Financial institutions have been facing class action lawsuits regarding overdraft and return item (NSF) fees since the early 2000s. Initially, the lawsuits were focused on the largest national banks. Over time, plaintiffs’ attorneys also began bringing lawsuits against regional banks and credit unions. Until recently, Maine-based institutions have avoided these claims. In the last several months, however, overdraft class actions have made their way to Maine.
Pierce Atwood’s nationally-recognized Class Action Defense Practice has been representing national and state-chartered financial institutions in overdraft fee class actions for more than a decade, and has defended more than two dozen of these cases in federal and state courts in New England and beyond. This alert provides an overview of the types of claims that plaintiffs are currently asserting and what Maine-based institutions can do to protect themselves.
Current Overdraft Litigation Theories
Multiple Overdraft/NSF Fees on Resubmitted Transactions
Plaintiffs have brought class actions challenging the practice of charging overdraft or NSF fees on transactions that were returned unpaid and later resubmitted for payment. The scenario at issue is:
- Financial institution returns a check or ACH transaction for insufficient funds and charges customer an NSF fee
- Merchant or other third party resubmits the returned transaction, which again presents against insufficient funds
- Institution (a) returns the resubmitted item and charges customer a second NSF fee, or (b) pays the resubmitted item and charges customer an overdraft fee
Plaintiffs argue that the original and resubmitted transactions are the same “item,” and therefore the assessment of more than one NSF or overdraft fee for that single “item” violates language in the institution’s account agreement or fee schedule that fees will be charged “per item.” At least three class actions recently filed in Maine assert this theory of liability.
Authorize Positive / Settle Negative Transactions
In another line of cases, plaintiffs challenged financial institutions’ assessment of overdraft fees on debit card transactions that are authorized when the customer’s balance is positive, but later are paid when the customer’s balance is insufficient to cover the transaction. The following example illustrates how this fee scenario can occur:
- Customer initiates a debit card purchase at a time when they had a positive account balance, and the institution authorizes the transaction
- Before merchant submits the debit card purchase to the institution for payment, another transaction (such as a check the customer wrote) posts to the customer’s account, reducing the balance available to pay other items
- When merchant presents the debit card purchase for payment, the customer’s account balance is no longer sufficient to cover it
- The institution pays the item and charges the customer an overdraft fee
Plaintiffs argue that the institutions’ account agreements and disclosures do not permit overdraft fees to be charged on items authorized on a positive account balance. One of the class actions recently filed in Maine asserts this liability theory.
Balance Calculation Claims
Plaintiffs have also asserted claims based on institutions’ alleged failure to properly describe the account balance used to determine overdrafts and how that balance is calculated. Most of these cases involve institutions that use the “available balance” method to pay items and assess fees. A customer’s available balance is reduced by holds on “pending” debit card transactions, i.e., transactions that the institution has authorized but have not yet paid. The following example illustrates the type of fee challenged by this theory:
- Customer has an available balance of $100, and uses their debit card to make a $70 purchase
- Institution authorizes the transaction, and immediately places a hold on the customer’s account for the $70 authorization, reducing the customer’s available balance to $30 ($100 minus $70)
- Before merchant submits the $70 purchase to the institution for payment, a check customer wrote for $50 clears
- Because the authorized purchase reduced the customer’s available balance, the $50 check overdraws the customer’s account by $20 even though the merchant has not been paid for the authorized debit card purchase
- Institution pays the check transaction and charges the customer an overdraft fee
Plaintiffs assert that the fee on the check transaction should not be charged because institutions’ account agreements do not adequately disclose the use of the available balance method, including the effect of pending debit card transactions, and that fees should instead be assessed on customers’ “actual (ledger) balance,” which is not reduced by pending debits and other holds.
The three theories described above have been the most commonly asserted overdraft theories in recent months, but are not the only theories advanced by plaintiffs. Other overdraft class action theories include claims based on financial institutions’ ordering of transactions for payment (posting order); the Regulation E overdraft opt-in rules, including the form of notice and the methods for obtaining consumers’ affirmative consent; and continuous or sustained overdraft fees charged when a customer’s account balance remains overdrawn for a specified number of days. Pierce Atwood has experience defending financial institutions against all of the overdraft theories described in this alert.
Steps to Protect Your Institution
The following provides general guidance on actions financial institutions can take to reduce their litigation risk for claims challenging overdraft practices and fees.
Make Sure Your Disclosures Match Your Practices
The common thread in overdraft cases is the financial institution’s alleged failure to disclose the precise manner in which the institution charges fees. To reduce the risk of such claims, institutions should closely review account agreements and other disclosures to ensure that they accurately and completely describe actual practices.
For this task, it is important that the institution understands fully how their core processor handles customer transactions, e.g., what account balance is used to authorize or pay each type of transaction, the order in which items are processed, and how and when fees are charged.
Institutions should also ensure that all overdraft-related disclosures and communications are consistent with each other across all channels, including print and online. Institutions that rely on third-party vendors to supply their disclosures should be particularly diligent, as a “one size fits all” approach may fail to correctly or fully describe the institution’s practices.
Make Disclosure Terms Clear and Unambiguous
Financial institutions should also strive to make the descriptions of their overdraft practices in account agreements and other disclosures as clear and unambiguous as possible. Particular attention should be given to practices that have been subject to litigation or regulatory attention.
For example, to the extent applicable, financial institutions should specifically disclose that resubmitted items can result in additional fees, state that transactions authorized on a positive account balance can incur overdraft fees, and explain how the institution calculates the account balance used to assess fees (including the effect of pending debit card transactions).
It can be helpful to provide customers a supplemental disclosure that explains the most important aspects of the institution’s overdraft practices in plain-spoken terms. Further, transaction-based examples explaining how fees might occur often help customers better understand the institution’s practices, and are viewed favorably by reviewing courts and regulators.
Stay on Top of Regulatory Developments
The regulatory landscape is constantly changing, and the plaintiffs’ bar is always advancing new overdraft claims and theories. Financial institutions should follow closely the public comments of regulators concerning overdraft practices and fees. Any regulatory attention or scrutiny of a particular overdraft practice frequently causes plaintiffs’ attorneys to bring new kinds of class-action cases.
If you have questions concerning overdraft litigation or steps your institution can take to better protect itself from claims, please contact Lucus Ritchie or Joshua Dunlap. In addition to defending class actions involving overdraft claims, Lucus and Josh frequently assist financial institutions in reviewing their overdraft disclosures to help ensure they are clear, transparent, and tailored to the institution’s actual practices.