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On November 8, the U.S. District Court for the District of Massachusetts granted in part and denied in part a credit union’s motion to dismiss a putative class action challenging the institution’s overdraft practices. As summarized in the order, the plaintiff alleged the credit union improperly charged overdraft fees when the “available balance” of her account, which was calculated by deducting pending debits and deposit holds, was insufficient to cover a transaction, even though the “actual” or ledger balance would have covered the transaction. The plaintiff brought multiple claims against the credit union, including breach of contract and Electronic Funds Transfers Act (EFTA) claims.
The credit union moved to dismiss arguing, in part, that the relevant account agreements referenced the “available balance” method for overdraft purposes and that the term is a “well-known bank term that has long been understood to mean the money in an account minus holds placed on funds to account for uncollected deposits and for pending debit transaction.”
The court disagreed, concluding that “available balance” is not a defined term, is ambiguous, and therefore its meaning presents a factual dispute that cannot be resolved on a motion to dismiss. The court allowed, however, the EFTA claim to proceed only for violations that occurred within one year of the complaint filing.
On November 1, the Arizona Attorney General announced the approval of two more participants in the state’s fintech sandbox program. The first company, which is based in New York, will test a savings and credit product, enabling Arizona consumers to obtain a small line of credit aimed at providing overdraft protection. If a consumer agrees to a repayment plan recommended by the company’s proprietary technology, the APR may be as low at 12 percent; if a consumer adopts a different repayment plan, the line of credit will have a standard APR of 15.99 percent. The company intends to report transactions under the payment plan to national credit bureaus to enable the building of credit histories. The second company, an Arizona-based non-profit, will test a lending product using proprietary blockchain technology, which has an APR cap of 20 percent.
As previously covered by InfoBytes, the Arizona governor signed legislation in March creating the first state sandbox program for companies to test innovative financial products or services without certain regulatory requirements. In October, the Attorney General announced the first sandbox participant, a mobile platform company (InfoBytes coverage available here).
Court approves final class action settlement; previously ruled that extended overdrawn balance charge fees are “interest” under National Bank Act
On August 31, the U.S. District Court for the Southern District of California granted final approval to a class action settlement, resolving a suit alleging that a national bank’s overdraft fees exceeded the maximum interest rate permitted by the National Bank Act (NBA). According to the order, the settlement ends a putative class action concerning the bank’s practice of charging a $35 “extended overdrawn balance charge” fee (EOBCs) on deposit accounts that remained overdrawn for more than five days when funds were advanced to honor an overdrawn check. Class members argued that the fee amounted to interest and—when taken into account as a percentage of an account holder’s negative balance—exceeded the NBA’s allowable interest rate. The bank countered, stating that “EOBCs were not ‘interest’ and therefore cannot trigger the NBA.” A 2016 order denying the bank’s motion to dismiss, which departed from several other district courts on this issue, found that “covering an overdraft check is an ‘extension of credit’” and therefore overdraft fees can be considered interest under the NBA. The bank appealed the decision to the 9th Circuit in April 2017, but reached a settlement last October with class members.
Under the terms of the approved settlement, the bank will refrain from charging extended overdraft fees for five years—retroactive to December 31, 2017—unless the U.S. Supreme Court “expressly holds that EOBCs or their equivalent do not constitute interest under the NBA.” The bank also will provide $37.5 million in relief to certain class members who paid at least one EOBC and were not provided a refund or a charge-off, and will provide at least $29.1 million in debt reduction for class members whose overdrawn accounts were closed by the bank while they still had an outstanding balance as a result of one or more EOBCs applied during the class period. The bank also will pay attorneys’ fees.
On July 26, the Federal Reserve Board released its inaugural Consumer Compliance Supervision Bulletin (Bulletin) to share information about the agency’s supervisory observations and other noteworthy developments related to consumer protection, and provide practical steps for banking organizations to consider when addressing consumer compliance risk. The first Bulletin focuses on fair lending issues related to the practice of redlining and outlines key risk factors the Fed considers in its review, such as (i) whether a bank’s Community Reinvestment Act (CRA) assessment areas inappropriately exclude minority census tracts; (ii) whether a bank’s Home Mortgage Disclosure Act or CRA lending data show “statistically significant disparities in majority minority census tracts when compared with similar lenders”; or (iii) whether the bank’s branches, loan production offices, or marketing strategies appear to exclude majority minority census tracts. Practical steps for mitigating redlining risk are also provided. The Bulletin also discusses fair lending risk related to mortgage pricing discrimination against minority borrowers, small dollar loan pricing that discriminates against minorities and women, disability discrimination, and maternity leave discrimination.
The Bulletin additionally addresses unfair or deceptive acts or practices risks related to overdrafts, misrepresentations made by loan officers, and the marketing of student financial products and services. The Bulletin also highlights regulatory and policy developments related to the Federal Financial Institutions Examination Council’s updated Uniform Interagency Consumer Compliance Rating System along with recent changes to the Military Lending Act.
On May 10, the U.S. Court of Appeals for the 11th Circuit held that a national bank did not waive its right to arbitration with respect to the unnamed plaintiffs in five class actions. The decision stems from multiple class action filings against that bank and over a dozen other banks in 2008 and 2009, alleging unlawful overdraft practices. In late 2009, the actions were consolidated and the bank filed answers to the five complaints, in each answer stating, “[a]bsent members of the putative classes have a contractual obligation to arbitrate any claims they have against [the bank].” The bank originally chose to not move for arbitration against the named class members, but after the Supreme Court decision in AT&T Mobility LLC v. Concepcion, the bank filed a motion to compel the named plaintiffs to arbitrate. The appellate court affirmed the district court’s denial of the motion. The bank then moved to compel arbitration against the unnamed class members, which the district court denied and the appellate court vacated, holding that the lower court lacked jurisdiction to rule on the arbitration obligations without a class certification. After the district court granted class certification, the bank moved to compel arbitration against the unnamed class members again and the district court denied the motion, holding that the bank “acted inconsistently with its arbitration rights” during the precertification litigation efforts.
In vacating the district court’s decision, the appellate court concluded that the bank had not acted inconsistently with respect to the unnamed plaintiffs and had expressly stated it wished to preserve arbitration rights against those class members when the matter became ripe. The panel vacated the district court’s order and remanded for further proceedings.
CFPB Succession: Bureau dismantles Office for Students; no longer plans student loan regulations; and more
On May 9, according to multiple reports, the CFPB internally announced that the Bureau would eliminate the Office of Students & Younger Consumers and move its staff into the Office of Financial Education as part of acting Director Mulvaney’s agency reorganization. The Bureau will continue to have a Student Loan Ombudsman position, which is required by the Dodd-Frank Act. It is also reported that the Bureau intends to create a new “Office of Cost Benefit Analysis” and rename certain existing offices. As previously covered by InfoBytes, acting Director Mulvaney plans to move the Office of Fair Lending and Equal Opportunity from the Division of Supervision, Enforcement and Fair Lending to the Office of the Director, in order to focus on “advocacy, coordination and education.” Day-to-day responsibility for enforcement and supervision oversight will remain in the renamed Division of Supervision and Enforcement (SE).
The Office of Management Budget (OMB) released the CFPB’s Spring 2018 rulemaking agenda, which no longer includes “Student Loan Servicing” as a Long-Term Action. In previous agendas, the Bureau described its plan for Student Loan Servicing as “The CFPB will continue to monitor the student loan servicing market for trends and developments. As this work continues, the Bureau will evaluate possible policy responses, including potential rulemaking. Possible topics for consideration might include specific acts or practices and consumer disclosures.” In addition to dropping Student Loan Servicing, the Spring 2018 agenda also no longer lists plans for Supervision of Larger Participants in Markets for Personal Loans, Overdraft Services, or Submission of Credit Card Agreements under TILA (more information on the CFPB’s previous plans for these rules can be found here).
As expected, the Spring 2018 agenda also included two new additions to the Proposed Rule Stage:
- HMDA. The Bureau has previously announced it intends to engage in a broader rulemaking to (i) re-examine the criteria determining whether institutions are required to report data; (ii) adjust the requirements related to reporting certain types of transactions; and (iii) re-evaluate the required reporting of additional information beyond the data points required by the Dodd-Frank Act (InfoBytes coverage here). The Bureau indicates it expects a Notice of Proposed Rulemaking (NPRM) on any changes to the HMDA rule before 2019.
- Payday, Vehicle Title, and Certain High-Cost Installment Loans. In January, the Bureau announced the intention to reconsider the 2017 payday rule (covered by InfoBytes here). The OMB agenda indicates the Bureau expects a NPRM by February 2019.
Notably, the CFPB continues to include “Debt Collection Rule” in a Proposed Rule Stage, as it has in previous agenda iterations. However, the Bureau has extended the deadline for its NPRM to February 2019.
On February 28, the U.S. District Court for the District of South Carolina dismissed a complaint from a consolidated class action against a national bank, which alleged that the bank’s $20 overdraft fee is an interest charge on credit and therefore exceeds usury limits under the National Bank Act (NBA). The plaintiffs in the consolidated class action challenged the bank’s methods for assessing overdraft fees, posting debit transactions, and assessing “sustained” overdraft fees, claiming they violated federal law. In granting the dismissal, the court noted that it had previously rejected a materially identical usury claim in December 2015 and that no new evidence or authority had been brought to light that would change its decision. In addition, the court concluded that “the law is still clear that sustained overdraft fees are not interest, and that assessing such fees cannot violate the usury provision of the NBA.”
OMB has released the CFPB’s Fall 2017 rulemaking agenda. Although this is the first update to the agenda since Richard Cordray left the agency in November 2017, delays in the publication of rulemaking agendas are common so the updated agenda may not reflect the views of new CFPB leadership. The updated agenda does not appear on the Bureau’s website. Further:
- HMDA & ECOA Amendments: The updated agenda states that the Bureau planned to determine by December 2018 whether to make permanent adjustments to the threshold for reporting open-end lines of credit. However, as discussed in greater detail here, the CFPB stated on December 21 that it intended to engage in a broader rulemaking to (i) re-examine the criteria determining whether institutions are required to report data; (ii) adjust the requirements related to reporting certain types of transactions; and (iii) re-evaluate the required reporting of additional information beyond the data points required by the Dodd-Frank Act.
- Prepaid Cards: The updated agenda states that the CFPB expected to finalize amendments to its rule on prepaid cards in November 2017, but no final amendments have been issued. Instead, on December 21, the CFPB announced its intent to adopt final amendments “soon after the new year” and stated that it expects to extend the April 1, 2018 effective date to allow more time for implementation.
- Debt Collection: The updated agenda states that the CFPB expects to issue a proposed rule in February 2018 “concerning FDCPA collectors’ communications practices and consumer disclosures.” However, on December 14, OMB announced that the CFPB had withdrawn its planned survey regarding debt collection disclosures because “Bureau leadership would like to reconsider the information collection in connection with its review of the ongoing related rulemaking.”
See previous InfoBytes coverage on the HMDA, Prepaid, and Debt Collection rulemaking updates.
Other noteworthy aspects of the updated agenda include:
- Regulation Reviews: The updated agenda reiterates the Bureau’s intent to review the regulations inherited from other agencies and “clarify ambiguities, address developments in the marketplace, and modernize or streamline regulatory provisions.” The updated agenda lists “pre-rule activities” as continuing through February 2018, rather than September 2017 under the prior agenda.
- “Larger Participants” in Installment Lending: Consistent with the prior agenda, the CFPB states that it is preparing a proposed rule to define the “larger participants” in the personal loan market (including consumer installment loans and vehicle title loans) that will be subject to Bureau examinations. The updated agenda also states that the Bureau is still considering “whether rules to require registration of these or other non-depository lenders would facilitate supervision, as has been suggested to the Bureau by both consumer advocates and industry groups.” However, while the prior agenda indicated that a proposal was expected in September 2017, the new agenda lists May 2018.
- Overdrafts: The updated agenda states only that the CFPB is “continuing to engage in additional research and consumer testing initiatives relating to the opt-in process” for overdraft protection and that “pre-rule activities” will continue through this month. Under the prior agenda, pre-rule activities were scheduled to continue through June 2017.
- Small Business Lending: The agenda indicates that the long-delayed implementation of the small business data reporting provisions of the Dodd-Frank Act will be delayed even longer. The last agenda listed “pre-rule activities” as continuing through June 2017, stating that the CFPB “is focusing on outreach and research to develop its understanding of the players, products, and practices in the small business lending market and of the potential ways to implement section 1071.” The new agenda states that these activities will continue until May 2018, after which the Bureau “expects to begin developing proposed regulations concerning the data to be collected, potential ways to minimize burdens on lenders, and appropriate procedures and privacy protections needed for information-gathering and public disclosure.”
- TRID/Know Before You Owe Amendments: The updated agenda lists April 2018 as the expected release date for finalization of the July 2017 proposed rule addressing the “black hole” issue, which is discussed in a Buckley Sandler Special Alert. The prior agenda listed March 2018.
- Mortgage Servicing Amendments: In October 2017, the CFPB issued proposed amendments to the mortgage periodic statement requirements to further address circumstances in which servicers transition between modified and unmodified statements in connection with a consumer’s bankruptcy case. The updated agenda does not provide an expected release date for final amendments.
- Credit Card Agreement Submission: The agenda continues to state that the Bureau is considering rules to modernize its database of credit card agreements to reduce the submission burden on issuers and to make the database more useful for consumers and the general public. The agenda lists “pre-rule activities” as continuing through February 2018. Under the prior agenda, pre-rule activities were scheduled to continue through October 2017.
On November 21, the CFPB released a report summarizing findings from a qualitative study about consumers’ experiences with overdraft programs. The study consisted of one-on-one interviews by telephone with 88 individual consumers from May 2014 through June 2014 (the report does not comment on the three-year gap between the interviews and the release). According to the CFPB, the study was not designed to identify systematic trends but instead to provide an in-depth review of consumers’ experiences. The report concluded that consumers need a wide range of educational resources to support the varying experiences and perceptions they have with overdraft services. For example, the report notes that while some consumers commented on unexpected overdraft fees after miscalculating the timing of transaction processing, others noted their intentional use of overdraft options to make purchases or pay bills. The CFPB encouraged financial educators to develop their own overdraft resources with the awareness that consumers may use and interpret programs in varying ways and provided a list of CFPB resources available for use.
On October 12, the U.S. Court of Appeals for the Seventh Circuit affirmed an Indiana District Court’s 2016 ruling, agreeing that an insurance company does not bear the responsibility for covering a bank’s $24 million class action settlement under a policy provision that excludes coverage for any case involving fees. In upholding the lower court’s decision, the three judge panel concluded that the insurance company had no duty to defend or indemnify the bank on the basis that the underlying overdraft fee claims fall under “Exclusion 3(n)” in the bank's professional liability insurance policy, which states that the insurance company “shall not be liable for [l]oss on account of any [c]laim . . . based upon, arising from, or in consequence of any fees or charges.” Class claims alleging that the bank manipulated its debit processing to “maximize overdraft revenue” by charging purportedly excessive fees to consumers who overdraw their checking and savings accounts triggered the exclusion. The panel also noted that an insurance company’s decision to include fee exclusions in banking liability policies is designed to prevent the “moral hazard” of allowing banks to “freely create other customer fee schemes” knowing they could easily secure coverage.
- Andrea K. Mitchell to discuss "Developments in fair lending law" at the Mortgage Bankers Association Summit on Diversity and Inclusion
- David S. Krakoff to discuss "The DOJ corporate enforcement policy and your disclosure calculus one year in: Are companies benefitting?" at the American Conference Institute International Conference on the Foreign Corrupt Practices Act
- Moorari K. Shah to discuss "Legal & regulatory issues" at the Opal Group Marketplace Lending & Alternative Financing Summit
- Moorari K. Shah to discuss "Fraud prevention, data security, and verification: How to manage fraud in an online marketplace with universally compromised data" at the Opal Group Marketplace Lending & Alternative Financing Summit
- Jonice Gray Tucker to discuss "Hot topics in consumer financial services" at the Practising Law Institute Banking Law Institute
- Daniel P. Stipano to discuss "New CDD Rule: Pitfalls in compliance" at the American Bankers Association/American Bar Association Financial Crimes Enforcement Conference
- Daniel P. Stipano to discuss "Anti-money laundering/OFAC compliance" at the Institute of International Bankers U.S. Regulatory/Compliance Orientation Program