Court Questions Whether Overdraft Fees are Interest Rates

Feb 8, 2019 | Litigation, News

The First Circuit Court of Appeals is hearing a case that will shed further light on whether a bank’s overdraft fee should be considered interest. Previous rulings have found that overdraft fees are not an extension of credit and therefore not interest.

In Fawcett v. Citizens Bank, U.S. Circuit Judge Kermit V. Lipez recently asked defendants, “When the bank agrees to honor an overdraft, isn’t it in the most basic way extending credit to its depositor?” When the defendant answered that overdraft fees are a “service related to account balancing” and thus not an extension of credit, Judge Lipez responded, “That sounds like a semantic game.”

Earlier in the case, U.S. District Judge Timothy S. Hillman dismissed the case saying that he followed, “the overwhelming majority of jurisdictions which have ruled that sustained overdraft fees are not considered interest under the [National Bank Act].”

The case originated in 2015 when the plaintiff says that Citizens Bank charged her $800 in overdraft fees over 18 months. The bank’s policy was to charge customers who overdrew their accounts an initial overdraft fee of $35, followed by $30 fees every few days that the account remained negative.

This case will be followed closely by banks. The average overdraft fee nationwide increased 54.1 percent between 1998 and 2018, although it has dipped slightly over the past year to $33.23. The rapid rise in overdraft fees has become an important source of income for many banks. In fact, banks with more than $1 billion in assets earned $11.45 billion in overdraft fees in 2017 alone.

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