Originally published in West Virginia Banker

With plaintiff attorneys seeing potential large dollar settlements and verdicts, along with increased regulatory scrutiny, banks need to review their overdraft practices.
 
As noted by the American Bankers Association, banks resolve most customer inquiries and disputes informally, with a phone call or through digital channels. Banks are incentivized in today’s hyper-competitive marketplace to do so to maintain customer satisfaction. When situations arise that require a more formal dispute resolution mechanism, many banks use arbitration because it is fair and more consumer-friendly than litigation. Historically, courts have recognized arbitration’s benefits as being less expensive than litigation with simpler rules, less hostile and intimidating for consumers, not disruptive to dealings among the parties, and more convenient and flexible in scheduling and location.

In July 2017, the Consumer Financial Protection Bureau (CFPB) issued a rule that would have prohibited requiring consumers to waive their ability to participate in class action suits and would have drastically limited the use of mandatory arbitration agreements for financial products and services. Congress overrode this rule under the Congressional Review Act and, under the Dodd-Frank Act, any new arbitration rule would have to be based on a finding that it was in the public interest and for protection of consumers. 

Several years ago, plaintiffs’ attorneys saw an opportunity and began to seek out potential bank customers to file class action suits against banks using the theory that banks wrongfully charged customers overdraft fees. Overdraft fees have been challenged in class action lawsuits under several different theories. Initially, many plaintiffs alleged banks violated account agreements by using customers’ available balances instead of current balances to determine whether a transaction was subject to overdraft fees. A second common theory has been that banks intentionally reordered pending transactions from largest to smallest in order to maximize overdraft and nonsufficient funds (NSF) fees. Additional claims include that banks improperly assessed debit card transactions by posting to accounts when funds were previously set aside when preauthorization holds were placed, and that banks used an ambiguous Regulation E form (explaining how overdraft fees are assessed) and, therefore, failed to comply with regulatory requirements.

Their efforts have proven fruitful with settlements against Bank of America for $66.6 million and TD Bank for $41 million. In the past couple of years, plaintiff attorneys in Virginia and West Virginia have become more active in finding groups of bank customers impacted by NSF and overdraft fees and are bringing class action suits. In addition, consumer groups are ramping up efforts to convince consumers (and their attorneys) of ways to avoid arbitration provisions. For instance, federal law prohibits mortgage lenders from using or enforcing arbitration clauses, including second mortgages, reverse mortgages, and other security interests in a dwelling. Another federal law prohibits arbitration requirements applied to active military personnel or their dependents in contracts involving almost all types of non-purchase-money, closed-end credit. As of October 3, 2017, the prohibition also applies to credit cards and other open-end credit.

Despite the overturning of anti-arbitration provision rules, the CFPB, the OCC, and other banking regulators continue to criticize bank overdraft practices and have warned of enhanced supervisory and enforcement scrutiny. In September 2022, the CFPB ordered Regions Bank to pay $50 million into the CFPB’s victims relief fund and to refund at least $141 million to customers harmed by its alleged illegal surprise overdraft fees. In October 2022, the CFPB issued supervisory guidance warning financial institutions that levying overdraft fees to consumers who would not reasonably anticipate the fees may constitute an unfair act or practice under the Consumer Financial Protection Act of 2010. In addition, in its Fall 2022 rulemaking agenda list release, the CFPB included an agenda item indicating that it may propose amendments to the Regulation Z overdraft rules. 

Sensing opportunity to bring complaints against deep-pocketed defendants and using regulatory rhetorical fodder, law firms are ramping up demand letters threatening a lawsuit or filing a lawsuit against banks alleging customers were improperly assessed overdraft and/or NSF fees.

Even when banks amend account agreements to include arbitration provisions and class action waivers, recent court decisions provide insight as to best practices. The Supreme Court of the United States recently declined to review the 6^th Circuit’s decision in Sevier County Schools Federal Credit Union v. Branch Banking & Trust Co. (BB&T), which presents a potential challenge to enforcing arbitration clauses added to account agreements. In this case, BB&T amended its account agreement by adding mandatory arbitration provisions. The Court found BB&T’s justification of continued use of the account constituted acceptance of changes and that BB&T did not offer customers the ability to opt out of the arbitration provisions was problematic. This serves as a reminder that introducing arbitration agreements should follow all contractual change-of-term requirements and create a record of affirmative customer assent whenever possible.
 
Given the costly awards to plaintiffs to date, banks should review recent supervisory findings and their own policies, customer disclosures and account agreements, internal guidelines on overdraft/non-sufficient funds fees, as well as any potential disparate impact these fees may pose. It will pay for banks to be proactive to minimize risk and exposure. As plaintiff lawyers search for impacted plaintiffs, banks should consider including binding arbitration language with class action waivers to account agreements. Such language could prevent these situations from becoming class action lawsuits. Further and in light of recent court decisions, banks seeking to adopt arbitration clauses through changes to account agreements should consider taking steps to distinguish their process from that at issue in BB&T. Options to consider could include offering the customer opt out options, requiring customers to affirmatively take some action to accept changed terms (rather than simply continuing to use the account), or including dispute resolution provisions that explicitly provide for future amendments to add arbitration agreements. While most account agreements permit a bank to amend the provisions without notice to the customer, many banks are sending notices to customers with the amended provisions in a separate communication and highlighting any opt out options.