Financial Services Law

Bank Can Be Liable Under California Law for Overdraft Fee Charge Ordering

A checking account that includes a debit card feature is a “service” under California’s Consumer Legal Remedies Act, according to a new federal court opinion allowing a consumer’s suit challenging the ordering of overdraft fees to continue.

Amber Hawthorne filed a putative class action against Umpqua Bank. She alleged that the bank processed transactions with larger amounts ahead of those with smaller amounts in an attempt to create more overdrafts and more revenue for the bank from overdraft fees.

Hawthorne claimed Umpqua violated California’s Unfair Competition Law, which prohibits three prongs of activity: “unlawful, unfair or fraudulent business act or practices.”

Umpqua sought to dismiss the suit, arguing that the National Bank Act preempted Hawthorne’s state law claims. Even though Umpqua is a state-chartered bank, NBA preemption applied through application of the Federal Deposit Insurance Act, the bank argued.

In his decision, U.S. District Court Judge Jon S. Tigar relied heavily upon a Ninth U.S. Circuit Court of Appeals decision, Gutierrez v. Wells Fargo Bank, 704 F.3d 712 (9th cir. 2012), where a plaintiff similarly challenged the alleged practice of reordering transactions to maximize overdraft fees. In that case, the Ninth Circuit found the NBA preempted the plaintiff’s claims under the “unfair” prong of the UCL but not the “fraudulent” prong.

Looking to Gutierrez, the judge found it foreclosed Hawthorne’s claims under the “unfair” prong but that she could move forward on the “fraudulent” prong claims. He then turned to an analysis of the plaintiff’s claims under the “unlawful” prong.

Hawthorne based her “unlawful” cause of action on Umpqua’s alleged violation of the state’s Consumer Legal Remedies Act, which prohibits unfair or deceptive acts involving a transaction “which results in the sale or lease of goods or services” to a customer.

Liberally construing the CLRA, which he said California courts “generally find financial transactions to be subject to,” Judge Tigar held that “debit cards are a ‘service’ for purposes of the CLRA.” Describing debit cards as a “service” is “consistent with the benefits consumers actually receive,” Judge Tigar wrote. “The relationship between Umpqua Bank and its customers is not simply a checking account relationship, and it certainly is not limited solely to the imposition of overdraft fees."

The court stated that, “Rather, the debit card relationship is best understood as encompassing convenience services that go beyond those associated with a simple checking account,” like cashless and checkless purchasing.

Therefore, Judge Tigar denied Umpqua’s motion to dismiss Hawthorne’s claims under the fraudulent and unlawful prongs of the UCL.

To read the court’s decision in Hawthorne v. Umpqua Bank, click here.

Why it matters: The Hawthorne decision opens the door to potential increased liability for banks, arguably allowing customers to bring class action suits alleging fraudulent or unlawful conduct on the part of financial institutions. The opinion appears to be the first to hold that a checking account with a debit card feature constitutes a “service” under California’s Consumer Legal Remedies Act. Banks can take some comfort in the court’s following of Gutierrez with respect to claims made under the “unfair” business practices prong of the Unfair Competition Law, as well as the judge’s express limitation of the decision to checking accounts with a debit card feature, explicitly declining to opine on whether a checking account without a debit card feature would fall under the purview of the CLRA.

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CFPB Launches Rulemaking Process for Debt Collection

In what the Consumer Financial Protection Bureau characterized as a step toward enhancing consumer protections in connection with debt collection, including under the 1977 Fair Debt Collection Practices Act, the agency recently released an Advance Notice of Proposed Rulemaking on a broad array of issues relating to debt collection.

“Debt collection . . . has more salience today than perhaps at any time in our country’s history,” CFPB Director Robert Cordray said in a statement. He noted that since the agency began accepting consumer complaints about debt collection in July, “debt collection is quickly becoming the topic that draws the most complaints of all of the consumer financial products and services covered by our consumer response team.”

The CFPB’s rulemaking authority is grounded in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which for the first time granted an agency the power to promulgate substantive rules under the FDCPA, as well as authorizing the CFPB to adopt regulations prohibiting “unfair, deceptive, or abusive” acts or practices and requiring disclosures in connection with financial products.

These additional powers to regulate “UDAAP” will come in handy if the CFPB decides to regulate debt owners and debt collection by original creditors, something not covered by the FDCPA, and an important topic in the ANPR. Earlier this year, the CFPB began oversight of entities that take in $10 million or more in receipts from consumer debt collection activities, about 175 companies or 60 percent of the total industry. But the CFPB in the ANPR indicates that it may go further, adopting rules that would cover, among other things, the duties of debt owners providing information to debt collectors.

To launch the rulemaking process, the agency published the 114-page ANPR, which includes 162 questions open for comment, ranging from the definition of terms in the FDCPA to what types of debt are not subject to the CFPB’s authority.

Specifically, the CFPB asked members of the financial services industry and the general public to weigh in on issues such as:

  • Should first-party collectors be regulated like third-party collectors, or should the regulations differ depending on who is collecting the debt?
  • What specific documents or information should be transferred by a debt owner with the sale or placement of a debt with a third-party collector?
  • When a debt is sold or placed for collection, should a requirement exist to notify the consumer?
  • What should the format and content of FDCPA validation notices and Fair Credit Reporting Act dispute processes look like?
  • Particularly in light of technological advancements like the rise of mobile technology, how should communications between the industry and consumers be regulated?
  • What should the role of the CFPB be in state debt collection litigation?

From the CFPB’s perspective, the agency stressed three issues: correct person, correct amount and correct documentation. Accuracy of account information – particularly when passed from original creditor to debt buyers or debt collection firms – poses a concern for the agency, which could lead to regulation on what documents are transferred upon the sale of a debt.

The CFPB also emphasized that new rules should ensure that consumers understand the debts they owe, their rights under the law and the options they have. For the financial services industry, this means an agency focus on notice procedures and the debt validation and dispute processes.

Finally, a large number of the questions posed by the CFPB pertain to communication between debt collectors and consumers. The FDCPA regulates the communications between debtors and certain debt collectors, but the CFPB said the law needs updating in the era of modern communication channels like social media and text messaging.

With the release of the ANPR, the CFPB also announced that it will now post consumer complaints about debt collection in the agency’s public Consumer Complaint Database. Since the agency began accepting complaints about debt collection on July 10, it has received 5,000 complaints to date, accounting for approximately 30 percent of total complaints in that time period.

Consumer complaints range from collection activities like harassing or unwanted phone calls to the lack of verification of the underlying debt or being contacted about debt that has already been paid to credit report issues, like being unable to remove a collection from their report, the agency said.

To read the CFPB’s Advance Notice of Proposed Rulemaking, click here.

To visit the Consumer Complaint Database, click here.

Why it matters: With the release of the ANPR, the agency appears poised to tighten regulations and increase scrutiny on a broad range of issues not just for third-party debt collectors but original creditors and other debt owners as well. The CFPB encouraged members of the financial services industry to weigh in on the agency’s questions, including whether they may impose unnecessary burdens on the industry. Public comment will be accepted until February 10, 2014. Given the potential ramifications of the agency’s rulemaking, industry members should consider submitting comments, keep a close eye on and get themselves involved in the process, while becoming prepared for substantive changes down the road.

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Underbanked Present Investment Opportunities

Looking for an investment opportunity? Consider a company serving the underbanked.

Companies focusing on consumers with low to moderate incomes in the areas of financial technology and specialty lending were the subject of equity investments, IPOs and acquisitions with a combined value of $5.2 billion in capital over a one-year period, according to a new study.

Sponsored by Morgan Stanley and authored by the Center for Financial Services and Core Innovation Capital, the study tracked investment banking transactions between July 2012 and June 2013. Companies focusing on consumers with low to moderate incomes were involved in a total of 85 investment banking transactions during that time period, broken down by the authors into three categories: specialty credit, payments and other financial technology.

Specialty credit includes transactions like small-dollar loans, small-business loans, private student loans and subprime auto loans, and constituted 42 percent of the total activity. Next, the category of payments made up 33 percent of the transactions, with prepaid cards, remittance and bill pay. The last catchall category, other financial technology, filled out the remaining 25 percent of transactions with personal financial management tools, alternate data analysis and savings products.

Of the 85 total transactions, the vast majority – 71 – were equity investments. The remaining activity consisted of three IPOs and 11 acquisitions. Private equity was involved in 84 percent of all the transactions, totaling $947 million of investments.

Because the study was the first by the authors on the topic, they told American Banker that they were attempting to define the market and could not determine if the activity was an increase or decrease from recent years.

“This is a space we are newly defining,” Arjan Schutte, the founder and managing partner at Core, a $50 million venture capital fund that focuses on the underbanked market, told the publication. “Take payments for instance. Payments overall have been heating up for years now. We are drawing a new circle in a Venn diagram across various types of companies that serve a similar customer base.”

Why it matters: The study may educate the financial services industry about the potential profit from investing in the underbanked market. “We believe in a market-based system,” Rob Levy, director of research for the CFSI, told American Banker. “The [financial services] industry doesn’t understand or value this market and that’s why we did the study – to explain the need.”

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