In a decision issued on March 26, the Court of Appeals for the First Circuit found that appellee Citizens Bank’s “Sustained Overdraft Fees” do not qualify as interest under the National Bank Act (“NBA”) and the Office of the Comptroller of the Currency’s (“OCC”) related regulations, rules, and interpretive letters that provide guidance with respect to the term “interest.”

The case is Fawcett v. Citizens Bank, N.A, No. 18-1443 (1st Cir. Mar. 26, 2019).

The underlying putative nationwide class action originated in the United States District Court for the District of Massachusetts in 2017. Plaintiff – and later appellant – Barbara Fawcett alleged Citizens’ “Sustained Overdraft Fees” were usurious under Rhode Island law in violation of the NBA. Per the complaint, when a Citizens customer overdraws their checking account, Citizens charges the customer $35 to either return the check or honor the check. If Citizens chooses to honor the check, in addition to the $35 “Overdraft Fee” previously mentioned, Citizens charges a $30 “Sustained Overdraft Fee” if the account remains overdrawn for a period of four consecutive business days. Citizens then charges an additional $30 if the account remains overdrawn after the seventh business day and the tenth business day. In total, Citizens could choose to charge a customer up to $90 to honor the overdraft. Fawcett alleged this $90 difference that could occur if Citizens chooses to honor a check rather than to return the check was greater than the 21% per annum maximum interest rate set forth under Rhode Island law.

On Citizens’ motion, the district court dismissed Fawcett’s complaint, citing in a cursory text order the “overwhelming majority of jurisdictions which have ruled that sustained overdraft fees are not considered interest under the NBA.” Fawcett appealed.

Writing for the majority, Judge Sandra L. Lynch found Citizens’ “Sustained Overdraft Fees” did not constitute interest under the NBA because the OCC clearly stated in a 2007 interpretive letter that “[c]reating and recovering overdrafts have long been recognized as elements of the discretionary deposit account services that banks provide.” Per existing OCC regulations, “[d]eposit account service charges are not subject to usury limits.”

Prior to this conclusion, however, the Court set forth a brief background of the NBA and the regulatory history of the OCC’s interpreting rules and regulations. The Court found that the NBA did not define the term “interest.” However, the OCC has defined “interest” in its regulations to include certain fees connected with the extension of credit. The Court noted that in 2001 the OCC stated that “‘overdraft and returned check charges’ imposed by a bank on its checking account customers were ‘deposit account services’ charges and ‘interest.’” However, the OCC agreed to consider the issue of whether the difference could be considered interest under the NBA when an overdraft fee exceeds a returned check fee. The OCC ultimately refused to address the issue due to the complexity of charges connected with the imposition of overdraft fees.

Then in 2007, the OCC addressed an overdraft fees issue involving a bank that was charging either $23 or $34, depending on the frequency of the customer’s overdrafts, in addition to a $5 continuous overdraft fee per each business day the account was overdrawn. The OCC responded with the aforementioned language that “recovering overdrafts have . . . been recognized as elements of . . . discretionary deposit account services.” The Court, noting the OCC’s interpretations of its regulations are controlling unless plainly erroneous, found the interpretive letter clearly resolved the case. Since Fawcett presented no argument that the OCC’s interpretation was plainly erroneous, the Court affirmed the district court’s dismissal of the action per the 2007 interpretive letter. The Court also rejected Fawcett’s arguments that the letter was not controlling, that the OCC has advanced inconsistent interpretations of the term “interest,” and that the OCC is not entitled to deference in its interpretation of the term “interest.”

The Court further bolstered its opinion with additional citation to OCC regulations that state flat excess overdraft fees are “deposit account service charges” because they “(1) arise from the terms of the bank’s deposit account agreement with its customers, (2) are connected to deposit account services, (3) lack the hallmarks of an extension of credit, and (4) do not operate like conventional interest rates.”

In a dissenting opinion, Judge Kermit V. Lipez agreed with Fawcett’s argument that the 2007 interpretive letter was not controlling of the issue and that Fawcett should be allowed to seek discovery on the factual basis and reasoning behind Citizens’ “Sustained Overdraft Fees.” To the dissent, the 2007 interpretive letter was silent as to whether the OCC was making any distinction in the treatment of initial overdraft fees, such as the returned check fee, and any subsequent continuous fees as “interest” under the NBA. “Silence,” the dissent argued, “is not guidance.” The dissent continued, “I do not see how we can defer to an interpretation that the OCC never clearly made on an issue that it previously described as complex and fact-specific.”