Consumer Protection - Overdraft Fees, UK Curbs Excessive Fees; US Efforts Not So Well Received

According to an article today in the UK Times, here, Britain's Office of Fair Trading has initiated a suit against UK banks for charging illegal overdraft fees. According to the coverage, the OFT believes that the illegal overdrafts were derived from "unauthorised overdrafts, bounced cheques and unpaid direct debits."

Abusive overdraft protection charges have also been a major problem in the US, but the government has not stepped in and private lawsuits have generally not been successful. In the US the overdraft problem has two main causes. First, the some banks do not adjust the accounts in real time to reflect debits and holds (despite the technology to do so), making more money appear to be available in the account than there actually is and thus allowing transactions to be processed against money that actually isn't there. In some instances, even when the bank knows the account is already overdrawn, they will also allow a debit to be processed rather than declined, calling it a "courtesy," and then charge an exhorbant fee.

The second problem is an accounting method called high-low sequencing. Rather than processing transactions on a first-in-first-out basis, banks will wait for the end of the day and then process your debits from the highest to lowest amount. The effect of high-low sequencing is that multiple overdraft transactions occur, rather than only one. For example, a customer has $10 in their account, makes nine $1 purchases, and then a $9 purchase later in the day. Under FIFO, the customer overdrafted once with the $9 transaction. Under high-low sequencing, however, the customer overdrafted eight times, the $9 transaction and one $1 transaction cleared the account, and each of the eight remaining $1 transactions were overdrafts. By using this accounting method, the bank, rather than collecting one fee of, say $30, will collect eight fees, amounting to $240.

Early overdraft litigation in the US showed some promise. See Best v. United States Nat'l Bank, 303 Ore. 557, 568 (Or. 1987); Best v. United States Nat'l Bank, 78 Ore. App. 1, 13 (Or. Ct. App. 1986) (national banking act does not preempt NSF litigation; an NSF fee of $6 is not unconscionable; whether the bank acted in good faith is a question of fact); Rebney v. Wells Fargo Bank, 220 Cal. App. 3d 1117, 1128 (Cal. Ct. App. 1990)(NSF Settlement for Wells Fargo/BOA, notes 1986, NSF fees were 3% of total income for banks).

In the late 1990's, however, judicial hostility towards overdraft litigation began to mount. See Video Trax, Inc. v. NationsBank, N.A., 33 F. Supp. 2d 1041 (SDFL, 1998)(Overdraft fees are not interest and therefore not subject to usury laws); Terrell v. Hancock Bank, 7 F. Supp. 2d 812 (D. Miss. 1998)(Overdraft fees are not interest and therefore not subject to usury laws).

In 2002, the Office of the Comptroller of Currency, the regulator who sets rules for National Banks (i.e., all banks with an "N.A." after their name), formally approved the practice of high-low sequencing. OCC Interpretive Letter #997, dated April 15, 2002, released August 2004 (discussing high-low sequening under 12 USC 24(7) and 12 CFR 7.4002).

In the last five years -- although mostly unrelated to the OCC's approval of high-low sequencing, but stemming from the same general mindset -- overdraft litigation in the US has been nearly futile. See e.g. Hill v. St. Paul Fed. Bank for Sav., 329 Ill. App. 3d 705, 710 (Ill. App. Ct. 2002)(debit sequencing, while not disclosing the accounting method, was not unfair or deceptive); Tobin v. Casco N. Bank, 663 A.2d 1 (Me. 1995)(it is not illegal to allow customer to overdraft account through $10 withdrawal from atm, where the bank knows the account will overdraft but the customer doesn't, and then charge a $20 fee); Hernandez v. Wells Fargo Bank, 2006 NMCA 18, 11 (N.M. Ct. App. 2005)(approving debit transactions despite knowledge that an NSF Fee will be incurred is not unconscionable); Hill v. St. Paul Fed. Bank for Sav., 329 Ill. App. 3d 705, 710 (Ill. App. Ct. 2002)(debit sequencing, while not disclosing the accounting method, was not unfair or deceptive); Hernandez v. Wells Fargo Bank, 2006 NMCA 18, 11 (N.M. Ct. App. 2005)(approving small debit transactions despite knowledge of already existing overdraft, and thus collecting a large fee, is not unconscionable); Brooks v. Northwest Corporation, 2004-NMCA-134, Docket No. 23,423 (NM, 2004)(denying class certification for an action related to high-low sequencing and NSF fees); But see 70 CFR 29582 ("courtesy" overdraft protection, and fees, must be disclosed to consumers).

There is some hope. At least one recent decision has been receptive towards overdraft litigation, Sola v. Wash. Mut. Bank FA (In re Wash. Mut. Overdraft Prot. Litig.), 201 Fed. Appx. 409, 410 (9th Cir. 2006)(allowing excessive overdrafts on a debit card may count as “unsolicited issuance of a credit card” under 12 CFR 226.12). There have been some high-quality academic commentary. See Aruna Apte, "The Impact of Check Sequencing on NSF (Not-Sufficient Funds) Fees," 34 Interfaces 97 (March, 2004). And at least one state's banking commission has conducted an investigation and found that banks intentionally use high-low sequencing for the sole purpose of increasing their NSF fee earnings, which are directed intentionally towards the uneducated and underprivileged, and have reaped an astonishing amount of profit from the practice (I found this report once, a year or two ago, but unfortunately have lost the citation).

Eventually, people are going to get angry enough to do something. In recent months, the FTC has held hearings on several credit issues and has moved towards wholesale improvement of its various consumer protection policies. If the government becomes receptive, and quality lawyers begin taking initiative (not just for profit, but for the general good), this terrible injustice will be rectified soon. Perhaps this activity in the UK, with the renewed scrutiny of banks after the mortgage backed securities scandal, will provide an impetus for improvement.

If you would like more information, please see my other related posts:

* February 8, 2009, "Potential Tide-Turning Victory In The Battle Against Illegal Overdraft And Non-Sufficient Fund Fees: Bank Of America Settles Closson Class Action."

* June 27, 2008, "Week In Review," (the Federal Reserve is now considering a rule to curb abusive overdraft fees by banks).

* May 7, 2008, "Debit Cards and Overdraft Protection: The US Allows Banks To Steal 10 Billion Dollars Per Year From The Poor."

* August 31, 2007, "The UK Takes Steps to Curb Illegal Overdraft Fees, But US Efforts Have Not Been So Well Received."

Also, consider the following outside sources:

* The Washington Post, Bailout recipients also major lobbyistsashington Post Article, (1/23/2009)

* USA Today, FDIC: Bank overdraft fees hit young, low-income customers, (12/3/2008)(Overdraft fees are boosting banks' profits at the expense of consumers, especially young and low-income people, finds a new Federal Deposit Insurance Corp. study.")

* USA Today, Banks raise penalty fees for customers' overdrafts (6/18/08)

* USA Today, Good news in the works on overdraft charges, 6/3/08.

* USA Today, Banks' check-clearing policies could leave you with overdrafts, (11/19/2006)

* USA Today, Banks' check-clearing policies could leave you with overdrafts (11/20/06)

* Wikipedia, Overdraft