Overdraft services practices were the basis for a $10 million fine from the Bureau of Consumer Financial Protection (CFPB) in a recent action against a national bank operating primarily in the northeast.

What happened

The bank offered overdraft protection for ATM and onetime debit card transactions at a cost of $35 for each overdraft, and an additional fee if the account remained overdrawn for a certain number of days. To sign consumers up for the service, the bank used a telemarketer.

In July 2010, an amended Regulation E of the Electronic Fund Transfer Act (EFTA) took effect. Promulgated by the Board of Governors of the Federal Reserve System, the "Opt-In Rule" prohibited charges for overdraft fees on ATM and onetime debit card transactions unless consumers elected to affirmatively opt in. If a consumer does not opt in, then a bank or credit union is not permitted to charge an overdraft fee and the transaction may be declined.

The bank responded to the Rule by launching a series of "vigorous telemarketing campaigns" to convince consumers to opt in to the program in order to "protect" the bank's fee revenue, the CFPB alleged.

As part of the opt-in call campaigns, the bank hired a third-party telemarketer to provide a brief description of its program and then requested the last four digits of consumers' Social Security numbers, enrolling them in the program without their consent, the CFPB alleged. In some instances, consumers declined to sign up for the program but requested information about it and the telemarketer allegedly enrolled them anyway.

Telemarketing representatives led consumers to believe that the program was a free service, even though it had the potential to cost hundreds of dollars in fees, the CFPB said. For example, some reps suggested that a consumer who brought his or her account current within five business days of an overdraft would not be charged while others left consumers with the impression that fees would only be charged for emergency transactions.

Adding to the alleged deceptive actions of the telemarketer were implications about potential fees if consumers chose not to opt in. The CFPB claimed that consumers were told the bank would charge overdraft fees on onetime debit card and ATM transactions whether or not they signed up for SAP, even though the bank was not allowed to make such charges without consent. Moreover, some consumers were allegedly informed they faced the risk of additional fees if they did not sign up for the program. The CFPB further alleged that telemarketers also falsely claimed their calls were not sales pitches (on some occasions telling the consumer the call was because the bank had changed its name).

The bank not only failed, said the Bureau, to stop the telemarketers' deceptive tactics, but also effectively encouraged them by providing financial incentives for the telemarketers to hit sales targets based on the number of consumers enrolled in the program, violating the Dodd-Frank Act's prohibition on unfair, deceptive, or abusive practices, in addition to the EFTA. The CFPB alleged that the bank was not only aware of the vendor's tactics as far back as 2010, but created or approved the scripts to be used by the vendor as part of the opt-in call campaign.

The bank reached a deal, agreeing to pay a $10 million fine to the CFPB. In addition, the CFPB required the bank, among other things, to validate all opt-ins associated with the telemarketer used to promote the program, prohibited the bank from using a vendor to conduct outbound telemarking of overdraft service to consumers (with a ban on financial incentives in connection with opt-ins), and ordered the bank to increase oversight of all third-party telemarketers, with the creation of a new or revised policy governing vendor management for service providers engaged in telemarketing of consumer financial products or services.

To read the consent order in In the Matter of Santander Bank, click here.

Why it matters

The action provides an important reminder to banks to keep a close eye on vendors, and that financial institutions will shoulder the full blame when they don't. The bank "tricked consumers into signing up for an overdraft service they didn't want and charged them fees," CFPB Director Richard Cordray said in a statement about the action. Its "telemarketer used deceptive sales pitches to mislead customers into enrolling in overdraft service. We will put a stop to any such unlawful practices that harm consumers."