The hottest topic in banking this month is overdraft fees. On December 1, 2021, Capital One bank announced it would be eliminating all overdraft fees for consumer accounts, ending a practice that once netted the bank over $150 million in revenue each year.[1] It is perhaps no surprise that later that same day, the Consumer Financial Protection Bureau (CFPB) released new research critiquing banks “deep dependence” on overdraft fees for revenue,[2] and CFPB Director Rohit Chopra stated that the agency would renew its focus on investigating overdraft fees.[3]

Capital One is not the first bank to drop overdraft fees; it joins a growing trend led by banks such as Ally Bank and smaller community banks and credit unions. Reasons for dropping these fees vary from institution to institution. Some banks may see the lack of an overdraft fee as a way to compete with rival banks. Others may seek to avoid regulatory scrutiny, which in recent years has led to settlements for amounts ranging from $30 million to $122 million.[4] Currently, overdraft regulation focuses on the way in which such fees are disclosed to consumers, rather than the actual terms or procedures of overdraft programs.[5] The CFPB’s recent activity implies additional regulation and scrutiny is coming.

Litigation Risk Related to Overdraft Fees

One factor likely driving the decision to drop overdraft fees is litigation risk. In addition to regulator interest, we have seen an increase in class action and deceptive trade practice litigation against banks (large and small) related to overdraft fees in recent years.

Overdraft litigation has so far challenged three primary categories of practices: (1) assessment of multiple fees on a single transaction, which is resubmitted or reprocessed multiple times, (2) assessment of multiple fees due to timing or prioritizing of some transactions over others, and (3) inadequate disclosure of the voluntary nature of overdraft programs. The third category is often challenged alongside practices involving the first and second categories.

In cases involving resubmission and reprocessing, the plaintiff often alleges that the bank improperly assessed multiple overdraft fees on a single transaction. For example, the bank might assess an overdraft or “non-sufficient funds” (NSF) fee and convey the NSF status to a vendor or the consumer attempting to complete a transaction. The vendor or consumer resubmits the same transaction, and the bank assesses another fee for the identical transaction. Alternatively, a bank may attempt to reprocess the same transaction again on a subsequent day on its own initiative, leading to multiple overdraft fees. Plaintiffs have alleged these kinds of practices as unfair and deceptive, leading to multi-million dollar settlements.[6]

In timing or prioritization-based cases, the plaintiff often alleges that the bank’s practice causes assessment of one or more fees that were otherwise avoidable. The most common theory involves “authorized positive, purportedly settled negative” (APPSN) transactions. In APPSN cases, the plaintiff alleges that the bank approved a transaction when the consumer’s balance was sufficient, but that the bank delayed payment of the transaction until other debits or withdrawals were completed and the account no longer had a sufficient balance. Sometimes this occurs due to the bank’s internal posting and settlement process. In addition, the plaintiffs most frequently argue that the bank’s account contract and terms do not disclose this practice and do not permit the imposition of fees on charges that were approved when the consumer had a positive and sufficient account balance. These kinds of cases have also led to multi-million dollar settlements—including one involving Capital One.[7]

Similarly, banks have been sued over their ordering of transactions. For example, the bank may disregard chronology (e.g., first in, first out) in favor of prioritizing transaction size (e.g., highest to lowest) so that large transactions are completed before smaller transactions received in a certain time frame. Or a bank might prioritize intra-bank transfers or debits involving its own services (e.g., credit card bill payments) over those of third parties, which may lead to the assessment of more than one overdraft fee that otherwise could have been avoided if the bank had employed a different methodology. Again, the plaintiffs often concurrently allege that the bank’s practices regarding ordering of transactions were not properly disclosed to the consumer. These cases, as well, have led to multi-million dollar settlements.[8]

Based on recent developments in this space, it is certainly possible that courts could find that banks are liable for overdraft fee practices in civil litigation.

Key Takeaways for Banks

CFPB Director Chopra recently remarked that the agency would be focusing on overdraft practices that lead to fees based on “the difference between authorization and settlement, the significance of the timing gap between the two, the amount of time a credit may take to show up in the account, the use of one kind of balance over another for fee calculation purposes, or the order of transaction processing across different types of credit and debits.”[9] As explained above, plaintiffs have already begun to challenge these practices, and overdraft litigation may increase in the future if the CFPB establishes additional standards, providing new fodder for alleging class action and deceptive trade practice claims. Banks should stay abreast of new CFPB developments and continually evaluate their overdraft programs for regulatory compliance and litigation risk.[10]

Winthrop & Weinstine is grateful to have represented financial institutions in these kinds of matters and obtained successful dispositions, including at the early motion to dismiss phase. Members of our team who have experience in this area of law include Matthew R. McBride, Joseph M. Windler, Quin C. Seiler, and Kyle R. Kroll.

We also express special thanks to Chris Cerny for his research assistance and contributions to this update.

[1] Hugh Son, Capital One Says It Is Ditching All Consumer Overdraft Fees, Giving Up $150 Million in Annual Revenue, CNBC (Dec. 1, 2021), https://www.cnbc.com/2021/12/01/capital-one-says-its-ditching-all-consumer-overdraft-fees.html.

[2] CFPB Research Shows Banks’ Deep Dependence on Overdraft Fees, CFPB (Dec. 1, 2021), https://www.consumerfinance.gov/about-us/newsroom/cfpb-research-shows-banks-deep-dependence-on-overdraft-fees/.

[3] Prepared Remarks of CFPB Director Rohit Chopra on the Overdraft Press Call, CFPB (Dec. 1, 2021), https://www.consumerfinance.gov/about-us/newsroom/prepared-remarks-cfpb-director-rohit-chopra-overdraft-press-call/.

[4] Consumer Financial Protection Bureau Announces Settlement with TD Bank for Illegal Overdraft Practice, CFPB (Aug. 20, 2020), https://www.consumerfinance.gov/about-us/newsroom/cfpb-announces-settlement-td-bank-illegal-overdraft-practices/; Bureah of Consumer Financial Protection Settles with TCF National Bank, CFPB (July 20, 2018), https://www.consumerfinance.gov/about-us/newsroom/bureau-consumer-financial-protection-settles-tcf-national-bank/.

[5] See 12 C.F.R. § 1005.17 (2016), https://www.consumerfinance.gov/rules-policy/regulations/1005/17/.

[6] See, e.g., Morris et al. v. Bank of America N.A., No. 3:18-CV-00157 (W.D.N.C.) ($75 million settlement); Lowe v. NBT Bank, N.A., No. 3:19-CV-1400 (N.D.N.Y.) ($5.75 million settlement); Marical v. BECU, No. 19-2-20417-6 (Wash. Super. Ct.) ($6 million settlement).

[7] See, e.g., Roberts v. Capital One, N.A., No. 1:16-CV-04841 (S.D.N.Y.) ($17 million settlement); Thompson v. Cmty. Bank, N.A., No 8:19-CV-00919 (N.D.N.Y) ($3.46 million settlement).

[8] See, e.g., Smith v. Bank of Hawaii, No. 1:16-CV-00513 (D. Haw.) ($8 million settlement); Dasher v. RBC Bank (USA), No. 1:09-MD-02036 (S.D. Fla.) ($7.5 million settlement).

[9] Supra note 3.

[10] One way to keep current with CFPB activity is to regularly visit https://www.consumerfinance.gov/about-us/newsroom/?topics=overdrafts and seek experienced legal counsel.

December 8, 2021