Class-action litigation involving overdraft and nonsufficient funds charges is nothing new to many financial institutions.  But in recent years, plaintiffs’ lawyers have shifted tactics and changed the types of practices they are targeting.  Financial regulators have also signaled their intention to place increased focus on these charges.  Financial institutions should therefore re-examine their account agreements and overdraft disclosure materials to ensure they minimize risk and exposure.

Recent litigation

Overdraft fees have been challenged in class action lawsuits under several different theories.  Initially, many plaintiffs alleged that banks and credit unions violated the governing account agreement by using customers’ available balances instead of their current balances to determine whether a transaction was subject to an overdraft fee.  See, e.g., Grenier v. Granite State Credit Union, No. 21-cv-00534-LM, 2021 WL 5177709 (D.N.H. Nov. 8, 2021) (collecting cases).  Another common theory was that financial institutions intentionally reordered pending transactions from largest to smallest in order to maximize overdraft and NSF fees.  See In re HSBC Bank, USA Debit Card Overdraft Fee Litig., 1 F. Supp. 3d 34 (E.D.N.Y. 2014).

Although many financial institutions modified their practices to address threats posed by these lawsuits, plaintiffs have presented additional theories to challenge overdraft fees, asserting:

  • That overdrafts constitute interest charges and exceed state usury limits.  See Walker v. BOKF, Nat’l Ass’n, 2019 WL 3082496 (D.N.M. July 15, 2019).  But see Johnson v. BOKF Nat’l Ass’n, 15 F.4th 356 (5th Cir. 2021) (holding extended overdraft charges are not interest).
  • That their bank charges multiple fees for the same transaction, if a merchant submits a transaction more than once.  See Roy v. ESL Fed. Credit Union, 2020 WL 6849297 (W.D.N.Y. 2020).
  • That the bank automatically charges overdrafts as soon as a transaction is made if the transaction amount is greater than the available account balance, even if the transaction has not yet settled.  See In re TD Bank, 325 F.R.D. 136 (D.S.C. 2018).
  • That the bank charges overdraft fees when, in fact, there were sufficient funds in the account holder’s account.  See Johnson v. Bank OZK, 2021 WL 1652939 (M.D. Ga. Apr. 27, 2021).
  • That banks use overdraft protection services to charge customers additional overdraft protection transfer fees and heightened interest rates after funds are advanced from the customer’s credit card to cover the overdraft.  See El-Hage v. Comerica Bank, 2020 WL 7389041 (E.D. Mich. Dec. 16, 2020).
  • That overdraft charges were assessed on authorize positive, settle negative transactions. where the account balance was allegedly positive at the time the charge was authorized but negative when the transaction settled.  See, e.g., Lussoro v. Ocean Fin. Fed. Credit Union, 456 F. Supp. 3d 474 (E.D.N.Y. 2020).
  • That overdraft charges were assessed on transfers from one account with the bank to another, and on micro-deposit transactions used for verification purposes, which have been referred to as “phantom transactions.”  See, e.g., Kelly v. Community Bank, N.A., 2020 WL 777463 (N.D.N.Y. Feb. 18, 2020).
  • Even when a bank accurately describes its overdraft practices in its account agreement, banks have been sued on the theory that their overdraft opt-in notices do not satisfy the requirements of Regulation E of the Electronic Funds Transfer Act—even when a bank uses the same opt-in form approved by federal regulators.  See Adams v. Liberty Bank, No. 3:20-cv-1601, 2021 WL 3726007 (D. Conn. Aug. 23, 2021).

These cases usually accuse defendants of breaching account agreements or claim that defendants did not clearly disclose their fee-charging practices.  Courts have often rebuffed defendants’ attempts to dismiss these cases on the grounds that the contracts are ambiguous. 

Regulatory scrutiny

While overdraft fees are being evaluated by courts in litigation, they have also been increasingly scrutinized by federal regulators.  The Consumer Financial Protection Bureau (“CFPB”) recently published two reports on overdraft fees: one which documented financial institutions’ reliance on these fees, and another which described the impact these fees can have on consumers.  The upshot of the reports is that, in the CFPB’s view, financial institutions have become too reliant on these fees and the fees are harmful to consumers.

CFPB Director Rohit Chopra has also shared his view that overdraft fees fall in a bucket of what he called “exploitative junk fees” that need to be reined in.  Chopra opined that banks’ use of overdraft fees represents a “clear market failure” and that the CFPB “will be enhancing its scrutiny of banks that are heavily depending on overdraft fees.”  This scrutiny, Chopra promised, will come in the form of new rules, enforcement actions, and open banking reforms that will make it easier for customers to switch between financial institutions.

The response from financial institutions

Financial institutions have responded to this scrutiny in several ways.  Some have relied on arbitration agreements to reduce the threat of class-action exposure.  Some have revised their account agreements and related disclosure materials.  And some financial institutions have responded by modifying their overdraft practices entirely, such as by providing a grace period to cure an overdraft before a fee is charged, by reducing an overdraft fee, or by eliminating them entirely.

Photo of Sameer Aggarwal Sameer Aggarwal

Sameer Aggarwal is a litigation associate in the firm’s Washington, DC office. He primarily works with the firm’s Commercial Litigation, Antitrust/Competition, and Appellate and Supreme Court Practice Groups.

Photo of Andrew Soukup Andrew Soukup

Andrew Soukup has a wide-ranging complex litigation practice representing highly regulated businesses in class actions and other high-stakes disputes. He has built a successful record of defending clients from consumer protection claims asserted in class-action lawsuits and other multistate proceedings, many of which…

Andrew Soukup has a wide-ranging complex litigation practice representing highly regulated businesses in class actions and other high-stakes disputes. He has built a successful record of defending clients from consumer protection claims asserted in class-action lawsuits and other multistate proceedings, many of which were defeated through dispositive pre-trial motions.
Andrew is co-chair of the firm’s Class Action Litigation practice group.

Andrew has helped his clients achieve successful outcomes at all stages of litigation, including through trial and appeal. He has helped his clients prevail in litigation against putative class representatives, government agencies, and commercial entities. Representative victories include:

  • Delivered wins in multiple nationwide class actions on behalf of large financial companies related to fees, disclosures, and other banking practices, including the successful defense of numerous lenders accused of violating the Paycheck Protection Program’s implementing laws, which contributed to Covington’s recent recognition as a “Class Action Group Of The Year.”
  • Successfully defending several of the nation’s leading financial institutions in a wide variety of litigation and arbitration proceedings involving alleged violations of RICO, FCRA, TILA, TCPA, FCBA, ECOA, EFTA, FACTA, and state consumer protection and unfair and deceptive acts or practices statutes, as well as claims involving breach of contract, fraud, unjust enrichment, and other torts.
  • Successfully defended several of the nation’s leading companies and brands from claims that they deceptively marketed their products, including claims brought under state consumer protection and unfair deceptive acts or practices statutes.
  • Obtained favorable outcomes for numerous clients in commercial disputes raising contract, fraud, and other business tort claims.

Because many of Andrew’s clients are subject to extensive federal regulation and oversight, Andrew has significant experience successfully invoking federal preemption to defeat litigation.

Andrew also advises clients on their arbitration agreements. He has successfully helped numerous clients avoid multi-district class-action litigation by successfully enforcing the institutions’ arbitration agreements.

Clients praise Andrew for his personal attention to their matters, his responsiveness, and his creative strategies. Based on his “big wins in his class action practice,” Law360 named Mr. Soukup a “Class Action Rising Star.

Prior to practicing law, Andrew worked as a journalist.