A California federal court judge signed off on a settlement agreement involving a national bank and a class of customers challenging its overdrawn balance charge fee with recovery north of $1 billion.
The bank agreed to provide cash payments of $37.5 million and debt reduction of at least $29.1 million as well as pay various other costs and fees, and it promised to stop charging the fee for five years, which will result in a cessation of revenue of roughly $1.2 billion.
What happened
Joanne Farrell wrote checks against insufficient funds in her checking account. Pursuant to the terms of the deposit agreement, the bank charged her a $35 fee for not having sufficient funds. The agreement also provided the bank with discretion as to whether to honor an overdrawn check, and in the event it did so, the deposit account holder was obligated to pay back the bank’s advance and any fees incurred.
Failure to do so within five days triggered an extended charge—an amount levied as a percentage of the negative account balance. Farrell claimed this charge exceeded the interest rate permitted by Section 85 of the National Banking Act (NBA) and filed a putative class action in California federal court. Her $35 extended balance charge for the $284.86 overdraft she did not restore for 13 days represented an annualized interest rate between 897 and 71,170 percent, she claimed.
The bank moved to dismiss, arguing that the extended charge was not interest but an authorized deposit account service charge. But U.S. District Judge M. James Lorenz disagreed, concluding that the extended charge constituted interest under Section 85 and denying the motion to dismiss.
Although the bank appealed the decision to the U.S. Court of Appeals, Ninth Circuit, the parties initiated settlement negotiations and reached a deal in October 2017. The deal provides four forms of consideration in return for the release of class members’ claims.
First, the bank agreed to cease charging the extended overdrawn balance charge for five years, beginning on Dec. 31, 2017. This obligation will terminate during the time period only if the Supreme Court expressly holds that such charges or their equivalent do not constitute interest under the NBA. The bank testified that this cessation will depress its revenue—and benefit deposit account holders—by approximately $20 million per month, or a total of $1.2 billion.
The cash portion of the deal includes $37.5 million to class members who were charged for an extended overdrawn balance and did not have the charge refunded or charged off. Attorneys’ fees of $14.5 million, costs of $53,119.92, $20,000 in named plaintiff service awards and settlement charges of $62,242 will come off the top, leaving roughly $22,864,638 to issue pro rata payments to the approximately 7,078,199 class members.
Also included in the settlement: debt reduction in the amount of at least $29.2 million for those class members whose accounts with the bank were closed with an outstanding balance stemming from one or more of the extended overdrawn balance charges levied during the class period.
Finally, the bank agreed to pay all settlement administration costs, currently estimated at just under $3 million. Any residual cash that remains after the first distribution will go to the class by way of a secondary distribution, if feasible; otherwise, the residue will be donated to the Center for Responsible Learning as a cy pres beneficiary.
Judge Lorenz granted final approval for the deal, concluding that it was fair, adequate and reasonable, noting the “substantial” recovery for the class members as well as the risk facing the plaintiffs of losing at the appellate level.
To read the order granting final approval to the settlement, click here.
Why it matters
Apart from the size of the settlement—estimated at $1.2 billion with the injunctive relief provided by the bank, plus additional cash payments and debt reduction—the case remains notable for the district court’s 2016 decision that a charge for failing to replenish an overdrawn account constitutes interest. By electing to settle the case, the bank declined to appeal the district court’s opinion to the Ninth Circuit, leaving in place a difference of opinion among federal district courts. With contrary authority from courts in Florida, Oklahoma and South Carolina that extended charges do not constitute interest under Section 85, banks face uncertainty given the split in opinions.