Consumer Financial Services Alert - August 24, 2010 August 24, 2010
In This Issue

Wells Fargo Bank Ordered to Pay $203 Million in Overdraft Case

Following a two-week bench trial, a federal judge has ordered Wells Fargo Bank, N.A. to pay its customers $203 million in restitution for its practice of resequencing posted debit card transactions from highest to lowest dollar amounts, which the court found was an “unfair” and “fraudulent” practice under California consumer protection laws. The court also issued injunctive relief requiring Wells Fargo to cease engaging in resequencing practices by November 30, 2010.

In its defense, Wells Fargo asserted that the practice of paying high dollar amount debit card transactions before those of lower amounts is intended to benefit customers by providing for the payment of high priority purchases before other purchases. According to the court, however, this computerized practice was intended to maximize revenue generated from overdraft transactions by depleting customer account balances more quickly than if debit transactions were deducted from accounts in the order in which they occurred. The court further found that Well Fargo’s resequencing practices, as well as its practice of approving overdraft transactions without point-of-sale notices, were not adequately disclosed to its customers and were contrary to “good faith” requirements under California law. The court also determined that the California consumer protection laws on which the plaintiffs relied to contest Wells Fargo’s resequencing practices do not impermissibly interfere with the business of banking or conflict with federal laws governing national bank fees. Accordingly, the court rejected Wells Fargo’s assertion that the National Bank Act and OCC regulations preempt the California consumer protections laws.

Click here for Gutierrez v. Wells Fargo Bank, N.A., No. C. 07-05923 (N.D. Cal. Aug. 10, 2010).

FDIC Issues Proposed Guidance on Overdraft Payment Programs

The FDIC issued proposed guidance on automated overdraft payment programs, which outlines additional expectations for the banks it supervises. The proposal would supplement the FRB’s overdraft rules under Regulation E, which are discussed in more detail in the June 1, 2010 and November 17, 2009 Consumer Financial Services Alerts. Whereas the new Regulation E opt-in requirement addresses only paying overdrafts resulting from one-time debit card and ATM transactions, the proposal provides that customers should have an opportunity to opt out of the payment of overdrafts resulting from non-electronic transactions (e.g., checks). The proposal also provides that banks should not process transactions in a manner designed to maximize the cost to customers. In addition, the proposal calls for banks to monitor accounts and take meaningful and effective action to limit use by customers as a form of short-term, high-cost credit, including, for example, giving customers who overdraw their accounts on more than six occasions where a fee is charged in a rolling 12-month period a reasonable opportunity to choose a less costly alternative and decide whether to continue with fee-based overdraft coverage. Moreover, the proposal states that the FDIC expects banks to institute appropriate daily limits on overdraft fees. The proposal notes that overdraft payment programs will be reviewed at FDIC examinations. Comments on the proposal are due no later than September 27, 2010. Click here for the proposal.

FDIC Approves Pilot Program for Electronic Deposit Accounts

The FDIC approved a pilot program designed to help meet the needs of underserved communities through participating banks offering electronic deposit accounts with product features identified in the FDIC Model Safe Accounts Template. These accounts will have "reasonable rates and fees that are proportional to their cost" and banks offering these accounts will not be allowed to charge fees for insufficient funds or overdrafts on participating accounts. The FDIC is accepting applications for the program through September 15, 2010. Click here for the related press release and here for more information on the FDIC Model Safe Accounts Template.

FRB Issues Final Rule on Mortgage Loan Transfer Disclosure

The FRB issued a final rule implementing a disclosure requirement for mortgage loan sales and transfers. The final rule was issued pursuant to a 2009 amendment of the Truth in Lending Act that requires a purchaser or assignee that acquires a mortgage loan to provide consumers notice when their loan has been sold or transferred in writing within 30 days. The FRB had previously issued an interim rule in November 2009, which was effective immediately. The mandatory compliance date for the final rule is January 1, 2011. Until then, the interim rule may be followed. Click here for the final rule and here for an online publication developed by the FRB for consumers concerning the final rule.

FRB Issues Interim Rule on Closed-End Mortgage Disclosures

The FRB issued an interim Regulation Z rule requiring lenders to disclose how borrowers' regular mortgage payments can change over time. The interim rule requires lenders to disclose, in tabular format, (1) the initial interest rate and corresponding monthly payment, (2) for adjustable-rate or step-rate loans, the maximum interest rate and payment that can occur during the first five years, and (3) for adjustable-rate and step-rate loans, a "worst case" example showing the maximum rate and payment during the entire term. Lenders must also disclose that consumers may not be able to avoid increased payments by refinancing. The interim rule requires additional disclosures for loans with negative-amortization payment options, introductory interest rates, interest-only payments, and balloon payments. The interim rule is effective 30 days after publication in the Federal Register, but compliance is not mandatory until January 30, 2011. Public comments on the rule are due 30 days after publication in the Federal Register. Click here for a copy of the interim rule.

FRB Proposes Additional Consumer Protections for Mortgage Loan Transactions

The FRB proposed amendments to Regulation Z which would provide additional consumer protections and disclosures for mortgage loan transactions. The proposal would (1) improve disclosures for reverse mortgage loans and seek to ensure that reverse mortgage loan advertising is accurate and balanced, (2) prohibit certain practices in the sale of reverse mortgage loans, such as conditioning the sale of the loan on the consumer's purchase of other financial or insurance products, (3) improve disclosures explaining a consumer's right to rescind certain mortgage transactions, and (4) require new disclosures when the key terms of an existing closed-end mortgage loan are modified. The proposal would also amend certain rules pertaining to all mortgage loans by (a) allowing consumers to obtain a refund of fees if they withdraw a loan application within three days of receiving disclosures and (b) requiring that, if the consumer requests information about the owner of the loan, the servicer must provide the information within a reasonable time. Comments on the proposal are due 90 days from publication in the Federal Register. Click here for the proposal.

FFIEC Issues Guidance on Reverse Mortgage Products

The FFIEC issued guidance addressing compliance and reputation risks surrounding reverse mortgage products. Key policy issues raised by the reverse mortgage guidance include consumer information and understanding, the existence and effectiveness of consumer counseling, conflicts of interest and abusive practices and third-party risk management. Click here for the guidance.