26 SEPTEMBER / OCTOBER 2020 COMPLIANCE CONNECTION Permissible Overdraft Fees And class action litigation Brett J. Ashton Partner Krieg DeVault LLP bashton@kdlegal.com Krieg DeVault LLP is a Diamond Associate Member of the Indiana Bankers Association. This information is provided for general education purposes and is not intended to be legal advice. Please consult legal counsel for specific guidance as to how this information applies to your institution’s circumstances or situation. Question: We received a demand letter from an attorney claiming that our bank had charged his client (and all of our customers) unauthorized overdraft fees, and that we should enter into a settlement with his firm to avoid costly litigation. We didn’t think there were limits on the permissible overdraft fees under Indiana law. How should we respond? Answer: You are correct that there are no dollar limitations on the permissible overdraft fees a bank can assess a depositor under Indiana law. Further, Indiana law does not restrict the manner in which you post transactions that overdraw the account,* although many institutions employ a low-to-high positing process in an effort to minimize customer fees. Over the past 18 months, several Indiana credit unions as well as an Indiana bank were targeted in class action litigation alleging abusive overdraft practices, because they charged overdraft fees on Authorized Positive, Purportedly Settled Negative (APPSN) transactions. For context, there is no provision in Indiana law – or in any other state or federal law, for that matter – that defines much less regulates the concept of an APPSN transaction. The crux of the plaintiffs’ claims in all of these overdraft cases centers around: • Whether the defendant institution’s deposit account terms and conditions clearly explain to customers how overdrafts will be assessed; and • Whether a PIN-based or signature debit card transaction results in funds being immediately removed from a customer’s account when a purchase is made and subsequently held in escrow until the transaction is fully settled, thus avoiding any potential overdraft fee. In cases where the defendant institution determines overdraft liability based on the customer’s available * See I.C. § 26-1-4-303(b) – “[I]tems may be accepted, paid, certified, or charged to the indicated account of its customer in any order.” balance at the time of the transaction, plaintiffs have sued claiming that the depository should have used the customer’s actual or ledger balance, and that to do otherwise is to charge a customer a fee for an overdraft in error because there are actual funds in the account, regardless of the available balance at the time. Alternatively, in cases where the defendant institution determines overdraft liability based on the customer’s actual balance at the time the transaction is presented for payment, plaintiffs have sued claiming that the depository should have held funds in escrow the moment the transaction was approved to avoid any future overdraft from occurring. Regardless of how your institution assesses overdraft fees, what is important is that you carefully review your deposit account terms and conditions to ensure they accurately describe how you calculate and assess overdraft fees. In particular, language that describes when an item is “paid” and exactly what that means should be reviewed, and the concept of how a debit hold differs from a debit PIN transaction should be addressed. If your deposit agreements do not contain arbitration and class action waiver provisions, discuss with your legal counsel the merits of adding this dispute resolution tool. While arbitration isn’t everyone’s preferred approach to resolving disputes with customers, many banks have concluded that eliminating the risk of multimillion-dollar class action exposure makes these provisions a critical part of any agreement. As for the attorney demanding you enter into a settlement negotiation with his firm, review the customer’s account, then consult your legal counsel about how best to respond. HB
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