The recent announcement by the Office of the Comptroller of the Currency (OCC) of its settlement with Woodforest National Bank represents the latest example of a federal banking regulator flexing its muscles under Section 5 of the Federal Trade Commission Act to challenge overdraft practices.
In its enforcement action against Woodforest, the OCC found that the bank had engaged in an unfair practice under Section 5 by charging "excessive aggregate amounts of overdraft fees" and by improperly assessing "continuous overdraft fees" to customers whose accounts were not brought to a positive balance within seven days. The OCC also found that the bank's marketing of its deposit accounts was deceptive because it omitted information about the high costs of the overdraft program.
The settlement requires Woodforest to make various changes to its overdraft program, including adopting "reasonable limits on aggregate and/or daily/monthly overdraft fees based on total dollars and/or total number of transactions." Although Woodforest neither admitted nor denied any wrongdoing, it agreed to pay a $1 million penalty and $32 million in reimbursement to consumers who paid more than seven continuous overdraft fees.
We are troubled by this precedent for a number of reasons. First, we question whether the OCC has authority under Section 5 to impose substantive fee limits. Second, the OCC has not adequately explained why the fees in question were "unfair" under the FTC Act. Although the OCC asserted that some consumers could not make the repayment of overdrafts necessary to avoid continuous fees, it did not explain its implicit assumption that given their other options (e.g., failing to make rent or utility payments), the overdraft program on balance injured consumers. Third, because the OCC acted through an individual enforcement proceeding rather than rulemaking, other banks are forced to guess as to its rationale and are precluded from providing input into the decision-making process. Finally, we worry that to induce Woodforest to pay more than 10 percent of its net worth to settle this action, the bank may have been subject to overwhelming pressure. Given the draconian remedies available to the federal banking agencies (and now the Bureau of Consumer Financial Protection), contesting enforcement proceedings may be impracticable in many, if not most, cases.
The OCC's enforcement action against Woodforest comes on the heels of the settlement in May 2010 of an enforcement action brought by the Office of Thrift Supervision (OTS), which challenged the overdraft practices of Woodforest's federal thrift affiliate, Woodforest Bank. The OTS action was discussed in an earlier Ballard Spahr legal alert, which also contains a summary of supplemental overdraft guidance proposed by the OTS in April 2010. Another legal alert summarized proposed new guidance on overdraft practices issued by the Federal Deposit Insurance Corporation in August 2010.
Several national consumer groups, including the Consumer Federation of America, Center for Responsible Lending, and National Consumer Law Center, jointly sent a letter dated October 13, 2010, to Acting Comptroller John Walsh urging the OCC to adopt stricter overdraft guidance. The restrictions sought in the letter include a ban on the use of a "high-to-low"order for processing transactions, a prohibition on repeated solicitations to the same customer to opt into overdraft coverage, and a limit on overdraft fees to no more than six per year.
Overdraft practices have also been the subject of dozens of class actions filed around the country involving claims by depositors that overdraft practices used by their banks were unfair, deceptive, or otherwise improper. Although most of these lawsuits are ongoing, Ballard Spahr lawyers have prevailed in three such actions, have persuaded another plaintiff to withdraw a class action, and are currently defending several banks in such class actions.