A Texas bank, the Competitive Enterprise Institute (“CEI”) and others filed suit against CFPB, the Treasury Department, and the Director of CFPB and others claiming that the CFPB and its enabling legislation in Dodd-Frank was unconstitutional.  The suit is pending in in federal court in the District of Columbia.  The Director, Richard Cordray, was alleged to have been fraudulently appointed and various constitutional grounds were alleged as the basis for declaring the Bureau and its founding legislation invalid.  The case is in the judicial process and there is no guidance as to its likely outcome. 

If Richard Cordray is not confirmed by the Senate the CFPB may face other problems.  Recently the D.C. Circuit Court of Appeals held that President Obama’s recess appointments of three N.L.R.B. commissioners were invalid.  The Third Circuit Court of Appeals has just joined in a similar ruling.  Since N.L.R.B. rules and decisions are by a vote of the commissioners, the recess appointment threatens to invalidate most the Board’s actions over the last years.  President Obama used the same recess appointment procedure when Richard Cordray was appointed as Director of CFPB.  It appears that Cordray’s appointment is similarly in jeopardy if he is not confirmed by the Senate—and Republicans have threatened filibuster.  CFPB’s regulations to date are probably not at risk, since CFPB does not act as a board like N.L.R.B.  However, there is serious doubt if the Bureau can continue it regulatory avalanche without a director.

And so the beat goes on.

Do Good

Marshall G. Martin

 Office   505 982 4611

 Cell       505 228 8506