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In September 2022, the Shopper Monetary Safety Bureau (CFPB) entered right into a consent order in opposition to a big nationwide financial institution for charging unfair and abusive overdraft charges. In help of its motion, the Bureau famous that most of the financial institution’s clients didn’t perceive the financial institution’s overdraft practices or moderately keep away from incurring overdraft charges. Particularly, the Bureau took situation with overdraft charges charged to clients on sure transactions (ATM withdrawals and debit card purchases) that had ample account balances on the instances the transactions had been initiated by the client and licensed by the financial institution however had been inadequate on the time of settlement (typically generally known as “authorize constructive, settle destructive” or “APSN” transactions).
CFPB’s Steering
Then, in October 2022, the Bureau issued Shopper Monetary Safety Round 2022-06 to offer formal steerage on the matter, saying that “monetary establishments have created severe obstacles to customers making knowledgeable choices about their use of overdraft companies.” Consequently, and as a part of the CFPB’s “junk payment initiative,” the Bureau concluded that overdraft charges occurring on APSN (and different transactions that customers wouldn’t moderately count on to present rise to such charges) are possible unfair and abusive in violation of the patron safety legal guidelines. 1
This place was possible premised upon a CFPB research exhibiting that overdraft and non-sufficient funds (NSF) income was estimated to be $15.47 billion in 2019. Three giant nationwide banks introduced in 44 p.c of the overall income amongst banks with belongings over $1 billion. The CFPB discovered that though regional and smaller banks obtained decrease whole revenues from overdraft costs, customers had been equally impacted. As well as, the CFPB condemned many banks’ observe of charging overdraft charges through the COVID-19 pandemic.
In mild of the CFPB’s place and the unpopularity of overdraft charges amongst customers, sure banks — giant and small — have not too long ago determined to eradicate overdraft charges altogether. However, you will need to be aware that the courts have held that overdraft charges, when accompanied by clear and full disclosures and knowingly agreed to by the purchasers, are authorized and could also be collected.2 As we have now seen below the CFPB’s present management, nevertheless, the Bureau continues to take aggressive positions within the title of shopper safety regardless of conflicting legislative and judicial authorities.
The CFPB not too long ago has tended to control by means of enforcement relatively than rulemaking, and, as evidenced in current consent orders, the Bureau expects all trade gamers to pay attention to and adjust to the company’s underlying authorized foundation for the orders and any associated steerage issued. Following entry of the September Consent Order, a number of banks have obtained letters from the CFPB inquiring into overdraft charges insurance policies and practices. Notably, the CFPB is specializing in an “unfair and abusive” argument, relatively than a deception idea. In these letters, the CFPB takes an aggressive and antagonistic place towards overdraft charges and makes clear that the Bureau expects banks to both 1) eradicate overdraft charges or 2) be capable of show buyer data, understanding and acceptance of any overdraft safety coverage and accompanying charges.
The Takeaway
As a result of present philosophy of the CFPB and its stance towards overdraft insurance policies and charges, however the obvious judicial conflicts, banks ought to take into account taking steps from a threat administration perspective to implement sound insurance policies and procedures relating to their overdraft practices. Banks must also count on inquiries from the CFPB throughout supervisory exams relating to these insurance policies and practices. If these insurance policies and practices are decided by the CFPB to be insufficient, banks must be ready to implement a remediation plan for customers affected by overdraft charges previously.
How We Can Assist
Holland & Knight’s Consumer Protection Defense and Compliance Team features a sturdy CFPB and Federal Commerce Fee observe, with skilled attorneys who’re acknowledged as thought leaders within the discipline. The agency has represented dozens of firms and people in federal and state investigations regarding promoting, advertising and marketing practices, privateness and knowledge safety, shopper credit score, telemarketing and debt assortment, saving purchasers from vital monetary loss, public scrutiny and having to make modifications to their core enterprise operations.
For extra data or questions in regards to the particular influence of the CFPB’s consent order, contact the authors.
Notes
1 CFPB, Shopper Monetary Safety Round 2022-06, “Unanticipated overdraft fee assessment practices,” Oct. 26, 2022.
2 See Video Trax, Inc. v. NationsBank, N.A., 33 F. Supp. 2nd 1041, 1054 (S.D. Fla. 1998), aff’d, 205 F.3d 1358 (eleventh Cir. 2000) (holding that an overdraft payment “isn’t rendered usurious by a depositor’s settlement to pay the payment contingent upon his delinquency, as a result of the cost or non-payment of that payment is totally throughout the depositor’s management.”); see additionally Hernandez v. Wells Fargo Financial institution New Mexico, N.A., 2006-NMCA-018, 139 N.M. 68, 128 P.3d 496 (holding that an overdraft payment isn’t per se unlawful below the Unfair Practices Act; as a substitute, the patron plaintiff should present that the payment is “unconscionable” based mostly on the patron’s lack of know-how in regards to the payment or a gross disparity between the worth obtained by the patron and the value paid for the payment).
Data contained on this alert is for the final schooling and data of our readers. It’s not designed to be, and shouldn’t be used as, the only supply of data when analyzing and resolving a authorized drawback, and it shouldn’t be substituted for authorized recommendation, which depends on a particular factual evaluation. Furthermore, the legal guidelines of every jurisdiction are totally different and are consistently altering. This data isn’t supposed to create, and receipt of it doesn’t represent, an attorney-client relationship. When you have particular questions relating to a specific truth state of affairs, we urge you to seek the advice of the authors of this publication, your Holland & Knight consultant or different competent authorized counsel.
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