SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF

Transcription

SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
Index No. 650562/2011
In re HSBC Bank USA, N.A.,
Checking Account Overdraft Litigation
SECOND AMENDED CLASS
ACTION COMPLAINT
Jury Trial Requested
Plaintiffs, through undersigned counsel, on behalf of themselves and all others similarly
situated, allege the following based on personal knowledge as to allegations regarding the
Plaintiffs and on information and belief as to other allegations.
INTRODUCTION
1.
This is a civil action seeking monetary damages, restitution, and injunctive relief
from Defendants HSBC Bank USA, N.A., and HSBC USA Inc. (collectively herein “HSBC” or
“Defendants”), arising out of their unfair, deceptive, and unconscionable assessment and
collection of excessive overdraft fees.
2.
HSBC provides debit cards and/or ATM cards (collectively herein “check
cards”) to its checking account customers, which include individual consumer and small
business depositors. Through those check cards, customers may engage in transactions using
funds directly from their accounts or may withdraw money from their accounts at automatic
teller machines. These are called “point of sale” (“POS”) or “debit” transactions.
3.
If, according to HSBC’s accounting practices detailed below, a customer does
not have sufficient funds in the account, the transaction is considered an “overdraft.” HSBC
may honor or allow an overdraft to go through despite the lack of funds in the account. If HSBC
allows such a POS or debit transaction to proceed, HSBC charges the customer’s account $35
for each separate overdraft. These fees are known as “overdraft fees.”
4.
Before check cards existed, banks occasionally extended the courtesy of
honoring paper checks written on overdrafted or otherwise deficient accounts for customers who
were typically in good standing. Banks extended this courtesy largely because the third party
involved in a sales transaction allowed the customer to purchase goods or services with a check
with an expectation that funds would be available and that the check would clear. For example,
if a customer used a check to purchase groceries, the grocery store would only know if the
check cleared after the groceries had been purchased.
5.
The same considerations are not present when the transaction is one with a check
card. HSBC could simply decline to honor debit or POS transactions made with check cards
where there are insufficient funds in the account. Retail and service transactions would simply
not take place if the consumer were unable to present an alternative form of payment. ATM
transactions could proceed if HSBC provided a warning that an overdraft fee would be incurred
and the consumer chose to proceed nevertheless. In fact, until a few years ago, most banks
simply declined debit and/or POS transactions that would overdraw an account.
6.
Instead of declining debit and/or POS transactions when there are insufficient
funds, however, or warning the customer that an overdraft fee will be assessed if he or she
proceeds with the transaction, HSBC routinely processes such transactions in order to charge its
customers an overdraft fee of $35, even when the transaction is for only a few dollars. This
automatic fee-based overdraft scheme is designed and intended solely to increase overdraft fee
revenue.
7.
Although it is possible to do so, HSBC does not alert its check card customers at
the time a POS transaction or ATM withdrawal is made that the transaction will overdraft their
account and cause them to incur fees.
8.
Because HSBC’s check card customers are not notified of the potential overdraft
and are not given the option to decline the check card transaction or to provide another form of
payment, the customers incur monetary damages in the form of overdraft fees.
9.
HSBC seeks to maximize the number of overdraft fees it charges check card
customers because overdraft fees are a primary source of revenue for HSBC.
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10.
On August 9, 2009, an article was published in the Financial Times that stated
that United States banks “stand to collect a record $38.5 [billion] in fees for customer overdrafts
this year,” and that “fees are nearly double those reported in 2000.” The article goes on to state
that “[o]verdraft fees accounted for more than three-quarters of service fees charged on
customer deposits.” See Exhibit A.
11.
HSBC’s overdraft fees can cost the account holders hundreds of dollars in a
matter of days, or even hours, when they may be overdrawn only by a few dollars. Even more
egregious, a customer’s account may not actually be overdrawn at the time the overdraft fee is
charged or at the time of the POS transaction.
12.
In an effort to cause as many overdrafts as possible, HSBC manipulates and
reorders debits from highest to lowest during the course of a day.
13.
Upon information and belief, HSBC has a computer-automated overdraft system
programmed to maximize the number of overdrafts, and thus the amount of fees charged, per
customer.
14.
As a result of HSBC’s manipulation of customers’ transactions, funds in a
customer’s account are depleted more rapidly and more overdraft fees are likely to be charged
for multiple smaller transactions. Indeed, overdraft charges are likely to occur at times when,
but for the manipulation, there would be adequate funds in the account and no overdraft would
occur. For example, if a customer has an account with a $50 balance and makes four
transactions of $10 and one later transaction of $100 the same day, HSBC debits the
transactions from the account largest-to-smallest, thus subjecting the customer to four overdraft
fees. Conversely, if the $100 transaction were debited last (in the order it was made), the
customer would only be subject to one overdraft fee. See FDIC Study of Bank Overdraft
Programs, November 2008, available at http://www.fdic.gov/bank/analytical/overdraft/, at p. 11,
n.12.
15.
Thus, it is through manipulation of customers’ transaction records that HSBC
maximizes overdraft penalties imposed on customers.
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16.
As described below, HSBC reorders transactions for no reason other than to
increase the number of exorbitant overdraft fees it can charge. This practice is a violation of
New York’s consumer protection laws, the terms of HSBC’s Debit Card Agreement, and the
implied covenant of good faith and fair dealing in HSBC’s Rules For Deposit Accounts.
17.
Prior to July 1, 2010, banks like HSBC could automatically enroll consumers in
their standard overdraft practices for all types of transactions when a customer opened an
account. Pursuant to new Federal Reserve System rules enacted in 2010, however, for new
accounts opened after July 1, 2010, customers were required to opt-in to receive overdraft
protection. Similarly, customers with existing accounts with overdraft protection who did not
affirmatively opt-in to overdraft protection by August 15, 2010 ceased receiving such
protection. The opt-in requirement applies to all accounts covered by Regulation E, including
payroll card accounts, but not to check transactions, recurring debits, or ACH transactions.
18.
Thus, prior to the middle of 2010, it was not clearly disclosed to check card
customers that they have the right to “opt out” of HSBC’s overdraft scheme. Moreover, after the
new Federal Reserve System rules went into effect, customers still were not given a meaningful
opportunity to “opt in,” as the nature of HSBC’s wrongful overdraft practices, as alleged in
greater detail herein, was not clearly disclosed to customers.
JURISDICTION AND VENUE
19.
This Court has jurisdiction over this action pursuant to §§ 301 and 302(a) of the
New York Civil Practice Laws and Rules (“CPLR”) because all Plaintiffs are or were domiciled
in the State of New York during the relevant time period and Defendants, who transact and
derive substantial revenues from business within this State, have committed wrongs, including
the violations of the New York General Business Law described below, within the State of New
York.
20.
Venue is proper in this Court because Defendants have, at all relevant times,
transacted business in New York County and throughout the State of New York; many of the
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wrongs complained of herein were committed in New York County; and Defendants maintain
their principal places of business in New York County.
THE PARTIES
21.
Plaintiff Ofra Levin is, and at all relevant times has been, a citizen of the State of
New York and a resident of Nassau County. Mrs. Levin is a customer of HSBC who was
charged improper overdraft fees.
22.
Plaintiff Michael D. Park was a citizen of the State of New York and a resident
of New York County. Since approximately March 2012, Mr. Park has been a resident of Los
Angeles County, California. At all relevant times, Mr. Park was a customer of HSBC who was
charged improper overdraft fees.
23.
Plaintiff 33 Seminary LLC (“33 Seminary”) is, and at all relevant times has been,
a New York limited liability company. 33 Seminary is a former small business depositor and
customer of HSBC that was charged improper overdraft fees.
24.
Plaintiff Binghousing Inc. (“Binghousing”) is, and at all relevant times has been,
a New York corporation. Binghousing is a small business depositor and customer of HSBC that
was charged improper overdraft fees.
25.
Defendant HSBC Bank USA, N.A., which maintains its principal executive
offices at 452 Fifth Avenue, New York, New York 10018, operates more than 475 bank
branches throughout the United States, with over 370 in New York state as well as branches in
Connecticut, Washington, D.C., Florida, New Jersey, Pennsylvania, Maryland, Virginia,
California, Delaware, Illinois, Oregon and Washington state. HSBC Bank USA, N.A is a
national bank subject to the National Bank Act, 12 U.S.C. § 1, et seq., and OCC regulations.
26.
Defendant HSBC USA Inc., which maintains is principal executive offices
located at 452 Fifth Avenue, New York, New York 10018, purports to be the nation’s tenth
largest bank holding companies by assets. HSBC USA Inc. operates wholly-owned subsidiary
HSBC Bank USA. Defendants HSBC USA Inc. and HSBC Bank USA, N.A. are collectively
referred to herein as “HSBC.”
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CLASS ACTION ALLEGATIONS
27.
Plaintiffs bring this action as a class action pursuant to N.Y. CPLR § 901(a), on
behalf of themselves and all others similarly situated. The proposed class is defined as:
All HSBC account holders in the United States who, within the
applicable statute of limitations, incurred an overdraft fee on a
debit card transaction as a result of HSBC’s practice of posting
transactions from highest to lowest dollar amount (the “Class”).
28.
Plaintiffs reserve the right to modify or amend the definition of the proposed
Class before the Court determines whether certification is appropriate.
29.
Plaintiffs also bring this action on behalf of a subclass, defined as:
All HSBC account holders in the United States who, within the
applicable statute of limitations, incurred an overdraft fee on a
debit card transaction conducted in the State of New York as a
result of HSBC’s practice of posting transactions from highest to
lowest dollar amount (the “Subclass”).
30.
Excluded from the Class and Subclass are Defendants and their parents,
subsidiaries, affiliates, officers and directors, any entity in which Defendants have a controlling
interest, all customers who make a timely election to be excluded, governmental entities, and all
judges assigned to hear any aspect of this litigation, as well as their immediate family members.
31.
Certification of Plaintiffs’ claims for class-wide treatment is appropriate because
Plaintiffs can prove the elements of their claims on a class-wide basis using the same evidence
as would be used to prove those elements in individual actions alleging the same claims.
(a)
Numerosity under CPLR §901(a)(1): the Class and Subclass are so
numerous that joinder of all members, whether otherwise required or permitted, is
impracticable. Plaintiffs are informed and believe that there are at least hundreds of
thousands of HSBC customers who have been damaged by HSBC’s unfair, deceptive,
and illegal conduct alleged herein.
(b)
Commonality under CPLR § 901(a)(2): there are questions of law or fact
common to the Class and Subclass which predominate over any questions affecting only
individual members. This action involves common questions of law and fact, including,
but not limited to:
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•
whether HSBC represented to Class members in its debit card agreement
and/or Rules for Deposit Accounts that overdraft fees would not be charged
on point-of-sale transactions if there were sufficient funds in the Class
member’s account at the time HSBC authorized the transaction;
•
whether HSBC breached its debit card agreement and/or Rules for Deposit
Accounts by charging overdraft fees on point-of-sale transactions when there
were sufficient funds in the Class member’s account at the time HSBC
authorized the transaction;
•
whether HSBC breached its debit card agreement and/or Rules for Deposit
Accounts by posting point-of-sale transactions from highest to lowest, instead
of in the order the transactions were authorized;
•
whether HSBC abused its discretion in posting debit card transactions from
highest to lowest in order to maximize the overdraft fees imposed on Class
members;
•
whether such abuse of discretion constitutes a breach of the covenant of good
faith and fair dealing;
•
whether HSBC’s representation in its debit card agreement that point-of-sale
transactions “constitute a simultaneous withdrawal from your Checking
Account” was false and/or likely to mislead a reasonable consumer acting
reasonably under the circumstances; and
•
whether HSBC’s representations to Class members in its debit card
agreement and/or Rules for Deposit Accounts that overdraft fees would not
be charged on point-of-sale transactions if there were sufficient funds in the
Class member’s account at the time HSBC authorized the transaction were
false and/or likely to mislead a reasonable consumer acting reasonably under
the circumstances.
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(c)
Typicality under CPLR § 901(a)(3): the claims or defenses of the
representative parties are typical of the claims or defenses of the Class and Subclass.
Plaintiffs, like all members of the Class, have been subject to HSBC’s overdraft charge
policies and practices and have damaged by HSBC’s misconduct in that they incurred
excessive overdraft charges. Furthermore, the factual bases of HSBC’s misconduct are
common to all members of the Class and represent a common thread of unconscionable,
unfair and/or deceptive misconduct resulting in injury to all members of the Class.
(d)
Adequacy of Representation under CPLR § 901(a)(4): the representative
parties will fairly and adequately protect the interests of the Class and Subclass.
Plaintiffs are committed to the vigorous prosecution of this action. Plaintiffs will fairly
and adequately protect the interests of the members of the Class and Subclass, and
Plaintiffs’ interests are coincident with and not antagonistic to those of the other Class
members they seek to represent. Plaintiffs have retained competent counsel experienced
in the prosecution of class actions to represent them and the Class.
(e)
Superiority under CPLR § 901(a)(5): a class action is superior to other
available methods for the fair and efficient adjudication of the controversy. Questions of
law common to the members of the Class and Subclass predominate over any questions
affecting only individual members with respect to some or all issues presented in this
Complaint. A class action is superior to other available methods for the fair and efficient
adjudication of this controversy. Individual litigation of the claims of all class members
is impracticable because the cost of litigation would be prohibitively expensive for each
class member and would impose an immense burden upon the courts. Individualized
litigation would also present the potential for varying, inconsistent, or contradictory
judgments and would magnify the delay and expense to all parties and to the court
system resulting from multiple trials of the same complex factual and legal issues. By
contrast, the conduct of this action as a class action, with respect to some or all of the
issues presented in this Complaint, presents fewer management difficulties, conserves
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the resources of the parties and of the court system, and is the only means to protect the
rights of all class members.
SUBSTANTIVE ALLEGATIONS
HSBC’S Customer Documents Regarding Overdrafts
32.
The terms of HSBC’s checking accounts are contained in a written standard
account holder agreement, which was drafted and imposed by HSBC and presented to its
customers on a “take it or leave it” basis. The “Rules For Deposit Accounts” is attached as
Exhibit B. The Rules For Deposit Accounts is a lengthy, single-spaced document written in
small font.
33.
The Rules for Deposit Accounts provides that an overdraft fee may be charged
on a Point-of-Sale transaction only if “you . . . make a withdrawal from . . . a point of sale
terminal . . . against insufficient funds”:
INSUFFICIENT OR UNAVAILABLE FUNDS
If you write a check for more money than you have in your
account or against unavailable funds, the Bank may either pay the
check, in which case you must pay the Bank back promptly, or
return it. The Bank may charge you a per item fee as shown on the
Terms and Charges Disclosure if you write a withdrawal slip or
check, or make a withdrawal from an automated teller machine
owned by HSBC or other electronic funds facility, (including a
point of sale terminal) against insufficient funds or against funds
unavailable for withdrawal.
Rules for Deposit Accounts at p. 3.
34.
The Rules For Deposit Accounts then states:
Your account may be debited on the same day an item is
presented, or at such an earlier time as notification is received by
the Bank by electronic or other means, that an item drawn on your
account has been deposited for collection in another financial
institution. You understand that the Bank reserves the right to pay
items into overdraft, to impose overdraft fees, and to apply any
later deposits (including direct deposits of social security or other
government benefits) to those overdrafts or overdraft fees, by way
of setoff.
A determination of your account balance for purposes of making a
decision to dishonor an item for insufficiency of available funds
may be made at any time between the receipt of such presentment
or notice and the time of return of the item, and no more than one
such determination need be made.
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Rules For Deposit Accounts, Ex. B at p. 4.
35.
The Rules For Deposit Accounts then states that “[t]he Bank generally pays the
largest debit items drawn on a depositor’s account first.” Rules For Deposit Accounts, Ex. B at
p. 4.
36.
The Rules for Deposit Accounts does not set forth the dollar amount of fees that
will be charged for purported overdrafts. Instead, a separate document, the “Terms & Charges
Disclosure” (“Charges Disclosure”) (copy attached as Exhibit C), lists the dollar amount of fees
that will be charged for purported overdrafts, in a chart entitled “Service Fees.” In small print,
the chart states:
Insufficient Funds (NSF) Checking ……………….. $35 each for
each withdrawal, check or electronic fund transfer we pay or
return that overdraws your account.
37.
Along with their debit cards, HSBC customers receive a copy of the HSBC Debit
MasterCard Cardholder Agreement (the “Debit Card Agreement”). A copy of the Debit Card
Agreement is attached as Exhibit D. The agreement provides that it “covers the use of your
HSBC Debit MasterCard,” and has remained unchanged since December 2008. HSBC
continues to enclose this same Debit Card Agreement with its debit cards.
38.
The Debit Card Agreement defines a “’Point-of-Sale’ transaction” as a use of the
card “to purchase goods or services at any merchant location that accepts the MasterCard debit
card.” Debit Card Agreement, § I.A. The agreement expressly provides that:
You acknowledge that all Point-of-Sale transactions will
constitute a simultaneous withdrawal from your Checking
Account, even through the transaction might not be paid from
your Checking Account until a later date.
Debit Card Agreement, § II.B (emphasis added).
39.
The Debit Card Agreement provides that if sufficient funds are available at the
time a Point-of-Sale transaction is authorized, a “hold” will be placed on the funds necessary to
cover the transaction:
•
“You can make point of sale purchases using your Debit
MasterCard up to the amount of the available balance in your
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Checking Account at the time of the Point-of-Sale transaction.”
Deducted from the “available balance” is the amount any
“outstanding Point-of-Sale authorizations made to your Checking
Account for Point-of-Sale transactions.”
•
“We have the right to return any check or other item drawn
against your Checking Account which would overdraw the
account due to the hold placed for a Point-of-Sale transaction
made or authorized using your Debit MasterCard.”
Debit Card Agreement, §§ I.A., II.B. (emphasis added).
40.
The Debit Card Agreement further provides that if sufficient funds are not
available at the time a Point-of-Sale transaction is authorized -- which “constitute[s] a
simultaneous withdrawal from your Checking Account” -- an overdraft fee may be imposed:
•
“We may, but do not have to, allow Point-of-Sale transactions
which exceed the available balance in your Checking Account. If
we do, you agree that we may treat the amount of such excess as
an overdraft . . . .”
•
“No Overdrafts. You understand that your Debit MasterCard
does not serve as a credit card nor as overdraft protection. You
agree that you will not use your Debit MasterCard to make any
withdrawal that exceeds the available balance in your Checking
Account. If you make such a withdrawal, we may treat the excess
amount as an overdraft on your account . . . .”
Debit Card Agreement, §§ II.B., IV.G. (emphasis added).
41.
The Debit Card Agreement provides that “[t]his Agreement is governed by the
laws of the State of New York, as well as the applicable laws and regulations of the United
States, whether you live in New York or use your Card in New York.” Debit Card Agreement,
§ V.A.
42.
Finally, the Debit Card Agreement provides that its provisions are controlling
over any inconsistent provisions in the Rules for Deposit Accounts or other disclosures:
Both your Checking Account and Savings Account are also
subject to the Rules for Deposit Accounts, the corresponding
Terms and Charges Disclosure and the EFT Facility Charges
Statement given to you in connection with your accounts. If any
of the provisions in those brochures are inconsistent with the
information in this Agreement, this Agreement will govern.
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Debit Card Agreement, p. 1 (emphasis added).
HSBC’S Re-Ordering of Checking Account Transactions
43.
In an effort to maximize overdraft revenue, HSBC manipulates and reorders
debits from highest to lowest during given periods of time. HSBC reorders transactions for no
reason other than to increase the number of exorbitant overdraft fees it can charge.
44.
HSBC misleads its customers regarding its reordering practices. Instead of
unequivocally telling its customers that it will reorder debits from highest to lowest, HSBC
states in its Rules for Deposit Accounts that “[t]he Bank generally pays the largest debit items
drawn on a depositor’s account first.” This statement is deceptive and/or unfair because it is, in
fact, HSBC’s practice to always reorder debits from highest to lowest, and because HSBC
groups together POS transactions that occurred on subsequent days with POS transactions that
occurred on earlier days, and reorders them so that higher debits that occurred on subsequent
days are posted to its customers’ accounts before lower debits that occurred on earlier days,
contrary to the terms of the Rules For Deposit Accounts and its customers’ reasonable
expectations.
45.
In addition, the Charges Disclosure also fails to disclose how transactions are
reordered from highest to lowest.
46.
Transactions involving debit cards used by HSBC’s customers, including the
withdrawal of cash from ATM machines and POS transactions with vendors, are processed
electronically. As a result, HSBC is notified instantaneously when the customer’s debit card is
swiped, and has the option to accept or decline these transactions.
47.
Notwithstanding the instantaneous nature of these electronic debit card
transactions, under HSBC’s posting system, it fails to post charges in the order in which they are
incurred or received. HSBC developed a policy and employs a practice whereby account
charges and debits are posted to its customers’ accounts out of chronological order for the sole
purpose of maximizing the number of overdraft transactions and, therefore, the amount of
overdraft fees charged to its customers.
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48.
Instead of processing such transactions in chronological order, HSBC processes
them starting with the largest debit and ending with the smallest debit, so as to generate the
largest possible number of overdrafts and the greatest possible amount of overdraft fees.
49.
HSBC refrains from immediately posting charges to a customer’s account as it
receives them – sometimes for multiple business days. By holding charges rather than posting
them immediately to an account, HSBC is able to amass a number of charges on the account.
Subsequently, HSBC posts all of the amassed charges on a single date. When the group of
charges is eventually posted to the customer’s account, HSBC posts them in order of largest to
smallest – not in the order in which they were received or in the order in which they were
charged. This delayed posting results in the imposition of multiple overdraft fees that would not
otherwise be imposed. The delayed posting also prevents customers from ascertaining the
accurate balances in their accounts.
50.
HSBC deducts the amount of each point-of-sale transaction from the customer’s
available balance at the time it authorizes the transaction, but its online banking system
accessible to customers does not show any such authorizations, making it nearly impossible for
customers to accurately determine their checking account balance at any point in time, resulting
in overdrafts.
51.
HSBC’s policy and practice of posting charges from largest to smallest, rather
than chronologically, or from smallest to largest, is specifically designed to maximize the
generation of overdraft fees by triggering overdraft fees for account charges that would not
otherwise result in such fees.
52.
HSBC enforces an unconscionable policy whereby charges incurred are posted to
customers’ accounts in a non-chronological order, from highest to lowest, and are held for
multiple days and then batched together, to maximize the number of overdraft transactions and
fees. HSBC’s processing practices substantially increase the likelihood that customers’ smaller
charges will result in multiple overdraft fees. The practices provide HSBC with substantially
higher service fee revenues than it would otherwise achieve absent these practices.
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53.
As a result, Plaintiffs and members of the Class have been assessed overdraft
fees for transactions which occurred when they actually had sufficient funds in their accounts to
cover those transactions.
HSBC Fails to Notify Customers of Overdrafts or Advise Customers of Right to Opt Out
54.
At the time that HSBC’s check card is used, for example at a POS or at an ATM,
HSBC is able to determine almost instantaneously whether there are sufficient funds in a
customer’s account to cover that particular transaction. HSBC has the technological capability
to decline transactions or notify customers at that very moment that the particular check card
transaction would result in an overdraft. HSBC could give customers the option to decline the
transaction to avoid incurring the overdraft fee, but it does not do this because it seeks to
maximize its overdraft fees.
55.
Notwithstanding its technological capabilities and actual knowledge, HSBC fails
to provide notice to customers that a particular debit card transaction will result in an overdraft
and, hence, an overdraft fee. Because HSBC’s customers are not notified of the potential
overdraft, and are not given the option of declining the debit card transaction or providing
another form of payment, the customers incur monetary damages in the form of overdraft fees.
56.
The Rules For Deposit Accounts fails to clearly or reasonably disclose to
depositors that they have the option to “opt out” of HSBC’s overdraft scheme.
HSBC’S Overdraft Policies and Practices are Contrary to Best Practices
57.
According to rules proposed by the Board of Governors of the Federal Reserve
System, the Office of Thrift Supervision, Treasury, and the National Credit Union
Administration (the “Agencies”): “Injury [caused by overdraft charges] is not outweighed by
countervailing benefits. . . . This is particularly the case for ATM withdrawals and POS debit
card transactions where, but for the overdraft service, the transaction would typically be denied
and the consumer would be given the opportunity to provide other forms of payment without
incurring any fee.” 73 F.R. 28904-01, 28929 (May 19, 2008).
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58.
HSBC’s overdraft policies make it difficult for a customer to avoid injury even if
a customer carefully tracks the balance in his or her account. In fact, the Agencies have stated
that “injury” resulting from such policies “is not reasonably avoid[able]” by the consumer. 73
F.R. 28904-01, 28929 (“It appears that consumers cannot reasonably avoid this injury if they are
automatically enrolled in an institution’s overdraft service without having an opportunity to opt
out. Although consumers can reduce the risk of overdrawing their accounts by carefully tracking
their credits and debits, consumers often lack sufficient information about key aspects of their
account. For example, a consumer cannot know with any degree of certainty when funds from a
deposit or a credit for a returned purchase will be made available.”).
59.
Prior to when the new Federal Reserve System rules went into effect, HSBC did
not follow the list of “best practices” with respect to overdraft programs set forth in the “Joint
Guidance on Overdraft Protection Programs” (herein “Joint Guidance”) (attached hereto as
Exhibit E), issued by the United States Department of the Treasury, the Office of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation and the National Credit Union Administration. These
“best practices” include: “Provide election or opt-out of service. Obtain affirmative consent of
consumers to receive overdraft protection. Alternatively, where overdraft protection is
automatically provided, permit consumers to ‘opt out’ of the overdraft program and provide a
clear consumer disclosure of this option.” 70 F.R. 9127-01, 9132.
60.
Even after those rules went into effect, HSBC still did not follow the Joint
Guidance’s “best practices.” The “best practices” listed in the Joint Guidance also advise banks
to “[a]lert customers before a transaction triggers any fees. When consumers attempt to
withdraw or transfer funds made available through an overdraft protection program, provide a
specific consumer notice, where feasible, that completing the withdrawal may trigger the
overdraft fees.” 70 F.R.D. 9127, 9132. The “best practices” go on to advise that “[t]his notice
should be presented in a manner that permits consumers to cancel the attempted withdrawal or
transfer after receiving the notice.” Id.
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61.
The list of “best practices” set forth in the “Overdraft Protection: A Guide For
Bankers” issued by the American Bankers Association includes offering customers the option of
“opting out” of any overdraft programs, and informing customers, before they access funds, that
a particular POS or ATM transaction will cause them to incur overdraft fees. (See Exhibit F,
attached, at pp. 18, 20).
62.
HSBC did not clearly or reasonably disclose to its customers that they have the
right to opt out of HSBC’s overdraft scheme, nor did they clearly or reasonably disclose such
scheme when customers began to opt-in as required by the new Federal Reserve System’s new
rules. HSBC also fails to notify consumers when use of a check card, such as an ATM or POS
transaction, will cause an overdraft fee.
63.
HSBC’s lack of reasonable disclosure regarding the ability to opt out of the
overdraft scheme and its failure to notify customers when the use of a check card, such as an
ATM or POS transaction, will cause an overdraft fee, is a violation of New York’s consumer
protection laws and the implied covenant of good faith and fair dealing in HSBC’s “Rules For
Deposit Accounts” – the agreement which governs its checking accounts.
HSBC’s Unconscionable Provisions and Policies
64.
Under New York General Business Law § 349, HSBC’s overdraft policies and
practices are unfair, deceptive and unconscionable in the following respects, among others:
(a)
HSBC did not clearly or reasonably disclose to customers that they have
the option to “opt out” of HSBC’s overdraft scheme, nor did they clearly or reasonably
disclose such scheme when customers began to opt-in as required by the new Federal
Reserve System’s new rules;
(b)
HSBC does not obtain the affirmative consent from checking account
customers prior to processing a transaction that would overdraw the account and result in
an overdraft fee;
16
(c)
HSBC does not alert its customers that a check card transaction will
trigger an overdraft fee and does not provide the customer the opportunity to cancel that
transaction;
(d)
The Rules For Deposit Accounts, to the extent it may be deemed a
contract, is a contract of adhesion in that it is a standardized form, imposed and drafted
by HSBC, which is a party of vastly superior bargaining strength, and relegates to the
depositor only the opportunity to adhere to it or reject it;
(e)
The Rules For Deposit Accounts provided to HSBC’s customers is
ineffective, ambiguous, deceptive and misleading in that it does not unambiguously state
that it always reorders debits from high to low (even though HSBC always reorders
transactions in this way so as to maximize overdrafts and revenue for HSBC), or that its
reordering of debits will necessarily increase the number of overdraft charges; and
(f)
The amounts of overdraft fees are disclosed in an ineffective, ambiguous,
misleading and deceptive manner, since they are not contained in the Rules For Deposit
Accounts.
65.
The Rules For Deposit Accounts also contains a “Waiver of Trial by Jury”
provision, which states “YOU AND THE BANK AGREE TO WAIVE THE RIGHT TO
TRIAL BEFORE A JURY IN ANY ACTION FOR ANY CLAIMS THAT MAY ARISE
FROM OR RELATE TO YOUR DEPOSIT ACCOUNT INCLUDING, BUT NOT LIMITED
TO, CONTRACT, NEGLIGENCE, USE, ATTORNEYS-IN-FACT, RESTRAINT AND
EXECUTION.”
66.
Such agreements are procedurally and substantively unconscionable and
unenforceable under New York law in that, inter alia, the Rules For Deposit Accounts, to the
extent it may be deemed a contract at all, is a contract of adhesion because, among other
reasons, it is a standardized form, imposed and drafted by HSBC, which is a party of vastly
superior bargaining strength, and relegates to the depositor only the opportunity to adhere to it
17
or reject it, and because it leads to overly harsh results for consumers and prevents consumers
from having a meaningful opportunity to redress their grievances.
ALLEGATIONS SPECIFIC TO PLAINTIFFS
Ofra Levin
67.
Plaintiff Ofra Levin is a current checking account customer of HSBC. She
opened her checking account with HSBC in approximately September 2008. She was issued a
check card when she opened her account.
68.
During her time as a checking account customer of HSBC, Mrs. Levin has been
charged with overdraft fees when there were sufficient funds in her account to cover the
transaction at issue.
69.
For example, on June 9, 2010, Mrs. Levin was charged with two (2) overdraft
charges in the amount of $35 each for a total of $70. The overdraft fees were based on the
following ordering of transactions:
Balance Sheet per HSBC Reordering Scheme
(Debits Processed from Highest to Lowest)
Debits
Deposits
Fees
Beginning
Balance on
6/4/10:
Balance
$21.33
Date Posted
Description
6/8/10
Payment to
Nationwide
P&C-NW
88.01
-66.68
6/8/10
Purchase (on 19.40
6/5/10) at
OmniTelecom
Local
-86.08
6/9/10
70.00
18
70.
If HSBC has not manipulated and reordered Mrs. Levin’s transactions from
highest to lowest, Mrs. Levin would have only incurred one overdraft fee instead of two:
(Debits Processed in Chronological Order)
Debits
Deposits
Fees
Beginning
Balance on
6/4/10:
Balance
$21.33
Date of
Transaction
Description
6/5/10
Purchase (on
6/5/10) at
Omni
Telecom
Local
19.40
1.93
6/8/10
Payment to
Nationwide
P&C-NW
88.01
-86.08
6/9/10
35.00
71.
At all relevant times, HSBC did not reasonably provide Mrs. Levin with notice
that she could opt out of HSBC’s overdraft program.
72.
HSBC has never notified Mrs. Levin at the time she made check card
transactions, including POS transactions, that her checking account was overdrawn or that it
would charge her an overdraft fee as a result of the transaction.
73.
HSBC never declined to pay any of Mrs. Levin’s check card charges, even when
her account was overdrawn. Rather, HSBC has always paid such charges and charged Mrs.
Levin with overdraft fees.
Michael Park
19
74.
Plaintiff Michael D. Park was, at all relevant times, a checking account customer
of HSBC. He opened his checking account with HSBC in 2007. During the relevant time period,
Mr. Park was issued a check card by HSBC.
75.
During his time as a checking account customer of HSBC, Mr. Park was charged
with overdraft fees when there were sufficient funds in his account to cover the transaction at
issue.
76.
For example, on May 21, 2008, Mr. Park was charged with two (2) overdraft
charges for a total of $70. The overdraft fees were based on the following ordering of
transactions:
Debits
Deposits
Fees
Beginning
Balance on
5/19/08:
Balance
$3,411.56
Date Posted
Description
5/20/08
Check #0229
4,600.00
-1,188.44
5/20/08
Purchase at
Da Andrea
56.00
-1,244.44
5/21/08
77.
70.00
If HSBC had not manipulated and reordered Mr. Park’s transactions from highest
to lowest, Mr. Park would have only incurred one overdraft fee instead of two:
Debits
Deposits
Beginning
Balance on
5/19/08:
Fees
Balance
$3,411.56
20
Date of
Transaction
Description
5/18/08
Purchase at
Da Andrea
56.00
3,355.56
5/20/08
Check #0229
4,600.00
-1,244.44
35.00
78.
On October 17, 2008, Mr. Park was charged with two (2) overdraft charges for a
total of $70. The overdraft fees were based on the following ordering of transactions:
Debits
Deposits
Fees
Beginning
Balance on
10/14/08:
Balance
$140.87
Date Posted
Description
10/16/08
Check #0245
2,300.00
-2,159.13
10/16/08
Purchase at
Skype.com
17.95
-2,177.08
10/17/08
79.
70.00
Debits
Deposits
Beginning
Balance on
10/14/08:
Date of
Fees
Balance
$140.87
Description
21
Transaction
10/11/08
Purchase at
Skype.com
17.95
122.92
10/16/08
Check #0245
2,300.00
-2,177.08
35.00
80.
On February 9, 2009, Mr. Park was charged with four (4) overdraft charges for a
Debits
Deposits
Fees
Beginning
Balance on
2/5/08:
Balance
$615.77
Date Posted
Description
2/6/09
Check #0197
1,007.00
-391.23
2/6/09
Purchase
127.00
-518.23
2/6/09
Cash
Withdrawal
102.00
-620.23
2/6/09
Purchase at
American
Onboard Sale
12.00
-632.23
2/9/2009
81.
140.00
to lowest, Mr. Park would have only incurred one overdraft fee instead of four:
Debits
Deposits
Beginning
Fees
Balance
$615.77
22
Balance on
2/5/08:
Date of
Transaction
Description
2/4/09
Purchase at
American
Onboard Sale
12.00
603.77
2/5/09
Cash
Withdrawal
102.00
501.77
2/5/09
Purchase
127.00
374.77
2/6/09
Check #0197
1,007.00
-632.23
35.00
82.
On May 12, 2009, Mr. Park was charged with two (2) overdraft charges for a
Debits
Deposits
Fees
Beginning
Balance on
5/8/09:
Balance
$1,120.92
Date Posted
Description
5/11/09
Check #0205
2,350.00
-1,229.08
5/11/09
Purchase at
Sephora
58.52
-1,287.60
5/12/09
83.
70.00
23
Debits
Deposits
Fees
Beginning
Balance on
5/8/09:
Balance
$1,120.92
Date of
Transaction
Description
5/7/09
Purchase at
Sephora
58.52
1,062.40
5/11/09
Check #0205
2,350.00
-1,287.60
35.00
84.
On August 25, 2009, Mr. Park was charged with two (2) overdraft charges for a
Debits
Deposits
Fees
Beginning
Balance on
8/21/09:
Balance
$94.23
Date Posted
Description
8/24/09
Check #0215
105.75
-11.52
8/24/09
Purchase at
Home
Restaurant
53.70
-65.22
8/25/09
85.
70.00
Debits
Deposits
24
Fees
Balance
Beginning
Balance on
8/21/09:
$94.23
Date of
Transaction
Description
8/21/09
Purchase at
Home
Restaurant
53.70
40.53
8/24/09
Check #0215
105.75
-65.22
35.00
86.
At all relevant times, HSBC did not reasonably provide Mr. Park with notice that
he could opt out of HSBC’s overdraft program.
87.
HSBC has never notified Mr. Park at the time he made check card transactions,
including POS transactions, that his checking account was overdrawn or that it would charge
him an overdraft fee as a result of the transaction.
88.
HSBC never declined to pay any of Mr. Park’s check card charges, even when
his account was overdrawn. Rather, HSBC has always paid such charges and charged Mr. Park
with overdraft fees.
33 Seminary
89.
Plaintiff 33 Seminary is a former checking account customer of HSBC. 33
Seminary, by and through its duly authorized signatories, opened a checking account with
HSBC in approximately September 2008. It was issued a check card when it opened the
account.
90.
During its time as a checking account customer of HSBC, 33 Seminary has been
charged with numerous overdraft fees when there were sufficient funds in the account to cover
the transactions at issue.
25
91.
For example, on November 3, 2009, 33 Seminary was charged with nine (9)
overdraft charges in the amount of $35 each for a total of $315. The overdraft fees were based
on the following ordering of transactions:
Debits
Deposits
Fees
Beginning
Balance on
10/30/09:
Date Posted
$4,281.18
Description
11/02/09
11/02/09
Balance
500.00
4,781.18
Check
#210946
Check
3,800.00
981.18
691.00
290.18
668.00
-377.82
11/02/09
Check
#210947
Home Depot
38.44
-416.26
11/02/09
Home Depot
31.96
-448.22
11/02/09
Home Depot
21.72
-469.94
11/02/09
Sunoco
20.39
-490.33
11/02/09
Hess
17.66
-507.99
11/02/09
Home Depot
15.31
-523.30
11/02/09
Home Depot
14.47
-537.77
11/02/09
Home Depot
12.60
-550.37
11/02/09
11/02/09
11/03/09
315.00
92.
If HSBC has not manipulated and reordered 33 Seminary’s transactions from
highest to lowest, 33 Seminary would have only incurred one overdraft fee instead of nine:
26
Debits
Deposits
Fees
Beginning
Balance on
10/30/09:
Balance
$4,281.18
Date of
Transaction
Description
10/29/09
Home Depot
38.44
4,242.74
10/29/09
Hess
17.66
4,225.08
10/29/09
Home Depot
15.31
4,209.77
10/30/09
Home Depot
31.96
4,177.81
10/30/09
Home Depot
21.72
4,156.09
10/30/09
Sunoco
20.39
4,135.70
10/30/09
Home Depot
14.47
4,121.23
10/30/09
Home Depot
12.60
4,108.63
11/02/09
11/02/09
11/02/09
11/02/09
93.
500.00
4,608.63
Check
#210946
Check
3,800.00
808.63
691.00
117.63
Check
#210947
668.00
-550.37
35.00
Eight (8) out of the nine (9) charges were the result of HSBC’s reordering of 33
Seminary’s debit and check transactions from highest ($3,800.00) to lowest ($12.60). But for
the reordering, 33 Seminary would have had sufficient funds in its account to cover 8 of the 9
transactions at issue and would have only incurred overdraft fees of $35 rather than $315.
94.
At all relevant times, HSBC did not reasonably provide 33 Seminary with notice
that it could opt out of HSBC’s overdraft program.
27
95.
HSBC has never notified 33 Seminary at the time it made check card
transactions, including POS transactions, that its checking account was overdrawn or that it
would charge it an overdraft fee as a result of the transaction.
96.
HSBC never declined to pay any of 33 Seminary’s check card charges, even
when its account was overdrawn. Rather, HSBC has always paid such charges and charged 33
Seminary with overdraft fees.
Binghousing
97.
Plaintiff Binghousing is a current checking account customer of HSBC.
Binghousing, by and through its duly authorized signatories, opened a checking account with
HSBC in approximately September 2008. It was issued a check card when it opened the
account.
98.
During its time as a checking account customer of HSBC, Binghousing has been
charged with overdraft fees when there were sufficient funds in the account to cover the
transaction at issue.
99.
For example, on November 17, 2009, Binghousing was charged with two (2)
overdraft charges in the amount of $35 each for a total of $70. The overdraft fees were based on
the following ordering of transactions:
Debits
Deposits
Beginning
Balance on
11/13/09:
Fees
Balance
$308.33
Date Posted
Description
11/16/09
Cash
Withdrawal
on 11/15 at
HSBC ATM
260.00
48.83
11/16/09
Check
50.00
-1.17
28
#21112
11/16/09
11/17/09
100.
Purchase (on
11/15)
4.89
-6.06
70.00
If HSBC has not manipulated and reordered Binghousing’s transactions from
highest to lowest, Binghousing would have only incurred one overdraft fee instead of two:
Debits
Deposits
Fees
Beginning
Balance on
11/13/09:
Balance
$308.33
Date of
Transaction
Description
11/15/09
260.00
Cash
Withdrawal at
HSBC ATM
48.83
11/15/09
Purchase
4.89
43.94
11/16/09
Check
#21112
50.00
-6.06
35.00
101.
At all relevant times, HSBC did not reasonably provide Binghousing with notice
that it could opt out of HSBC’s overdraft program.
102.
HSBC has never notified Binghousing at the time it made check card
transactions, including POS transactions, that its checking account was overdrawn or that it
would charge an overdraft fee as a result of the transaction.
29
103.
HSBC never declined to pay any of Binghousing’s check card charges, even
when its account was overdrawn. Rather, HSBC has always paid such charges and charged
Binghousing with overdraft fees.
FIRST CAUSE OF ACTION
(On Behalf of All Plaintiffs and the Class)
(Breach of Implied Covenant of Good Faith and Fair Dealing)
104.
Plaintiffs repeat and reallege all of the foregoing paragraphs as though fully set
forth herein.
105.
As described above, Plaintiffs and all other members of the Class entered into a
contract with HSBC.
106.
Plaintiffs and all other members of the Class performed all, or substantially all, of
their responsibilities under the contract.
107.
A covenant of good faith and fair dealing is implied into every contract.
108.
HSBC abused its discretion, and materially breached the covenant of good faith
and fair dealing implied in its contract with the Class, by re-sequencing debit card transactions
in the manner set forth above.
109.
HSBC destroyed or injured the rights of Plaintiffs and all other members of the
Class to receive the fruits of the contract.
110.
As a consequence of the foregoing, HSBC is liable to Plaintiffs and all other
members of the Class, the amount of such damages to be determined at trial.
SECOND CAUSE OF ACTION
(On Behalf of the Subclass)
(Violation of New York General Business Law § 349)
111.
Plaintiffs repeat and reallege each and every allegation contained in all of the
foregoing paragraphs as if fully set forth herein.
30
112.
Through its misconduct described above, HSBC has engaged in acts and/or
practices that are deceptive or misleading in a material way and that resulted in injury to
Plaintiffs and the other members of the Subclass.
113.
The Debit Card Agreement represents that point-of-sale transactions would
“constitute a simultaneous withdrawal from Your Checking Account,” and that overdraft fees
would not be charged on point-of-sale purchases if there were sufficient funds in the account at
the time HSBC authorized the purchase. These representations were fraudulent, likely to
mislead a reasonable consumer acting reasonably under the circumstances, and did mislead
Plaintiffs and the Subclass.
114.
As a result of practice of re-sequencing transactions in the manner set forth
above, Plaintiffs incurred overdraft fees on debit card transactions conducted in the State of
New York.
115.
By reason of the foregoing, HSBC has violated New York General Business Law
§ 349 and decisional law prohibiting deceptive trade practices and consumer fraud, is liable to
Plaintiffs and the other members of the Subclass for the damages that they have suffered as a
result of HSBC’s actions, the amount of such damages to be determined at trial, plus attorneys’
fees.
THIRD CAUSE OF ACTION
(On Behalf of Plaintiffs and the Class)
(Breach of Contract)
116.
117.
The Debit Card Agreement provides that “all Point-of-Sale transactions will
constitute a simultaneous withdrawal from your Checking Account, even though the transaction
might not be paid from your Checking Account until a later date.” Defendants breached this
provision when they posted debit card transactions in high to low order, instead of in the order
that the debit card transactions were authorized.
31
118.
The Debit Card Agreement further provides that if sufficient funds are available
at the time a point-of-sale transaction is “authorized,” a “hold” will be placed on the funds
necessary to cover the transaction, and that if sufficient funds are not available at the time a
point-of-sale transaction is “allow[ed]” (i.e., authorized) by HSBC, it “may treat the amount of
such excess as an overdraft.” This provision allows HSBC to treat a point-of-sale transaction as
an “overdraft” only if there are insufficient funds in the account at the time HSBC authorized
the transaction. HSBC routinely breaches this provision by charging overdraft fees on debit
card transactions when there were sufficient funds in the account at the time HSBC authorized
the transaction.
119.
The Debit Card Agreement further provides that if the debit card is used to
“make any withdrawal that exceeds the available balance in your checking account,” HSBC
“may treat the excess amount as an overdraft . . . .” As all point-of-sale transactions “constitute
a simultaneous withdrawal from your Checking Account, even though the transaction might not
be paid from your Checking Account until a later date,” this provision allows HSBC to treat a
point-of-sale transaction as an “overdraft” only if there are insufficient funds in the account at
the time of authorization. HSBC routinely breaches this provision by charging overdraft fees on
debit card transactions when there were sufficient funds in the account at the time HSBC
authorized the transaction.
120.
Defendants breached the Debit Card Agreement with Plaintiffs and the National
Re-Sequencing Class when they charged overdraft fees on debit card transactions when there
were sufficient funds in the account to cover the transaction at the time it was authorized by
HSBC.
121.
The Rules for Deposit Accounts – which must yield to the Debit Card Agreement
in the event of any inconsistency – provides that an overdraft fee may be charged on a Point-ofSale transaction only if “you . . . make a withdrawal from . . . a point of sale terminal . . . against
insufficient funds or against funds unavailable for withdrawal.” As all “withdrawals” from
point of sale terminals are deemed “simultaneous” with the transaction’s authorization, HSBC
32
routinely breaches this provision by charging overdraft fees on debit card transactions when
there were sufficient funds in the account at the time HSBC authorized the transaction.
122.
Defendants breached the Rules for Deposit Accounts agreement with Plaintiffs
and the Class when they charged overdraft fees on debit card transactions when there were
sufficient funds in the account to cover the transaction at the time it was authorized by HSBC.
FOURTH CAUSE OF ACTION
(On Behalf of Plaintiffs and the Class)
(Violation of Consumer Protection Laws of Other States)
123.
124.
To the extent that, as a result of HSBC’s practice of re-sequencing transactions in
the manner set forth above, Plaintiffs and the members of the Class incurred overdraft fees on
debit card transactions conducted outside the State of New York, HSBC’s acts and practices
described above constitute unfair and deceptive acts and practices and false and misleading
advertising in violation of the consumer protection laws of the jurisdictions in which those
transactions took place, including:
a. Ala. Code § 8-19-1, et seq.
b. Alaska Stat. Code § 45.50.471, et seq.
c. Ariz. Rev. Stat. § 44-1522, et seq.
d. Ark. Code Ann. § 4-88-107, et seq.
e. Cal. Bus. & Prof. Code § 17200, et seq. and Cal. Bus. & Prof. Code § 17500, et seq.
f. Colo. Rev. Stat. § 6-1-101, et seq.
g. Conn. Gen. Stat. § 42-110b, et seq.
h. Del. Code Ann. tit. 6, § 2511, et seq.
i. D.C. Code Ann. § 28-3901, et seq.
j. Fla. Stat. Ann. § 501.201, et seq.
k. Ga. Code Ann. §10-1-392, et seq.
33
l. Haw. Rev. Stat. § 480, et seq.
m. Idaho Code § 48-601, et seq.
n. 815 Ill. Comp. Stat. 505/1, et seq.
o. Ind. Code Ann. § 24-5-0.5-1, et seq.
p. Iowa Code §714.16, et seq.
q. Kan. Stat. § 50-623, et seq.
r. Ky. Rev. Stat. Ann. § 367.110, et seq.
s. La. Rev. Stat. § 51:1404, et seq.
t. Me. Rev. Stat. tit. 5, § 205-A, et seq.
u. Md. Code. Ann., Com. Law § 13-101, et seq.
v. Mich. Comp. Laws § 445.901, et seq.
w. Minn. Stat.§ 8.31, et seq.
x. Miss. Code Ann. § 75-24-3, et seq.
y. Mo. Rev. Stat. § 407.010, et seq.
z. Mont. Code Ann. § 30-14-101, et seq.
aa. Neb. Rev. Stat. § 59-1601, et seq.
bb. Nev. Rev. Stat. 598.0903, et seq.
cc. N.H. Rev. Stat. Ann. § 358-A:1, et seq.
dd. N.M. Stat. Ann. § 57-12-1, et seq.
ee. N.J.S.A. § 56:8-1, et seq.
ff. N.C. Gen. Stat. § 75-1.1, et seq.
gg. N.D. Cent. Code § 51-15-01, et seq.
hh. Ohio Rev. Code Ann. § 1345.01, et seq. and Ohio Rev. Code Ann. § 4165.01, et seq.
ii. Okla. Stat. tit. 15, § 751, et seq.
jj. Or. Rev. Stat. § 646.605, et seq.
kk. Pa. Cons. Stat. § 201-1, et seq.
ll. R.I. Gen. Laws § 6-13.1-1, et seq.
34
mm.
S.C. Code § 39-5-10, et seq.
nn. S.D. Codified Laws § 37-24-1, et seq.
oo. Tenn. Code Ann. § 47-18-101, et seq.
pp. Tex. Bus. & Com. Code Ann. § 17.41, et seq.
qq. Utah Code. Ann. § 13-11-1, et seq.
rr. Vt. Stat. Ann. tit. 9, § 2451, et seq.
ss. Va. Code Ann. § 59.1-196, et seq.
tt. Wash. Rev. Code § 19.86.010, et seq.
uu. W. Va. Code § 46A-6-IOI, et seq.
vv. Wis. Stat. § 100.18, et seq.
ww.
Wyo. Stat. Ann. § 40-12-101, et seq.
125.
HSBC is liable to Plaintiffs and the other members of the Class for the damages
suffered as a result of these violations and/or restitution, plus statutory enhancements, attorneys’
fees, and costs, as provided by statute.
PRAYER FOR RELIEF
WHEREFORE, Plaintiffs, on behalf of themselves and the members of the Class,
demand a jury trial and judgment as follows:
1.
Preliminary and permanent injunctive relief enjoining HSBC from charging
overdraft fees under its current policies and from engaging in the unfair and deceptive business
practices alleged herein;
2.
Restitution of all overdraft fees paid to HSBC by Plaintiffs and the members of
the Class, as a result of the wrongs alleged herein, within the applicable statutes of limitations,
in an amount to be determined at trial;
3.
Disgorgement of the ill-gotten gains derived by HSBC from its misconduct;
4.
Actual damages in an amount according to proof;
5.
Damages pursuant to N.Y. Gen. Bus. Law § 349 and the consumer protection
statutes of the other States;
35
6.
Pre-judgment interest at the highest rate permitted by law;
7.
The costs and disbursements incurred by Plaintiffs and the members of the Class
in connection with this action, including attorneys’ fees; and
8.
Such other and further relief as the Court deems just and proper.
Dated: March 2, 2015
/s/ Barry Himmelstein________
Barry Himmelstein (pro hac vice)
[email protected]
HIMMELSTEIN LAW NETWORK
2000 Powell Street, Suite 1605
Emeryville, CA 94608-1861
Telephone: (510) 450-0782
Facsimile: (510) 924-0403
Adam Seth Turk
[email protected]
TURK & DAVIDOFF PLLC
575 Lexington Avenue, 12th Floor
New York, New York 10022
Telephone: (212) 265-4900
Facsimile: (646) 964-6600
Counsel for Plaintiffs Ofra Levin,
Michael Park, 33 Seminary LLC,
and Binghousing Inc.
36
EXHIBIT A
EXHIBIT B
EXHIBIT C
EXHIBIT D
EXHIBIT E
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket No. 05-03]
FEDERAL RESERVE SYSTEM
[Docket No. OP-1198]
FEDERAL DEPOSIT INSURANCE CORPORATION
NATIONAL CREDIT UNION ADMINISTRATION
Joint Guidance on Overdraft Protection Programs
AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC); Board of
Governors of the Federal Reserve System (Board); Federal Deposit Insurance
Corporation (FDIC); and National Credit Union Administration (NCUA).
ACTION: Final Guidance.
SUMMARY: The OCC, Board, FDIC, and NCUA (the Agencies), are issuing final Joint
Guidance on Overdraft Protection Programs (guidance). This guidance is intended to
assist insured depository institutions in the responsible disclosure and administration of
overdraft protection services.
FOR FURTHER INFORMATION CONTACT:
OCC: Michael Bylsma, Director, Margaret Hesse, Special Counsel, or Deana Lee,
Attorney, Community and Consumer Law Division, (202) 874-5750; or Kim Scherer,
National Bank Examiner/Credit Risk Specialist, Credit Risk Policy, (202) 874-5170.
Board: Minh-Duc T. Le, Senior Attorney, Daniel Lonergan, Counsel, or Elizabeth
Eurgubian, Attorney, Division of Consumer and Community Affairs, (202) 452-3667; or
William H. Tiernay, Supervisory Financial Analyst, Division of Bank Supervision and
Regulation, (202) 452-2412. For users of Telecommunications Device for the Deaf
(“TDD”) only, contact (202) 263-4869.
FDIC: Mark Mellon, Counsel, (202) 898-3884, Legal Division; James Leitner,
Examination Specialist, (202) 898-6790; Patricia Cashman, Senior Policy Analyst, (202)
898-6534; or April Breslaw, Chief, Compliance Section, (202) 898-6609, Division of
Supervision and Consumer Protection.
NCUA: Elizabeth A. Habring, Program Officer, Office of Examination and Insurance,
(703) 518-6392; or Ross P. Kendall, Staff Attorney, Office of the General Counsel, (703)
518-6562.
SUPPLEMENTARY INFORMATION:
I.
Background
The Agencies have developed this final joint guidance to address a service offered
by insured depository institutions commonly referred to as “bounced-check protection” or
“overdraft protection.” This service is sometimes offered to transaction account
customers as an alternative to traditional ways of covering overdrafts (e.g., overdraft lines
of credit or linked accounts).
While both the availability and customer acceptance of these overdraft protection
services have increased, aspects of the marketing, disclosure, and implementation of
some of these programs have raised concerns with the Agencies. In a 2001 letter, the
OCC identified some of these particular concerns.1 In November 2002, the Board sought
comment about the operation of overdraft protection programs.2
In response to concerns raised about overdraft protection products, the Agencies
published for comment proposed Interagency Guidance on Overdraft Protection
Programs, 69 FR 31858 (June 7, 2004).3 The proposed guidance identified the historical
and traditional approaches to providing consumers with protection against account
overdrafts, and contrasted these approaches with the more recent overdraft protection
programs that are marketed to consumers. The Agencies also identified some of the
existing and potential concerns surrounding the offering and administration of such
overdraft protection programs that have been identified by federal and state bank
regulatory agencies, consumer groups, financial institutions, and their trade
representatives.
In response to these concerns, the Agencies provided guidance in three primary
sections: Safety and Soundness Considerations, Legal Risks, and Best Practices. In the
section on Safety and Soundness Considerations, the Agencies sought to ensure that
financial institutions offering overdraft protection services adopt adequate policies and
procedures to address the credit, operational, and other risks associated with these
services. The Legal Risks section of the proposed guidance outlined several federal
consumer compliance laws, generally alerted institutions offering overdraft protection
services of the need to comply with all applicable federal and state laws, and advised
institutions to have their overdraft protection programs reviewed by legal counsel to
ensure overall compliance prior to implementation. Finally, the proposed guidance set
forth best practices that serve as positive examples of practices that are currently
observed in, or recommended by, the industry. Broadly, these best practices address the
marketing and communications that accompany the offering of overdraft protection
services, as well as the disclosure, and operation, of program features.
The Agencies together received over 320 comment letters in response to the
proposed guidance. Comment letters were received from depository institutions, trade
associations, vendors offering overdraft protection products, and other industry
representatives, as well as government officials, consumer and community groups, and
individual consumers.
II.
Overview of Public Comments
The Agencies received comments that addressed broad aspects of the guidance, as
well as its specific provisions. Many industry commenters, for instance, were concerned
about the overall scope of the guidance and whether it would apply to financial
institutions that do not market overdraft protection programs to consumers but do cover
1
OCC Interpretive Letter 914, September 2001. 67 FR 72618, December 6, 2002. The Board received approximately 350 comments; most were from
industry representatives describing how the programs work. 3
The Office of Thrift Supervision joined the Agencies proposing the interagency guidance. 2
2
the occasional overdraft on a case-by-case basis. Commenters also addressed the three
specific sections of the proposed guidance.
In regard to the Safety and Soundness section, for example, many industry
commenters suggested extending the proposed charge-off period from 30 days to a longer
period such as 45 or 60 days, in part because they believed a longer charge-off period
would provide consumers with more time to repay overdrafts and avoid being reported to
credit bureaus as delinquent on their accounts. Comments were also received addressing
technical reporting and accounting issues.
The Agencies received numerous comments regarding the Legal Risks section –
particularly the Equal Credit Opportunity Act and Truth in Lending Act (TILA)
discussions. For instance, many consumer and consumer group comments stated that
overdraft protection should be considered credit covered by TILA’s disclosures and other
required protections. Some of these comments likened the product to payday lending,
which is covered by TILA. Many industry commenters argued against the coverage of
overdraft programs by TILA and Regulation Z, and argued that the payment of overdrafts
does not involve credit and finance charges requiring TILA disclosures and protections.
Lastly, many commenters also offered specific criticism or recommended edits
with respect to particular best practices identified in the proposal. Several industry
commenters sought general clarification on whether examiners would treat the best
practices as law or rules when examining institutions offering overdraft protection
services.
III.
Final Joint Guidance
The final joint guidance incorporates changes made by the Agencies to provide
clarity and address many commenter concerns. In particular, language has been added to
clarify the scope of the guidance. The Safety and Soundness section expressly states that
it applies to all methods of covering overdrafts. The introduction to the Best Practices
section clarifies that while the Agencies are concerned about promoted overdraft
protection programs, the best practices may also be useful for other methods of covering
overdrafts.
In response to the comments regarding the Safety and Soundness section, the
Agencies have extended the charge-off requirement to 60 days.4 Other technical edits
have been made to further clarify reporting and accounting aspects of this section of the
guidance.
The discussion regarding the applicability of TILA has been shortened to more
closely focus on the relevant, existing regulatory provisions. In the proposed guidance,
the discussion of TILA and Regulation Z, like the individual discussions of other laws
4
Federal credit unions are required by regulation to establish a time limit, not to exceed 45 calendar days,
for a member to either deposit funds or obtain an approved loan from the credit union to cover each
overdraft. 12 CFR § 701.21(c)(3).
3
and regulations (e.g., the Federal Trade Commission Act), was not intended to represent a
full explication of the scope, terms, and exceptions to those provisions. Rather, it was
intended to highlight that, commonly, fees charged in connection with overdraft
protection programs and traditional methods of paying overdrafts fall within an existing
regulatory exception to the “finance charge” definition. Disparate commenters urged the
Board to take positions on various aspects of TILA and Regulation Z that are unnecessary
in light of the exception addressed and the appropriate scope of the guidance. The
revisions to this section, and the addition of language to the Safety and Soundness section
to address the credit nature of overdrafts, is not intended as a commentary on the statute,
nor the adoption of any particular commenter point of view. As indicated in the proposal,
the existing regulatory exceptions were created for the occasional payment of overdrafts,
and as such could be reevaluated by the Board in the future, if necessary. Were the
Board to address these issues more specifically, it would do so separately under its clear
authority.
Lastly, in the final joint guidance, the Agencies reaffirm that the best practices are
practices that have been recommended or implemented by financial institutions and
others, as well as practices that may otherwise be required by applicable law. The best
practices, or principles within them, are enforceable to the extent they are required by
law. In addition, as mentioned above, the final guidance explicitly states that while the
Agencies are particularly concerned about promoted overdraft protection programs, these
practices may be useful in connection with other methods of covering overdrafts. The
Agencies have also revised numerous best practices for clarity, in response to particular
commenter suggestions.
The text of the final Joint Guidance on Overdraft Protection Programs follows:
Joint Guidance on Overdraft Protection Programs
The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal
Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), and National
Credit Union Administration (NCUA), collectively “the Agencies,” are issuing this joint
guidance concerning a service offered by insured depository institutions that is
commonly referred to as “bounced-check protection” or “overdraft protection.” This
credit service is sometimes offered on both consumer and small business transaction
accounts as an alternative to traditional ways of covering overdrafts. This joint guidance
is intended to assist insured depository institutions in the responsible disclosure and
administration of overdraft protection services, particularly those that are marketed to
consumers.5
5
Federal credit unions are already subject to certain regulatory requirements governing the establishment
and maintenance of overdraft programs. 12 CFR § 701.21(c)(3). This regulation requires a federal credit
union offering an overdraft program to adopt a written policy specifying the dollar amount of overdrafts
that the credit union will honor (per member and overall); the time limits for a member to either deposit
funds or obtain a loan to cover an overdraft; and the amount of the fee and interest rate, if any, that the
credit union will charge for honoring overdrafts. This joint guidance supplements but does not change
these regulatory requirements for federal credit unions.
4
Introduction
To protect against account overdrafts, some consumers obtain an overdraft line of credit,
which is subject to the disclosure requirements of the Truth in Lending Act (TILA). If a
consumer does not have an overdraft line of credit, the institution may accommodate the
consumer and pay overdrafts on a discretionary, ad-hoc basis. Regardless of whether the
overdraft is paid, institutions typically have imposed a fee when an overdraft occurs,
often referred to as a nonsufficient funds or “NSF” fee. Over the years, this
accommodation has become automated by many institutions. Historically, institutions
have not promoted this accommodation. This approach has not raised significant
concerns.
More recently, some depository institutions have offered “overdraft protection” programs
that, unlike the discretionary accommodation traditionally provided to those lacking a
line of credit or other type of overdraft service (e.g., linked accounts), are marketed to
consumers essentially as short-term credit facilities. These marketed programs typically
provide consumers with an express overdraft “limit” that applies to their accounts.
While the specific details of overdraft protection programs vary from institution to
institution, and also vary over time, those currently offered by institutions incorporate
some or all of the following characteristics:
• Institutions inform consumers that overdraft protection is a feature of their accounts
and promote the use of the service. Institutions also may inform consumers of their
aggregate dollar limit under the overdraft protection program.
• Coverage is automatic for consumers who meet the institution’s criteria (e.g., account
has been open a certain number of days; deposits are made regularly). Typically, the
institution performs no credit underwriting.
• Overdrafts generally are paid up to the aggregate limit set by the institution for the
specific class of accounts, typically $100 to $500.
• Many program disclosures state that payment of an overdraft is discretionary on the
part of the institution, and may disclaim any legal obligation of the institution to pay
any overdraft.
• The service may extend to check transactions as well as other transactions, such as
withdrawals at automated teller machines (ATMs), transactions using debit cards,
pre-authorized automatic debits from a consumer’s account, telephone-initiated funds
transfers, and on-line banking transactions.6
6
Transaction accounts at credit unions are called share draft accounts. For purposes of this joint guidance,
the use of the term “check” includes share drafts.
5
• A flat fee is charged each time the service is triggered and an overdraft item is paid.
Commonly, a fee in the same amount would be charged even if the overdraft item
was not paid. A daily fee also may apply for each day the account remains
overdrawn.
• Some institutions offer closed-end loans to consumers who do not bring their
accounts to a positive balance within a specified time period. These repayment plans
allow consumers to repay their overdrafts and fees in installments.
Concerns
Aspects of the marketing, disclosure, and implementation of some overdraft protection
programs, intended essentially as short-term credit facilities, are of concern to the
Agencies. For example, some institutions have promoted this credit service in a manner
that leads consumers to believe that it is a line of credit by informing consumers that their
account includes an overdraft protection limit of a specified dollar amount without clearly
disclosing the terms and conditions of the service, including how fees reduce overdraft
protection dollar limits, and how the service differs from a line of credit.
In addition, some institutions have adopted marketing practices that appear to encourage
consumers to overdraw their accounts, such as by informing consumers that the service
may be used to take an advance on their next paycheck, thereby potentially increasing the
institutions’ credit exposure with little or no analysis of the consumer’s creditworthiness.
These overdraft protection programs may be promoted in a manner that leads consumers
to believe that overdrafts will always be paid when, in reality, the institution reserves the
right not to pay some overdrafts. Some institutions may advertise accounts with
overdraft protection coverage as “free” accounts, and thereby lead consumers to believe
that there are no fees associated with the account or the overdraft protection program.
Furthermore, institutions may not clearly disclose that the program may cover instances
when consumers overdraw their accounts by means other than check, such as at ATMs
and point-of-sale (POS) terminals. Some institutions may include overdraft protection
amounts in the sum that they disclose as the consumer’s account “balance” (for example,
at an ATM) without clearly distinguishing the funds that are available for withdrawal
without overdrawing the account. Where the institution knows that the transaction will
trigger an overdraft fee, such as at a proprietary ATM, institutions also may not alert the
consumer prior to the completion of the transaction to allow the consumer to cancel the
transaction before the fee is triggered.
Institutions should weigh carefully the risks presented by the programs including the
credit, legal, reputation, safety and soundness, and other risks. Further, institutions
should carefully review their programs to ensure that marketing and other
communications concerning the programs do not mislead consumers to believe that the
program is a traditional line of credit or that payment of overdrafts is guaranteed, do not
mislead consumers about their account balance or the costs and scope of the overdraft
6
protection offered, and do not encourage irresponsible consumer financial behavior that
potentially may increase risk to the institution.
Safety & Soundness Considerations
When overdrafts are paid, credit is extended. Overdraft protection programs may expose
an institution to more credit risk (e.g., higher delinquencies and losses) than overdraft
lines of credit and other traditional overdraft protection options to the extent these
programs lack individual account underwriting. All overdrafts, whether or not subject to
an overdraft protection program, are subject to the safety and soundness considerations
contained in this section.
Institutions providing overdraft protection programs should adopt written policies and
procedures adequate to address the credit, operational, and other risks associated with
these types of programs. Prudent risk management practices include the establishment of
express account eligibility standards and well-defined and properly documented dollar
limit decision criteria. Institutions also should monitor these accounts on an ongoing
basis and be able to identify consumers who may represent an undue credit risk to the
institution. Overdraft protection programs should be administered and adjusted, as
needed, to ensure that credit risk remains in line with expectations. This may include,
where appropriate, disqualification of a consumer from future overdraft protection.
Reports sufficient to enable management to identify, measure, and manage overdraft
volume, profitability, and credit performance should be provided to management on a
regular basis.
Institutions also are expected to incorporate prudent risk management practices related to
account repayment and suspension of overdraft protection services. These include the
establishment of specific timeframes for when consumers must pay off their overdraft
balances. For example, there should be established procedures for the suspension of
overdraft services when the account holder no longer meets the eligibility criteria (such
as when the account holder has declared bankruptcy or defaulted on another loan at the
bank) as well as for when there is a lack of repayment of an overdraft. In addition,
overdraft balances should generally be charged off when considered uncollectible, but no
later than 60 days from the date first overdrawn.7 In some cases, an institution may allow
a consumer to cover an overdraft through an extended repayment plan when the
consumer is unable to bring the account to a positive balance within the required time
frames. The existence of the repayment plan, however, would not extend the charge-off
determination period beyond 60 days (or shorter period if applicable) as measured from
the date of the overdraft. Any payments received after the account is charged off (up to
the amount charged off against allowance) should be reported as a recovery.
Some overdrafts are rewritten as loan obligations in accordance with an institution’s loan
policy and supported by a documented assessment of that consumer’s ability to repay. In
those instances, the charge-off timeframes described in the Federal Financial Institutions
7
Federal credit unions are required by regulation to establish a time limit, not to exceed 45 calendar days,
for a member to either deposit funds or obtain an approved loan from the credit union to cover each
overdraft. 12 CFR § 701.21(c)(3).
7
Examination Council (FFIEC) Uniform Retail Credit Classification and Account
Management Policy would apply.8
With respect to the reporting of income and loss recognition on overdraft protection
programs, institutions should follow generally accepted accounting principles (GAAP)
and the instructions for the Reports of Condition and Income (Call Report), and NCUA
5300 Call Report. Overdraft balances should be reported on regulatory reports as loans.
Accordingly, overdraft losses should be charged off against the allowance for loan and
lease losses. The Agencies expect all institutions to adopt rigorous loss estimation
processes to ensure that overdraft fee income is accurately measured. Such methods may
include providing loss allowances for uncollectible fees or, alternatively, only
recognizing that portion of earned fees estimated to be collectible.9 The procedures for
estimating an adequate allowance should be documented in accordance with the Policy
Statement on the Allowance for Loan and Lease Losses Methodologies and
Documentation for Banks and Savings Institutions.10
If an institution advises account holders of the available amount of overdraft protection,
for example, when accounts are opened or on depositors’ account statements or ATM
receipts, the institution should report the available amount of overdraft protection with
legally binding commitments for Call Report, and NCUA 5300 Call Report purposes.
These available amounts, therefore, should be reported as “unused commitments” in
regulatory reports.
The Agencies also expect proper risk-based capital treatment of outstanding overdrawn
balances and unused commitments.11 Overdraft balances should be risk-weighted
according to the obligor. Under the federal banking agencies’ risk-based capital
guidelines, the capital charge on the unused portion of commitments generally is based
on an off-balance sheet credit conversion factor and the risk weight appropriate to the
obligor. In general, these guidelines provide that the unused portion of a commitment is
subject to a zero percent credit conversion factor if the commitment has an original
maturity of one year or less, or a 50 percent credit conversion factor if the commitment
has an original maturity over one year. Under these guidelines, a zero percent conversion
factor also applies to the unused portion of a "retail credit card line" or "related plan" if it
is unconditionally cancelable by the institution in accordance with applicable law.12 The
phrase “related plans” in these guidelines includes overdraft checking plans. The
8
For federally insured credit unions, charge-off policy for booked loans is described in NCUA Letter to Credit Unions No. 03-CU-01, “Loan Charge-off Guidance,” dated January 2003. 9
Institutions may charge off uncollected overdraft fees against the allowance for loan and lease losses if such fees are recorded with overdraft balances as loans and estimated credit losses on the fees are provided for in the allowance for loan and lease losses. 10
Issued by the Board, FDIC, OCC, and Office of Thrift Supervision. The NCUA provided similar guidance to credit unions in Interpretive Ruling and Policy Statement 02-3, “Allowance for Loan and Lease Losses Methodologies and Documentation for Federally Insured Credit Unions,” 67 FR 37445, May 29, 2002. 11
Federally insured credit unions should calculate risk-based net worth in accordance with the rules contained in 12 CFR Part 702. 12
See 12 CFR Part 3, Appendix A, Section 3 (b)(5) (OCC); 12 CFR Part 208, Appendix A, Section III.D.5 (Board); and 12 CFR Part 325, Appendix A, Section II.D.5 (FDIC). 8
Agencies believe that the overdraft protection programs discussed in this joint guidance
fall within the meaning of “related plans” as a type of “overdraft checking plan” for the
purposes of the federal banking agencies’ risk-based capital guidelines. Consequently,
overdraft protection programs that are unconditionally cancelable by the institution in
accordance with applicable law would qualify for a zero percent credit conversion factor.
Institutions entering into overdraft protection contracts with third-party vendors must
conduct thorough due diligence reviews prior to signing a contract. The interagency
guidance contained in the November 2000 Risk Management of Outsourced Technology
Services outlines the Agencies' expectations for prudent practices in this area.
Legal Risks
Overdraft protection programs must comply with all applicable federal laws and regulations, some of which are outlined below. State laws also may be applicable, including usury and criminal laws, and laws on unfair or deceptive acts or practices. It is important that institutions have their overdraft protection programs reviewed by counsel for compliance with all applicable laws prior to implementation. Further, although the guidance below outlines federal laws and regulations as of the date this joint guidance is published, applicable laws and regulations are subject to amendment. Accordingly, institutions should monitor applicable laws and regulations for revisions and to ensure that their overdraft protection programs are fully compliant. Federal Trade Commission Act / Advertising Rules
Section 5 of the Federal Trade Commission Act (FTC Act) prohibits unfair or deceptive acts or practices.13 The banking agencies enforce this section pursuant to their authority
in section 8 of the Federal Deposit Insurance Act, 12 U.S.C. § 1818.14 An act or practice is unfair if it causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. An act or practice is deceptive if, in general, it is a representation, omission, or practice that is likely to mislead a consumer acting reasonably under the circumstances, and the representation, omission, or practice is material. In addition, the NCUA has promulgated similar rules that prohibit federally insured credit
unions from using advertisements or other representations that are inaccurate or
misrepresent the services or contracts offered.15 These regulations are broad enough to
prohibit federally insured credit unions from making any false representations to the
public regarding their deposit accounts.
Overdraft protection programs may raise issues under either the FTC Act or, in
connection with federally insured credit unions, the NCUA’s advertising rules, depending
13
15 U.S.C. § 45. See OCC Advisory Letter 2002-3 (March 2002); and joint Board and FDIC Guidance on Unfair or
Deceptive Acts or Practices by State-Chartered Banks (March 11, 2004).
15
12 CFR § 740.2.
14
9
upon how the programs are marketed and implemented. To avoid engaging in deceptive, inaccurate, misrepresentative, or unfair practices, institutions should closely review all aspects of their overdraft protection programs, especially any materials that inform
consumers about the programs. Truth in Lending Act
TILA and Regulation Z require creditors to give cost disclosures for extensions of consumer credit.16 TILA and the regulation apply to creditors that regularly extend consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments.17
Under Regulation Z, fees for paying overdraft items currently are not considered finance charges if the institution has not agreed in writing to pay overdrafts.18 Even where the institution agrees in writing to pay overdrafts as part of the deposit account agreement, fees assessed against a transaction account for overdraft protection services are finance charges only to the extent the fees exceed the charges imposed for paying or returning
overdrafts on a similar transaction account that does not have overdraft protection. Some financial institutions also offer overdraft repayment loans to consumers who are unable to repay their overdrafts and bring their accounts to a positive balance within a specified time period.19 These closed-end loans will trigger Regulation Z disclosures, for example, if the loan is payable by written agreement in more than four installments. Regulation Z will also be triggered where such closed-end loans are subject to a finance charge.20
Equal Credit Opportunity Act
Under the Equal Credit Opportunity Act (ECOA) and Regulation B, creditors are prohibited from discriminating against an applicant on a prohibited basis in any aspect of a credit transaction.21 This prohibition applies to overdraft protection programs. Thus, steering or targeting certain consumers on a prohibited basis for overdraft protection programs while offering other consumers overdraft lines of credit or other more favorable credit products or overdraft services, will raise concerns under the ECOA. In addition to the general prohibition against discrimination, the ECOA and Regulation B
contain specific rules concerning procedures and notices for credit denials and other
16
15 U.S.C. §§ 1601 et seq. TILA is implemented by Regulation Z, 12 CFR Part 226.
See 15 U.S.C. § 1602(f) and 12 CFR 226.2(a)(17). Institutions should be aware that whether a written
agreement exists is a matter of state law. See, e.g., 12 CFR § 226.5. 18
See 12 CFR 226.4(c)(3). Traditional lines of credit, which generally are subject to a written agreement, do not fall under this exception.
19
For federal credit unions, this time period may not exceed 45 calendar days. 12 CFR § 701.21(c)(3). 20
See 12 CFR 226.4. 21
15 U.S.C. §§ 1691 et seq. The ECOA is implemented by Regulation B, 12 CFR Part 202. The ECOA
prohibits discrimination on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to contract), the fact that all or part of the applicant’s income
derives from a public assistance program, and the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act.
17
10
adverse action. Regulation B defines the term “adverse action,” and generally requires a creditor who takes adverse action to send a notice to the consumer providing, among other things, the reasons for the adverse action.22 Some actions taken by creditors under overdraft protection programs might constitute adverse action but would not require notice to the consumer if the credit is deemed to be “incidental credit” as defined in Regulation B. “Incidental credit” includes consumer credit that is not subject to a finance charge, is not payable by agreement in more than four installments, and is not made pursuant to the terms of a credit card account.23 Overdraft protection programs that are not covered by TILA would generally qualify as incidental credit under Regulation B. Truth in Savings Act
Under the Truth in Savings Act (TISA), deposit account disclosures must include the amount of any fee that may be imposed in connection with the account and the conditions under which the fee may be imposed.24 In addition, institutions must give advance notice to affected consumers of any change in a term that was required to be disclosed if the change may reduce the annual percentage yield or adversely affect the consumer. When overdraft protection services are added to an existing deposit account, advance
notice to the account holder may be required, for example, if the fee for the service
exceeds the fee for accounts that do not have the service.25 In addition, TISA prohibits
institutions from making any advertisement, announcement, or solicitation relating to a
deposit account that is inaccurate or misleading or that misrepresents their deposit
contracts.
Since these automated and marketed overdraft protection programs did not exist when
most of the implementing regulations were issued, the regulations may be reevaluated.
Electronic Fund Transfer Act
The Electronic Fund Transfer Act (EFTA) and Regulation E require an institution to
provide consumers with account-opening disclosures and to send a periodic statement for
each monthly cycle in which an electronic fund transfer (EFT) has occurred and at least
quarterly if no transfer has occurred.26 If, under an overdraft protection program, a
consumer could overdraw an account by means of an ATM withdrawal or POS debit card
transaction, both are EFTs subject to EFTA and Regulation E. As such, periodic
statements must be readily understandable and accurate regarding debits made, current
balances, and fees charged. Terminal receipts also must be readily understandable and
accurate regarding the amount of the transfer. Moreover, readily understandable and
accurate statements and receipts will help reduce the number of alleged errors that the
22
See 12 CFR §§ 202.2(c) and 9. See 12 CFR § 202.3(c).
24
12 U.S.C. §§ 4301 et seq. TISA is implemented by Regulation DD at 12 CFR Part 230 for banks and savings associations, and by NCUA’s TISA regulation at 12 CFR Part 707 for federally insured credit
unions. 25
An advance change in terms notice would not be required if the consumer’s account disclosures stated
that their overdraft check may or may not be paid and the same fee would apply.
26
15 U.S.C. §§ 1693 et seq. The EFTA is implemented by Regulation E, 12 CFR Part 205.
23
11
institution must investigate under Regulation E, which can be time-consuming and costly
to institutions.
Best Practices
Clear disclosures and explanations to consumers of the operation, costs, and limitations
of an overdraft protection program and appropriate management oversight of the program
are fundamental to enabling responsible use of overdraft protection. Such disclosures
and oversight can also minimize potential consumer confusion and complaints, foster
good customer relations, and reduce credit, legal, and other potential risks to the
institution. Institutions that establish overdraft protection programs should, as applicable,
take into consideration the following best practices, many of which have been
recommended or implemented by financial institutions and others, as well as practices
that may otherwise be required by applicable law. While the Agencies are concerned
about promoted overdraft protection programs, the best practices may also be useful for
other methods of covering overdrafts. These best practices currently observed in or
recommended by the industry include:
Marketing and Communications with Consumers
• Avoid promoting poor account management. Institutions should not market the
program in a manner that encourages routine or intentional overdrafts. Institutions
should instead present the program as a customer service that may cover inadvertent
consumer overdrafts.
• Fairly represent overdraft protection programs and alternatives. When
informing consumers about an overdraft protection program, inform consumers
generally of other overdraft services and credit products, if any, that are available at
the institution and how the terms, including fees, for these services and products
differ. Identify for consumers the consequences of extensively using the overdraft
protection program.
• Train staff to explain program features and other choices. Train customer service
or consumer complaint processing staff to explain their overdraft protection
program’s features, costs, and terms, including how to opt out of the service. Staff
also should be able to explain other available overdraft products offered by the
institution and how consumers may qualify for them.
• Clearly explain discretionary nature of program. If payment of an overdraft is
discretionary, make this clear. Institutions should not represent that the payment of
overdrafts is guaranteed or assured if the institution retains discretion not to pay an
overdraft.
• Distinguish overdraft protection services from “free” account features.
Institutions should not promote “free” accounts and overdraft protection programs in
12
the same advertisement in a manner that suggests the overdraft protection program is
free of charges.
• Clearly disclose program fees. In communications about overdraft protection
programs, clearly disclose the dollar amount of the fee for each overdraft and any
interest rate or other fees that may apply. For example, rather than merely stating that
the institution’s standard NSF fee will apply, institutions should restate the dollar
amount of any applicable fee or interest charge.
• Clarify that fees count against the disclosed overdraft protection dollar limit.
Consumers should be alerted that the fees charged for covering overdrafts, as well as
the amount of the overdraft item, will be subtracted from any overdraft protection
limit disclosed.
• Demonstrate when multiple fees will be charged. If promoting an overdraft
protection program, clearly disclose, where applicable, that more than one overdraft
fee may be charged against the account per day, depending on the number of checks
presented on, and other withdrawals made from, the consumer’s account.
• Explain impact of transaction clearing policies. Clearly explain to consumers that
transactions may not be processed in the order in which they occurred, and that the
order in which transactions are received by the institution and processed can affect
the total amount of overdraft fees incurred by the consumer.
• Illustrate the type of transactions covered. Clearly disclose that overdraft fees may
be imposed on transactions such as ATM withdrawals, debit card transactions,
preauthorized automatic debits, telephone-initiated transfers or other electronic
transfers, if applicable, to avoid implying that check transactions are the only
transactions covered.
Program Features and Operation
• Provide election or opt-out of service. Obtain affirmative consent of consumers to
receive overdraft protection. Alternatively, where overdraft protection is
automatically provided, permit consumers to “opt out” of the overdraft program and
provide a clear consumer disclosure of this option.
• Alert consumers before a transaction triggers any fees. When consumers attempt
to withdraw or transfer funds made available through an overdraft protection
program, provide a specific consumer notice, where feasible, that completing the
withdrawal may trigger the overdraft fees (for example, it presently may be feasible at
a branch teller window). This notice should be presented in a manner that permits
consumers to cancel the attempted withdrawal or transfer after receiving the notice.
If this is not feasible, then post notices (e.g., on proprietary ATMs) explaining that
transactions may be approved that overdraw the account and fees may be incurred.
13
Institutions should consider making access to the overdraft protection program
unavailable through means other than check transactions, if feasible.
• Prominently distinguish balances from overdraft protection funds availability.
When disclosing a single balance for an account by any means, institutions should not
include overdraft protection funds in that account balance. The disclosure should
instead represent the consumer’s own funds available without the overdraft protection
funds included. If more than one balance is provided, separately (and prominently)
identify the balance without the inclusion of overdraft protection.
• Promptly notify consumers of overdraft protection program usage each time
used. Promptly notify consumers when overdraft protection has been accessed, for
example, by sending a notice to consumers the day the overdraft protection program
has been accessed. The notification should identify the date of the transaction, the
type of transaction, the overdraft amount, the fee associated with the overdraft, the
amount necessary to return the account to a positive balance, the amount of time
consumers have to return their accounts to a positive balance, and the consequences
of not returning the account to a positive balance within the given timeframe. Notify
consumers if the institution terminates or suspends the consumer’s access to the
service, for example, if the consumer is no longer in good standing.
• Consider daily limits on the consumer’s costs. Consider imposing a cap on
consumers’ potential daily costs from the overdraft program. For example, consider
limiting daily costs from the program by providing a numerical limit on the total
overdraft transactions that will be subject to a fee per day or by providing a dollar
limit on the total fees that will be imposed per day.
• Monitor overdraft protection program usage. Monitor excessive consumer usage,
which may indicate a need for alternative credit arrangements or other services, and
inform consumers of these available options.
• Fairly report program usage. Institutions should not report negative information to
consumer reporting agencies when the overdrafts are paid under the terms of
overdraft protection programs that have been promoted by the institutions.
This concludes the text of the final Joint Guidance on Overdraft Protection Programs.
14
[THIS SIGNATURE PAGE PERTAINS TO THE FINAL “JOINT GUIDANCE ON
OVERDRAFT PROTECTION PROGRAMS”]
Dated: February 15, 2005
Julie L. Williams (signed)
Julie L. Williams, Acting Comptroller of the Currency.
15
By order of the Board of Governors of the Federal Reserve System, February 17, 2005.
Robert deV. Frierson (signed)
Robert deV. Frierson, Deputy Secretary of the Board. 16
Dated at Washington, D.C., the 16th day of February, 2005.
By order of the Federal Deposit Insurance Corporation.
Robert E. Feldman
Robert E. Feldman,
Executive Secretary.
(signed)
17
By the National Credit Union Administration Board on February 17, 2005.
Mary F. Rupp (signed)
Mary F. Rupp,
Secretary of the Board.
18
EXHIBIT F

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF

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