Citizens Bank, N.A. Argues Sustained Overdraft Fees Aren’t Interest
Rhode Island-based Citizens Bank, N.A, is requesting an appeals court to affirm a Massachusetts federal judge’s decision to dismiss a proposed class action lawsuit that alleges the bank’s sustained overdraft fees are actually illegal interest charges.
Citing a 2007 interpretive letter by the Office of the Comptroller of the Currency (OCC), Citizens Bank said the OCC has “consistently concluded” that when the bank honors a checking account customer’s overdraft, it isn’t extending credit. Therefore any fees associated with the overdraft are not interest.
Barbara Fawcett, a Citizens Bank checking account customer who initiated the suit last year, alleges that the bank’s policy to charge an overdraft fee was essentially providing her a loan by advancing her money to cover the shortfall in her account. The overdraft fees were charged periodically in amounts of up to $30 each after an initial overdraft fee of $35. The money Citizens Bank, N.A. was “loaning” her to cover her negative balance came with sustained overdraft fees that “worked out to annual interest rates that often exceeded 1,000%,” according to Fawcett. The National Bank Act (NBA) limits national banks to the maximum rate of interest in their home states. In Rhode Island, the highest permissible rate during an 18-month period is 21%.
U.S. District Judge Timothy S. Hillman was the first to dismiss Fawcett’s complaint saying he chose “to follow the overwhelming majority of jurisdictions which have ruled that sustained overdraft fees are not considered interest under the NBA.” In addition, an Eleventh Circuit’s 2000 ruling held that overdraft fees aren’t interest. The ruling stated that honoring an overdraft fee isn’t an extension of credit, describing it as the “only appellate decision addressing the issue.”
Limiting Overdraft Fees
There has been recent movement in Washington, D.C. to limit banks’ ability to charge overdraft fees. Over the summer, U.S. Senators Cory Booker (D-N.J.) and Sherrod Brown (D-Ohio) introduced legislation targeting what they see as “exploitative overdraft fees that banks charge consumers when they make a purchase or pay a bill but don’t have sufficient funds in their account.” The bill, dubbed the “Stop Overdraft Profiteering Act of 2018,” would ban overdraft fees on debit card transactions and ATM withdrawals, and limit fees placed for checks and recurring payments.
Indeed, overdraft fees serve as a big source of revenue for banks. According to statistics from Moebs Services, Americans were charged $34.3 billion in overdraft fees by financial institutions in 2017, a full $1 billion more than 2016. Fees managed to rise again despite one-third of banks decreasing their overdraft fees last year. The average overdraft fee remained flat at $30.
