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From Banking and Finance Law Daily, March 28, 2019

Continuing checking account overdraft fees aren’t interest under OCC rules

By Richard A. Roth, J.D.

A bank’s fee for continuing to cover an overdraft wasn’t interest under the National Bank Act, so charging the fee, which could reach $90, did not violate state usury laws.

A bank that charged as many as four successive fees when a customer did not cover an overdraft—which could result in overdraft fees that exceeded dishonored check fees by up to $90—did not violate state usury laws because the fees did not constitute interest, the U.S. Court of Appeals for the First Circuit has decided. The "Sustained Overdraft Fees" were an account fee, not interest, under guidance from the Office of the Comptroller of the Currency, and that guidance was entitled to deference by the courts, according to the majority opinion (Fawcett v. Citizens Bank, N.A., March 26, 2019, Lynch, S.).

The majority opinion said that Citizens Bank’s checking account agreements allowed it to choose whether to cover a customer’s overdraft and that, whether the bank covered the overdraft or returned the check, it would charge a $35 fee. However, if the bank covered the overdraft, it also would charge up to three separate $90 fees until the overdraft was covered: the first fee would be charged four business days after the overdraft; the second on the seventh business day; and the third on the 10th business day. As a result, a dishonored check would result in a single $35 fee, while a covered overdraft could cost a customer a total of up to $125.

The opinion said the bank conceded that the ongoing overdraft fees charged to the complaining customer would violate the Rhode Island usury law if they constituted interest.

Interest limits. The National Bank Act allows a national bank to charge interest at the rate permitted by the law of the state where the bank is located (12 U.S.C. §85). However, the NBA does not define "interest," the majority opinion observed. That means the word is ambiguous. The OCC, as the agency responsible for adopting regulations has the authority to interpret the word, the opinion continued, and the OCC’s interpretation is entitled to judicial deference.

The OCC’s definition of "interest" is found in 12 CFR 7.4001, the majority opinion said. If a challenged charge does not meet that definition, then it is an "account service charge" under 12 CFR 7.4002. The only restriction on service charges is that they must be consistent with safe and sound banking.

After it adopted the regulation, the OCC later clarified, in Interpretive Letter 1082, that a bank’s continuous overdraft charge of $5 per day, for seven consecutive business days, was a permitted overdraft fee.

Fee isn’t interest. That Interpretive Letter decided the issue, the majority opinion said. The Supreme Court has said that an agency’s interpretation of its own regulation is to be accepted by a court unless it is "plainly erroneous or inconsistent with the regulation" (Auer v. Robbins, 519 U.S. 452 (1997)), and the consumer conceded there was no plain error or inconsistency.

The majority opinion considered, but easily rejected, three arguments against deference that were raised by the consumer:

  1. The claim that the Interpretive Letter looked at the regulation on account fees rather than the regulation on interest was "a non-starter." A charge had to be either one or the other. If it was an account fee, it was not interest.
  2. The OCC had not used inconsistent interpretations that would prevent a flat excess overdraft charge from being an account fee.
  3. Whether the regulation did no more than paraphrase the NBA was irrelevant.

However, even if the Interpretive Letter were not entitled to judicial deference under Auer, it merited deference because it was persuasive, the majority opinion then said. As the letter pointed out, flat fees charged for overdrafts arise from the terms of customer accounts, compensate a bank for its account services, and lack the characteristics of interest.

The court majority also disagreed with the customer’s claim that guidance issued jointly by the banking regulatory agencies in 2005 declared that the "economic reality" of the continuing overdraft charge showed that it was interest.

Dissenting opinion. In dissent, Judge Lipez argued that the bank customer’s suit should not have been dismissed before she had an opportunity to engage in discovery to learn the reasons and factual bases for the bank’s overdraft payment decisions. The continuing charges—as opposed to the initial overdraft charge—appeared to relate to the customer’s use of the bank’s money over time. In other words, they had the appearance of interest. The customer deserved a chance to develop that claim, Judge Lipez said.

The case is No. 18-1443.

Attorneys: Edward F. Haber (Shapiro Haber & Urmy LLP) for Barbara Fawcett. David J. Zimmer (Goodwin Procter LLP) for Citizens Bank, N.A.

Companies: Citizens Bank, N.A

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