By TED CARTER
Regions Bank is paying tens of millions in reimbursements and a fine of $7.5 million after its executives ignored a warning two years ago that its overdraft practices could be illegal.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act brought new scrutiny to bank overdraft practices across the country. Until the federal law ordered banks to provide overdraft protection, banks enjoyed a steady source of non-interest income through charges to customers who made ATM withdrawals or debit card purchases without enough money in their accounts to cover the transactions.
To conform to Dodd-Frank, banks provided the coverage at a monthly price that typically ranged from $35 to $36. But they took a hit on their non-interest income when many of their customers bought the protection and could no longer be assessed fees for over-drafting.
Regions, for instance, lost $57 million the first year it offered the overdraft protection, CFO David Turner said in a 2011 earnings report presentation.
Today, even with the opt-in rule in place, more than half of the income banks earn from consumer checking accounts comes from overdraft or similar fees, according to the U.S. Consumer Financial Protection Bureau.
With the huge amount of dollars at stake, perhaps no one should be surprised that banks of all sizes are landing in hot water over overdraft practices.
At the end of April, banking giant Capital One agreed to a $32 million settlement of a class action suit that had over 500,000 account holders as members. The settlement is pending approval from the U.S. District Court for the Southern District of Florida.
The same court will also soon hear a suit challenging the overdraft practices of Tupelo-based BancorpSouth. Lawyers for plaintiff Shane Swift initially filed the federal suit in Arkansas, but allowed the suit to be moved to South Florida, where other class action suits relating to overdraft fees had been sent.
Swift’s lawyers claim BancorpSouth wronged their client by sequencing his checking account transactions from largest to smallest, thus raising the likelihood of him unknowingly making an overdraft.
Meanwhile, the Dodd-Frank created Consumer Financial Protection Bureau has signaled its large level of concern for the overdraft issue through the size of the fine imposed on Regions. The fine assessed the $122-billion Regions Bank marked the first overdraft related monetary penalty levied by the CFPB.
The watchdog agency is also overseeing reimbursements to 200,000 account holders that have already reached $49 million.
In each instance, Regions assessed the overdraft fee without the account holder opting-in, the CFPB said. “This failure to get the required consumer permissions resulted in consumers paying tens of millions of dollars in illegal overdraft fees,” said Cara Petersen, the CFPB’s deputy enforcement director, in an April 29 tele-conference.
With Regions’ holding the largest share of retail banking business in Mississippi, a sizable number of Mississippians may have fallen victim to the bank’s overdraft practices.
Regions’ trouble started a couple of years ago when it began adding overdraft protection – and the monthly $36 charge that goes with it – to what are known as “linked accounts.” With these accounts, the bank customer can have money from a savings account cover overdrafts from his checking account.
It was the assessing of unauthorized overdraft fees to the linked-accounts that led a mid-level executive to sound an alarm. The executive’s superiors kept the warning to themselves, leaving the bank’s top decision-makers in the dark, according to the CFPB.
“The result was that the bank continued to charge consumers incorrectly for almost a year after it discovered the problem,” Petersen said.
The $7.5 million fine is for the bank’s “illegal actions and its slow response to correct the errors,” the agency said.
The repayments to customers came in 2012 and 2013. In January 2015, the bank identified more affected customers and is now required to provide them with a full refund, the CFPB said.
CFPB spokeswoman Moira Vahey said the Bureau won’t comment on whether it thinks a conscious business strategy led Regions to assess the overdraft coverage fee without a customer opting-in. The amount of the fine speaks for itself, according to Vahey.
Regions has hired a consultant to help it identify any additional customers victimized by the unauthorized charges for overdraft coverage, she said. The CFPB will oversee the consultant’s work, she added.
In its brief comment on the fine and the reimbursements, Regions said it thinks it has repaid most of the wrongfully assessed fees.
“After discovering that a small subset of customers had been charged fees in error, we reported it to the CFPB and began refunding the fees,” Regions said. “We believe the vast majority of the refunds have been completed and we have made changes to our internal systems to resolve these matters.”
The CFPB said Regions extended the illegal overdraft fees to its short-lived “Regions Ready Advance,” a low-dollar short-term loan many critics compared to a payday loan.
“Regions said it would not charge overdraft or nonsufficient funds fees when its customers made repayments on their Ready Advance loans, but the bank did in fact assess such fees in instances where it collected payment from the consumer’s checking account and caused the balance to drop below zero,” the CFPB’s Petersen said at the tele-conference.
“Charging such fees in addition to collecting its payments was contrary to its description of how these loans worked,” she said. “At various times from November 2011 until August 2013, the company charged nonsufficient funds fees and overdraft charges of nearly $2 million to tens of thousands of its Deposit Advance customers.”
The Birmingham-based Regions, which operates in 16 states, must also straighten out any credit blemishes account holders endured over the illegal overdraft practices, Petersen said.
Meanwhile, Judge James L. King of the federal district court in Miami has been handed a consolidated batch of lawsuits from around the country alleging various banks charged abusive overdraft fees.
At issue in most of the federal suits is the legality of banks posting a customer’s transactions from largest to smallest, rather than chronologically. This draws down available balances more rapidly and triggers a higher volume of overdraft fees, lawyers for account holders say.
The CFPB does not prohibit the large-to-small sequencing of transactions but the practice is something the agency is examining, according to Vahey, the CFPB spokeswoman.
Robert Gilbert, the lead attorney in Shane Swift’s suit against BancorpSouth, said the sequencing of Swift’s transactions from largest to smallest amounted to a “bad faith action” on the part of the multi-state Mississippi bank.
It goes to “fair dealing” in upholding terms of a contract, said Gilbert in a phone interview from his Coral Gables, Fla., office. “Our lawsuit is primarily founded on when two parties enter into an agreement to do business together, both parties have to deal in good faith.”
A breAch can occur, Gilbert added, if one party’s reason for doing something – the high-to-low sequencing – is just to extract money from the other party.
Gilbert said he is awaiting a trial date.
BancorpSouth declined comment on the suit Tuesday. But in a motion to reject a summary judgment in the Swift suit, lawyers for the Tupelo bank argued BancorpSouth has the option of posting transactions in the order it chooses. Swift, the lawyers said, would have known this as early as 2006 “if he simply had read BancorpSouth’s Account Information Statement.”
The account statement provided customers noted that BancorpSouth “would pay transactions in an order determined by BancorpSouth, even if the posting order resulted in more overdraft or insufficient funds fees,” lawyers for the bank said.
BancorpSouth denied it “re-sequences” checking account transactions. “BancorpSouth receives debit transactions at different times throughout the day in no particular order,” the bank’s lawyers said. “After all transactions are captured and the entire system is balanced, BancorpSouth then sorts the transactions in a predetermined sequence and posts transactions to accounts.”
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