On April 16, 2024, the U.S. District Court Judge Gershwin A. Drain in the Eastern District of Michigan granted summary judgment in favor of Flagstar Bank (the “Bank”) in a case where the plaintiff alleged breach of contract and conversion with respect to the Bank’s overdraft (OD) and non-sufficient funds (NSF) fee practices.  The court previously dismissed the plaintiff’s conversion claim in 2021, but allowed the breach of contract claims to proceed.

The Bank’s OD fee practices on transactions that were authorized into a positive available balance but settled into a negative available balance (APSN) were as follows:

• Everyday debit card transactions were authorized against a positive available balance;
• A temporary debit authorization hold was placed on the account in the amount of the debit card transaction;
• When the debit card transaction was presented for final payment, the temporary hold was removed and the transaction posted to the account; and
• If the account’s available balance was negative due to intervening transactions that posted to the account prior to the debit card transaction posting to the account, an OD fee was charged to consumers who consented to participate in the Bank’s overdraft service.

The Bank also charged a NSF fee each time an item was presented for payment and returned unpaid due to insufficient funds, resulting in multiple NSF fees charged on the same transaction.

The court determined that the plaintiff did not sufficiently demonstrate that the Bank had breached the account agreement by assessing the OD fees for APSN transactions and multiple NSF fees for items that were returned unpaid more than once.  (Note that there was no dispute that plaintiff opted into the overdraft service for everyday debit card transactions.)

The court found that the Bank’s 2017 change in terms notice delivered to plaintiff provided effective notice of the updated circumstances that could lead to assessment of an OD/NSF fee.  The APSN language in the account agreement (from the 2017 change in terms) explained how APSN overdraft transactions work and when a fee will be assessed with an illustrative example.  The court found plaintiff’s assertion that OD fees would not be assessed on APSN transactions inconsistent with the plain language of the account agreement, which stated that the Bank makes the determination to assess an OD/NSF fee “at the time the Item is presented for payment.”  The court also noted that “[plaintiff] cannot advance an interpretation to a contract that she did not read.” In her discovery deposition, plaintiff admitted that she “glanced” or “skimmed over” the account agreement but did not “read” it.  The court also rejected plaintiff’s arguments that the Bank acted in bad faith when it exercised its discretion to pay or return a transaction or that its revised disclosures were an acknowledgement of prior wrongdoing.

While the Bank prevailed on its clear fee disclosures, we do not expect this ruling to deter similar class actions or mass arbitrations.  The case was brought 4 years ago, prior to the issuance of the regulatory guidance set forth below.  Plaintiff attorneys will continue to bring claims and leverage recent regulatory guidance from federal and state regulators that indicate assessing overdraft fees for APSN transactions and multiple NSF fees are unfair or deceptive practices.  Recent regulatory guidance includes:

• Consumer Financial Protection Bureau (CFPB) Guidance:
  • In October 2022, the CFPB issued Circular 2022-06 to address the unfair practice of charging unanticipated overdraft fees for APSN transactions.  The CFPB found the practice unfair because the fees cannot be reasonably anticipated by consumers, are likely to impose substantial injury that cannot be avoided, and are not outweighed by countervailing benefits to consumers or competition.
  • The CFPB also addressed overdraft fee and NSF practices in its Supervisory Highlights “Junk Fees” Special Edition Issue 29, Winter 2023 and Supervisory Highlights Junk Fees Update Special Edition Issue 31, Fall 2023, indicating that CFPB examiners found institutions had engaged in unfair practices when they assessed fees for unanticipated overdraft fees for APSN transactions and assessed multiple NSF fees when the same transaction was presented multiple times for payment against an insufficient balance in the consumer’s account.
  • Although the CFPB has not yet formally weighed in on the issue of representment NSF fees, the federal prudential regulators and the CFPB generally take consistent positions with respect to consumer compliance issues (and Acting Comptroller Hsu and CFPB Director Chopra are current members of the FDIC Board of Directors.)
  • In January 2024, the CFPB proposed a rule to cap overdraft fees and make overdraft credit programs subject to Regulation Z disclosure requirements and a rule to ban “rarely charged” NSF fees for declined transactions.
• Federal Deposit Insurance Corporation (FDIC) Guidance:
  • In April 2023, the FDIC issued FIL-19-2023: Supervisory Guidance on Charging Overdraft Fees for Authorize Positive, Settle Negative (APSN) Transactions to advise banks that charging overdraft fees for APSN transactions is an unfair practice and can result in violations of the Section 5 of the FTC Act and Dodd-Frank Act.
  • In August 2022, the FDIC issued FIL-40-2022, which it replaced with FIL 32-2023 Supervisory Guidance on Multiple Re-Presentment NSF Fees in June 2023.  The FDIC advised that failure of a bank to clearly and conspicuously provide information that adequately advises customers that it assesses multiple NSF fees arising from the same transaction is considered to be deceptive pursuant to Section 5 of the FTC Act and, in certain circumstances, unfair if multiple NSF fees are charged for the same transaction in a short period of time without giving customers sufficient notice or opportunity to bring their accounts to a positive balance in order to avoid the assessment of additional NSF fees.  The FDIC also warned that “while revising disclosures may address the risk of deception, doing so may not fully address the unfairness risks.”  The FDIC overcame a legal challenge to this guidance in April 2024.
• Office of the Comptroller of the Currency (OCC) Guidance:
  • In April 2023, the OCC issued Bulletin 2023-12: Overdraft Protection Programs: Risk Management Practices (4.26.23).  The OCC advised that in reviewing overdraft programs that assess APSN overdraft fees, it has found, in some instances, that account materials were deceptive for purposes of Section 5 of the FTC Act with respect to the banks’ overdraft practices.  The misleading disclosures contributed to OCC findings that the APSN overdraft fees were also unfair practices for purposes of Section 5.  Notably, the OCC also states that even when disclosures described the circumstances under which consumers could incur overdraft fees, the OCC found that APSN overdraft fees were unfair for purposes of Section 5 because consumers were still unlikely to be able to reasonably avoid injury and the facts satisfied the other factors for establishing unfairness (i.e., the practice causes substantial consumer injury and the injury is not outweighed by benefits to the consumer or to competition).  The OCC stated that through ongoing supervision, it has identified concerns with a bank’s assessment of an additional fee on a representment transaction, resulting in findings in some instances that the practice was unfair and deceptive. The OCC indicated that disclosures can be deceptive under Section 5 if they do not clearly explain that multiple or additional NSF or overdraft fees may result from multiple presentments of the same transaction.  The OCC stated that even when disclosures explain that a single check or ACH transaction can result in more than one fee, a bank’s practice of assessing fees on each representment can also be unfair under Section 5 if consumers cannot reasonably avoid the harm and the other factors for unfairness are met.
• New York Department of Financial Services Guidance:
  • In July 2022, New York Department of Financial Services issued guidance to discourage banks from engaging in certain unfair practices involving APSN transactions that cause overdraft fees, multiple NSF fees on representments, and so-called “double” overdraft fees in connection with overdraft protection services.
• California Attorney General Guidance:
  • In February 2024, California’s Attorney General issued letters to state-chartered banks and credit unions warning that overdraft fees for APSN transactions and returned deposited item fees may violate California’s Unfair Competition Law and the federal Consumer Financial Protection Act.

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