A large bank was sued in federal court in New York last week by a putative nationwide class alleging that the bank engaged in “unfair, deceptive, and unconscionable assessment and collection of excessive overdraft fees.”
The complaint accuses HSBC Bank and other companies of manipulating the order of customers’ debit card transactions to maximize overdraft penalties by depleting the customer’s account faster with larger transactions and then charging multiple overdraft fees on smaller transactions that were actually made when the account had sufficient funds to cover those purchases. The compliant also accuses HSBC of failing to advise its debit card customers that they have the right to “opt out” of HSBC’s overdraft program, as required by Federal Reserve, and alleges that HSBC could have simply declined to process a debit or point-of-sale transaction when a customer had insufficient funds to cover the purchase or could have warned the customer that he or she was about to overdraw their account.
Now is a good time to review some of the available regulatory guidance on overdraft protection programs, including that provided by the FDIC and the Department of the Treasury. These agencies have suggested certain practices with respect to overdraft programs, including: 1) informing customers of different ways to handle overdrafts, such as lines of credit or automatic transfers, that would avoid overdraft fees; 2) educating customers about choices they have with respect to overdrafts and giving them an opportunity to “opt-out” before the overdraft program is implemented; 3) monitoring customer activity to track customers who incur multiple overdrafts and educating them about the costs and alternatives to overdrafting; 4) communicating frequently with customers to ensure their understanding of the program.
The HSBC suit is yet another warning to banks against aggressive marketing campaigns. As we know from the Bureau’s credit card settlements this past summer and its recent warning to mortgage lenders, marketing practices are under scrutiny – now is the time to review your procedures!