First Circuit Holds Bank's Sustained Overdraft Fees Are Not Interest Under the National Bank Act

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The First Circuit recently affirmed the dismissal of a case in which the plaintiff alleged that Citizens Bank's "Sustained Overdraft Fees" on overdrawn checking accounts were usurious interest charges in violation of Section 85 of the National Bank Act (the "NBA"). Fawcett v. Citizens Bank, N.A. 

The Bank's policy permitted it, if a customer overdrew his account, to either decline to cover the overdraft and return the check or cover the overdraft. In either case, the Bank charged the customer $35. If the Bank chose to cover the overdraft, however, and the customer's account continued to be in overdraft, the Bank charged the customer an additional $30 after 4 business days of the overdraft, another $30 after 7 business days after overdraft and another $30 after 10 business days in overdraft. This meant that a customer could pay up to $90 more in "Sustained Overdraft Fees" if the Bank chose to cover the overdraft instead of returning the check.

Plaintiffs in this putative class action alleged that these fees were "interest" under the NBA and, therefore, the rate charged by the Bank could not exceed the maximum rate permitted by state law, known as a "usury limit." The Plaintiffs contended the $90 in potential fees were in excess of the usury limit. The District Court for the District of Massachusetts disagreed and dismissed the case and the Plaintiffs appealed.

The First Circuit disagreed with Plaintiffs, finding the Sustained Overdraft Fees were not interest under the NBA. It found the issue to be easily resolved by resort to regulations and reasoning from the Office of the Comptroller of the Currency (the "OCC"), the federal agency charged with implementing the NBA. In 2007, after receiving a question from an unnamed bank about its overdraft fee structure, the OCC issued Interpretive Letter 1082, approving a fee structure nearly identical to the one used by the Bank in this case. The First Circuit found that the OCC's interpretation was controlling, as it was not plainly erroneous or inconsistent with the regulation and, therefore, the Bank's Fees were not in violation of the NBA. The First Circuit went on to say that, even setting aside agency deference, the Fees were not interest under Section 85 and its regulations because the Fees are connected with deposit services, not credit interest, and do not operate like conventional interest charges. The First Circuit declined the Bank's urging for a broad ruling that no fee connected with overdraft is interest under the NBA, instead holding narrowly that on the facts of this case and Interpretive Letter 1082, the Bank's Fees were not interest under the NBA. 

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