September 2022 OBA Legal Briefs

• Concerns about overdrafts and fees grow (Part 1)
• Repossessions and the SCRA

Concerns about overdrafts and fees grow — Part 1

By John S. Burnett

Regulators have run hot and cold on the topics of overdraft programs and associated fees for well over a decade. A few landmark issuances along that rocky road were:

• The 2005 Interagency Joint Guidance on Overdraft Protection Programs
• The FDIC’s Final Overdraft Payment Supervisory Guidance in November 2010
• FAQ from FDIC in April 2011
• A 2014 letter from the Kansas City FDIC’s Division of Depositor and Consumer Protection on Fees Associated with Extended Overdrafts

Enter the CFPB

The subjects of overdrafts and associated fees have been studied and written about by the CFPB almost since the Bureau opened its doors in 2011. The Bureau’s first Director, Richard Cordray, was a harsh critic of then-current overdraft programs and fees during his tenure at the Bureau. He advocated for “safer” accounts designed to prevent overdraft fees, and even suggested the use of prepaid cards as an alternative to expensive checking accounts and their fees. In August 2017, in a press call on overdrafts, Cordray spoke of a study that found frequent overdrafters who have opted in to debit card and ATM overdraft service typically pay almost $450 more in overdraft fees per year comparted to frequent overdrafters who had not opted in. The Bureau issued updated model disclosure prototypes to replace the Regulation E Model A-9 disclosure form with that study

In April 2015, the Bureau issued a consent order in an administrative proceeding against Regions Bank for failing to obtain required opt-ins from customers who had linked their savings accounts to checking accounts to cover overdrafts, but charging the customers overdraft fees when the savings account was wiped out by ATM or one-time debit card transactions, but had not obtained an opt-in for overdraft service as required by Reg E. For that violation and others, Regions Bank was fined $7.5 million and refunded over $47 million to customers before the order was issued, and was ordered to identify any other customers who were owed a refund.

In July 2016, the Bureau ordered Santander Bank, N.A., to pay a $10 million fine for illegal overdraft service practices. This case involved a telemarketing vendor that deceptively marketed the service and signed some of the bank’s customers up without their consent.

In January 2017, a federal district court approved a Bureau settlement with TCF National Bank regarding its marketing and sale of overdraft services. The Bureau had alleged that, when attempting to obtain consent for OD service as required by Reg E, TCF obscured the fees it charged and made consenting to fees seem mandatory for new customers. TCF agreed to pay $25 million in restitution and a penalty of $5 million.

In August 2020, the Bureau issued a consent order against TD Bank, N.A. regarding its marketing and sale of its optional overdraft service, Debit Card Advance (DCA). The Bureau found that TD Bank’s overdraft enrollment practices violated the Electronic Fund Transfer Act (EFTA) and Regulation E by charging consumers overdraft fees for ATM and one-time debit card transactions without obtaining their affirmative consent. The Bureau found that TD Bank violated the Consumer Financial Protection Act (CFPA) prohibition against deceptive acts or practices by making misleading representations to consumers regarding DCA while offering that service to consumers in person, over the phone, and through mailed solicitations. The Bureau also found that TD Bank violated the CFPA’s prohibition against abusive acts or practices by materially interfering with consumers’ ability to understand the terms and conditions of DCA. . TD Bank paid a $25 million penalty and was ordered to pay an estimated $07 million in restitution.

Recent CFPB activity

One of the first actions taken by the Bureau’s newest director, Rohit Chopra, has been an ongoing campaign against “junk fees,” with an undisguised disdain for bank overdraft and NSF fees.

In December 2021, the CFPB released research on OD and NSF revenue, which reached an estimated $15.47 billion in 2019. Three banks (JPMorgan Chase, Wells Fargo, and Bank of America) brought in 44 percent of the total OD and NSF income reported in 2019 by banks with assets over $1 billion. The CFPB also said that while small institutions with overdraft programs charged lower fees on average, consumer outcomes were similar to those found at larger banks. The research also notes that, despite a drop in fees collected, many of the fee harvesting practices persisted during the COVID-19 pandemic,

In February 2022, the Bureau posted a blog article comparing overdraft fees and policies across the top 20 banks ranked by 2019 reported overdraft income. The article noted significant changes by several of the banks. In an update of the table provided in that blog. The Bureau now reports that, since the 2021 review, 15 of the banks have eliminated NSF fees (you will see a possible reason for that change later in this article). Fifteen reported no sustained OD fee (up from 12 in 2021). Two banks (up from one), reported they charge no OD fees at all. Four banks (up from three) reported they don’t charge OD fees on debit card purchases, and eight banks don’t charge OD fees on ATM withdrawals (up from four in 2021).

The Bureau is highlighting these changes to demonstrate that some big banks are paying attention to regulatory saber-rattling, or are just plain tired of fighting the battle over what the Bureau has termed “junk fees.”

Multiple NSF fees and the FDIC

There has been growing regulator concern over the practice of charging multiple NSF fees for multiple presentments of items for a single transaction. Briefly, this can happen when a bank charges a first NSF fee for a check drawn on insufficient funds and returns the check, and, when the check is presented a second time against insufficient funds, returns the check again, assessing a second NSF fee. In some cases, checks get presented more than twice, or they are converted to ACH debits (a re-presented check or RCK entry), which can be used once if the check has been returned twice, or twice if the check has only been returned once. Imagine a $50 check  being bounced three times at $35 an event!

Regulators have been voicing their concerns over the practice and point to recent litigation in which banks and a very large federal credit union have been sued for charging multiple NSF fees for a single transaction. A class action suit against Navy FCU was dismissed, but when the lead complainant appealed, the CU agreed to a settlement.

The FDIC issued “Supervisory Guidance on Multiple Re-Presentment NSF Fees” with FIL-40-2022 (https://www.fdic.gov/news/financial-institution-letters/2022/fil22040.html) on August 18, 2022, “to address certain consumer compliance risks associated with assessing multiple non-sufficient funds (NSF) fees arising from the re-presentment of the same unpaid transaction.” In the Guidance, the FDIC also shared “its supervisory approach when a violation of law is identified, as well as expectations for full corrective action.”

According to the Guidance, during consumer compliance examinations, the FDIC has “identifies violations of law when financial institutions charged multiple NSF gees for the re-presentment of unpaid transactions.” The FDIC found that “some disclosures provided to customers did not fully or clearly describe e the institution’s re-presentment practice, including not explaining that the same unpaid transaction might result in multiple NSF fees if an item was presented more than once.”

Comment: Some banks might be tempted at this point to pull out Regulation DD’s commentary to section 1030.4(b)(4) – Account disclosures; Content of account disclosures; Fees— and run down the page to comment 4(b)(4)-5, Fees for overdrawing an account, which says, “Under § 1030.4(b)(4) of this part, institutions must disclose the conditions under which a fee may be imposed. In satisfying this requirement institutions must specify the categories of transactions for which an overdraft fee may be imposed. An exhaustive list of transactions is not required. It is sufficient for an institution to state that the fee applies to overdrafts ‘created by check, in-person withdrawal, ATM withdrawal, or other electronic means,’ as applicable. Disclosing a fee ‘for overdraft items’ would not be sufficient.”

The point being made by the FDIC, however, isn’t that the banks that charged multiple fees for re-presentments violated the Truth in Savings Act or Regulation DD; it’s that not disclosing that multiple NSF fees may be charged if multiple items for the same transaction are presented and not explaining how that can occur creates “a heightened risk of violations of Section 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices (UDAP).” The Guidance continues, “While specific facts and circumstances ultimately determine whether a practice violates a law or regulation, the failure to disclose material information to customers about re-presentment and fee practices has the potential to mislead reasonable customers, and there are situations that may also present risk of unfairness if the customer is unable to avoid fees related to re-presented transactions.”

In a footnote, the FDIC suggests that these practices may also violate Section 1036(a)(1)(B) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (12 U.S.C. § 5536(a)(1)(B)), which prohibits any covered person or service provider from engaging in, among other things, abusive acts or practices in connection with a consumer financial product or service. That portion of the Dodd-Frank Act is also referred to as the Consumer Financial Protection Act.

Deceptive practices: The guidance continues: “In a number of consumer compliance examinations, the FDIC determined that if a financial institution assesses multiple NSF fees arising from the same transaction, but disclosures do not adequately advise customers of this practice, the misrepresentation and omission of this information from the institution’s disclosures is material. The FDIC found that if this information is not disclosed clearly and conspicuously to customers, the material omission of this information is considered to be deceptive pursuant to Section 5 of the FTC Act.”

Unfair Practices: On this topic, the Guidance offers, “In certain circumstances, a failure to adequately advise customers of fee practices for re-presentments raises unfairness concerns because the practices may result in substantial injuries to customers; the injury may not be reasonably avoidable; and there may be no countervailing benefits to either customers or competition. In particular, a risk of unfairness may be present if multiple NSF fees are assessed for the same transaction in a short period of time without sufficient notice or opportunity for customers to bring their account to a positive balance in order to avoid the assessment of additional NSF fees. While revising disclosures may address the risk of deception, doing so may not fully address the unfairness risks.

Comment: Thus far, the Guidance has suggested that banks need to ensure that their disclosures reflect what actually happens in the case of multiple re-presentments for a single transaction, and that something may need to be done about better notifying customers when an item is returned and an NSF is assessed and/or banks may want to consider setting some limit on how many times re-presentments of items derived from the same transaction will trigger another NSF fee.

Watch for Part 2:  In Part 2 of this article, we’ll look at third-party risk and what the FDIC expects of a bank that discovers it has problems like those described in the Guidance. We will also look at another relatively new regulatory concern about overdraft programs.

Repossessions and the SCRA

By Andy Zavoina

I want to share a recent issue that a compliance officer consulted me on. This is your opportunity to realize that even when you train and have sound policies and procedures, people can – and will — still make mistakes.

I had a disturbing call recently from a banker who appears to have a good compliance program. I say the program is “good” not because I have audited it, but because she was auditing files from three months prior and she found a questionable repossession. As you will read, she was right to question it, and that is why I say that part of her Compliance Management Program is working. Detecting errors leads to an earlier correction when that may be possible, and to fewer repeat problems because a part of any corrective action typically involves re-training.  Very often an auditor reviews a file, scans it to understand what has happened and explains the actions away as a way of justification.

In this case, the lender had a car loan that was past due and was ready for a repossession order. Having recently had some training on repossession procedures and the Servicemembers Civil Relief Act (SCRA), he checked the DMDC database to verify the borrower was not covered.

In my SCRA training materials I recommend that banks “Design [their] foreclosure procedures to ensure counsel is following all requirements, to include completion of all background research and proper notice as expected by the regulators. This includes repossession of personal property as well. When you check the SCRA database you will enter a date in a field for ‘Active Duty Status Date’ and the response you will receive based on that date, is the status of the individual – whether or not the individual was actively serving, received a notice to serve, or was serving  – for a period of 367 days prior to the given date. So when you check this, you are getting the status for the last year.” The yearlong lookback allows for real property foreclosure protections that last for a year after discharge. That does not apply to vehicle repossessions.

In this case the lender checked, received a negative response and put the car out for repossession by a third-party agent. This is where it gets questionable. I do not know how much time elapsed, but on the day of the repossession itself, the lender checked again. As you can predict, the response was now affirmative. As of that day the borrower was a servicemember and afforded all the protections under section 302 of the SCRA (50 U.S.C. 3952).

“After a servicemember enters military service, a contract by the servicemember for–

(A) the purchase of real or personal property (including a motor vehicle); or

(B) the lease or bailment of such property,

may not be rescinded or terminated for a breach of terms of the contract occurring before or during that person’s military service, nor may the property be repossessed for such breach without a court order.

This section applies only to a contract for which a deposit or installment has been paid by the servicemember before the servicemember enters military service.”

I do not know if the car was repossessed before or after the second verification was done. If it was done before, repo order should have been rescinded. If it was not possible to do immediately it should have been done as soon as possible. Now that the car could not technically be repossessed, those expenses will be paid for by the bank and without the ability to collect them as a collection cost. Add to that the bank may now have to pay to return the car to the servicemember which adds to the cost of the already delinquent loan. The benefit here would be that a recent check did not indicate a protected status but one on the day of the repossession did. The car could be retuned and the bank could claim “no harm, no foul” so long as there is no claim of damage to the car from the repossession. But it did not stop there. That would not be an interesting lesson.

This repo occurred three months before. Regardless of the above recommendation to immediately return the car and undo a bad situation, that advice is too late. The lender, now knowing the borrower was protected, proceeded to sell the car and apply the proceeds against the loan balance. Why?

As an auditor there are now more questions to be asked. This file escalates from a routine audit to damage control.

• When was the protected status known?
• Why was the car sold?
• Was this a commercially reasonable sale, were personal items returned, were notifications of the sale sent and was the borrower provided an ample period to cure the default?
• When was the lender last trained on the bank’s policy and procedure?
• Was the training thorough?
• Was the second DMDC check a standard procedure (I would say it would be a good one) or did the lender suspect the borrower was going to be protected and wanted to “beat the clock” so to speak and get the car before protections were actually in effect?
• What was the cost of the repo?
• What was the sale price and was there a deficit?
• Has the borrower contacted anyone at the bank?

The Compliance Officer also has immediate work to do, and it was needed yesterday.

• Review training records to verify the lender was appropriately trained. If he was not, why not?
• Advise all lenders/collectors of the requirements to immediately prevent a repeat violation. It would move to catastrophic to have the same thing happen after the bank is aware of this instance.
• Was this an anomaly? Realistically all repossessions need to be reviewed for a period of (my recommendation) three years. After the most recent six months is done management needs to be aware of the problem. Since there have been no other alarms, attorney calls, anyone from JAG or the borrower, the issue is thus far contained, but now must be controlled.
• Discuss the case with management. Advise them of the case and the fact that a review is being conducted and so far, how it looks.
• The Compliance Officer is not Human Resources, but assuming training was done, and policies and procedures were provided, HR may have to be involved. Disciplinary action may well be called for.

Some readers may be asking why all this work, what’s the big deal if the borrower has not claimed any protections after three months? Here is the deal, and it can be costly. SCRA violations are reviewed by the Department of Justice (DOJ), not your banking regulator, although they will likely be involved if the case is worth pursuing.

There was one very similar case to this. On March 28, 2018, the United States vs California Auto Finance (CAF), Case No. 8:18-cv-00523 was filed. CAF is a large sub-prime lender in Southern California and the Southwest. The suit alleges CAF repossessed a servicemember’s car after being made aware the borrower was in the service.

Andrea Starks purchased a car in Glendale, Arizona, in September 2015. She made her first payment in October 2015 which was pre-service and meets the requirements for SCRA protection. She enlisted in April 2016 and reported for active duty on May 9, 2016, the same day her vehicle was repossessed. Two days after enlisting, she provided CAF with a copy of her orders. She would not have been protected as a reservist being called to active duty based on receipt of her orders, but rather when she met the definition of “military service” which, in this case, would be when she was paid by Uncle Sam.

Had the vehicle been repossessed the day before, Starks would not have been technically protected. In any case, it was taken on the same date as she reported for duty. CAF sold the vehicle on or about May 25, 2016.

This was the single complaint against CAF made by Starks to the DOJ in November 2016. There were no other complaints against CAF mentioned. In describing the violations committed by CAF, the DOJ explains the facts it reviewed in its investigation that began in December 2016.

1. The Defense Manpower Data Center (DMDC) is a free database allowing lenders to determine if a person is protected under the SCRA. The CAF did not verify her status prior to repossessing the vehicle. (It would be interesting to know if Starks would have been shown as currently serving, it being her first day.) Regardless, CAF had already been given a copy of Starks orders by Starks herself.
2. This was pre-service debt under the SCRA.
3. No court order was obtained prior to the act of repossessing the vehicle.
4. The CAF believed at the time, and still as of this court filing, that only deployment orders would have provided protections to a servicemember. (This is incorrect. It is the act of serving, whether that be in the continental United States or overseas.)
5. The CAF had and still has no policies or procedures to provide staff with SCRA compliance guidance.
6. Because of a demonstrated lack of knowledge and guidance (the policy or procedures) the DOJ stated they “may have repossessed motor vehicles without court orders from other servicemembers” and as such viewed this as a pattern or practice of violating the SCRA protections and requirements of the SCRA. This means that Starks and other servicemembers have suffered damages.
7. The actions of CAF were “intentional, willful, and taken in disregard for the rights of servicemembers.”

The bank has obviously done more than CAF had and is aware of the protections the servicemember had. But it seems the violation was blatant and willful and because the lender represents the bank, the bank is at fault. The bank repossessed the car and knowing the borrower was protected, sold the car anyway.

In the Starks case there was $30,000 paid to Martinez, the only other violation the DOJ found after scrubbing years’ worth of repossession files and a $50,000 penalty. We do not know how much Starks was paid but I would be confident in estimating that in addition to the $80,000, plus the cost of attorneys, motions, court expenses, and employee cost on the CAF side of the file reviews, that CAF spent $125,000 because of that one repossession, which turned into two. Two is not excessive, but it is two too many.

In May 2017 Wells Fargo repossessed the car of Jin Nakamura. He was protected by the SCRA and paying, but the bank repossessed and sold his car. That launched an investigation, and a pattern was found. The bank paid $5,125,000 plus a third of the legal expenses for its violations. Each servicemember was paid $12,300 from the settlement except for Nakamura, who received a greater share as he instigated the case, which was settled in May 2019.

In our recent case the bank should immediately involve counsel who is familiar with the SCRA and enforcement actions. The bank should consider settling with the borrower if possible. That might avoid DOJ involvement. Servicemembers are trained on their benefits when they enlist, but it may have gone in one ear and out the other. But the military periodically retrains them, and the matter will likely come up again. Any amount of research and the borrower could decide that car was special and worth far more than the bank sold it for. The bank needs to consider zeroing the loan balance, removing the credit rating in total or certainly the repossession, and reimbursing the agreed value of the car to the servicemember. These costs combined would be far less than a DOJ investigation and the reputational risk the bank would suffer.

Here is an example/article from “Housing Wire” of a foreclosure that happened in 2010, but the complaint was not made for six years. The DOJ was heavily involved, and the complaint was years after the foreclosure.

In late 2017, Northwest Trustee Services, the “largest foreclosure trustee in the Pacific Northwest,” illegally foreclosed on dozens of military veterans and servicemembers over the last few years, the DOJ claimed in its lawsuit. According to the DOJ, in the prior six years, Northwest had foreclosed on at least 28 homes owned by servicemembers without the necessary court orders.

The lawsuit came after the DOJ launched an investigation into Northwest’s foreclosure practices at the urging of Marine veteran Jacob McGreevey of Vancouver, Washington, who submitted a complaint to the DOJ’s Servicemembers and Veterans Initiative in May 2016.

Portland’s The Oregonian has been all over McGreevy’s story, previously chronicling his fight against Northwest and PHH Mortgage, his mortgage servicer, for foreclosing on his home shortly after he returned from active duty.

According to the DOJ, Northwest foreclosed on McGreevey’s home in August 2010, less than two months after he was released from active duty in Operation Iraqi Freedom.

In 2016, McGreevey sued both PHH and Northwest, but a U.S. District Court Judge accepted PHH and Northwest’s argument that McGreevy had waited too long to file his case and dismissed the case on that basis.

Here’s how the Oregonian described that process in one of its reports:

Altogether, he served four tours in either Iraq or Afghanistan. In between deployments, McGreevey would return to Vancouver, where he bought a house on Northeast 24th Court. But he fell behind on payments.

PHH Mortgage repossessed his house in June 2010. Knowing next to nothing about the consumer protections afforded him as a member of the military, McGreevey didn’t contest it. The foreclosure became final the following September.

McGreevey had advanced from private to staff sergeant by the time his final deployment ended in 2012. Though diagnosed 80% disabled with post-traumatic stress syndrome, hearing loss and a back injury, he set about reinventing himself for civilian life. He earned a business degree from Portland State University and got a job at a bank.

That’s when he learned about consumer protection laws, including the Servicemembers Civil Relief Act.

From there, McGreevy sued Northwest and PHH. But McGreevy’s case was dealt a blow earlier that year, when the DOJ sided with Northwest and PHH in McGreevy’s lawsuit.

But later, the DOJ reversed its position and cites McGreevy’s case as the impetus for its lawsuit against Northwest. It should be noted that the DOJ had taken no action against PHH in this case, to this point.

According to the DOJ, its investigation revealed that, beyond McGreevey, Northwest foreclosed on other homes of SCRA-protected servicemembers in violation of the SCRA since 2010.

“The loss of a home is a devastating blow for anyone – but far worse for active duty service members often called to war zones far from Western Washington,” said U.S. Attorney Annette Hayes.

Our investigation revealed that Northwest Trustee Services repeatedly failed to comply with laws that are meant to ensure our service members do not have to fight a two-front war – one on behalf of all of us, and the other against illegal foreclosures,” Hayes continued. “My office will continue to work closely with our colleagues in the Civil Rights Division in Washington, D.C. to protect Western Washington service members from this kind of misconduct.”

According to the DOJ, it is seeking monetary damages for affected servicemembers, as the SCRA provides for civil monetary penalties of up to $60,788 for the first offense and $121,577 for each subsequent offense.

But Sean Ridell, who served in the Marines and is McGreevy’s lawyer, told the Oregonian that he wants much more than just money.

“I want Northwest Trustee and PHH put out of business, their buildings burned down, and the ground salted so that nothing ever grows for what they did to veterans,’ Ridell said.

As you can see, historically these violations do not end well for the bank whether it is a home foreclosure or auto repossession and there can be years between the violation and the final reckoning. During that time there are expenses and distractions, none of which are good for the bank. The actions of the lender may have cost the bank six figures. If it acts proactively, it will emerge smarter and only at a five-figure expense. This is a real case, and all bankers should assess their own situation and ask, “Could this have happened here?”