A divided panel of the U.S. Court of Appeals for the Tenth Circuit has ruled in Walker v. BOKF, National Association that the extended overdraft fees charged by BOKF were not “interest” under the National Bank Act (NBA). The Tenth Circuit’s ruling on what it called “an issue of first impression in this circuit” follows similar rulings by the First and Fifth Circuits.
The plaintiff had a checking account with BOKF. When presented with an item that overdrew the plaintiff’s account, BOKF elected to pay the item and charged the plaintiff an initial overdraft fee of $34.50. On the sixth day following the overdraft, BOKF begin imposing an extended overdraft fee of $6.50 per business day. The plaintiff’s account remained overdrawn for nearly two months, resulting in the assessment of 36 separate extended overdraft fees totaling $234.00.
In his putative class action complaint, the plaintiff alleged that because the extended overdraft fees were “interest” under the NBA, the charges were usurious under Section 85 of the NBA. (The plaintiff did not challenge the initial overdraft fee.) Section 85 allows a national bank to charge “interest at the rate allowed by the laws of the State…where the bank is located.” Accordingly, the plaintiff alleged that as a bank located in Oklahoma, BOKF was subject to Oklahoma’s 6% per annum rate limit, and that the $234.00 in extended overdraft fees charged by BOKF was usurious because the fees translated to an effective annual interest rate of 501% or more. The district court granted BOKF’s motion to dismiss, agreeing with BOKF that the extended overdraft fees were not interest under the NBA and therefore not subject to the Oklahoma rate limit.
In affirming the district court’s dismissal of the complaint, the Tenth Circuit first identified two OCC regulations relevant to what charges qualify as “interest” under the NBA. The first regulation is 12 C.F.R. Section 7.4001 which defines “interest” for purposes of the NBA as “any payment compensating a creditor or prospective creditor for an extension of credit, making available of a line of credit, or any default or breach by a borrower of a condition upon which credit was extended.” The second regulation is 12 C.F.R. Section 7.4002 which states that banks can also impose “non-interest charges and fees, including deposit account service charges.”
The Tenth Circuit also identified a 2007 OCC Interpretive Letter that, as described by the court, “for the first time directly addressed whether fees charged by a bank in connection with paying an overdraft may qualify as ‘interest’ under the NBA.” The letter was written in response to a request from a bank for clarification regarding the legality of its overdraft fee structure. The bank charged an initial overdraft fee in the form of a flat fee that depended on the number of overdrafts during the preceding 12-month period and a continuous overcharge fee in the form of flat fee per business day from the fourth through eleventh calendar day that an account was overdrawn.
In its letter, the OCC stated that the bank ‘s ability to charge both the initial and continuous overdraft fees was “expressly reaffirmed” by the authority provided in Section 7.4002 for banks to charge “non-interest charges and fees, including deposit account service charges.” The OCC also indicated that as long as the bank followed the factors listed in 7.4002 when setting the fees, “there is no supervisory impediment to the bank exercising its discretionary authority to charge non-interest fees and charges—such as the overdraft fees at issue here—pursuant to section 7.4002(a).”
The Tenth Circuit found that Sections 7.4001 and 7.4002 were ambiguous as to whether overdraft fees constitute interest or non-interest charges and that the OCC’s determination in its Interpretive Letter that extended overdraft fees are “deposit account service charges” under 7.4002 was a reasonable interpretation. Based on these findings, and its findings that the OCC’s interpretation (1) was an official interpretation, (2) fell within the OCC’s substantive expertise, and (3) reflected a fair and considered judgment, the Tenth Circuit concluded that the Interpretive Letter was entitled to deference under the standard established by the U.S. Supreme Court in Auer v Robbins.
In her dissent, Judge Eid stated that she would hold that BOKF’s extended overdraft fees are “interest” under Section 7.4001 and therefore under NBA Section 85. In her view, there was no basis to invoke Auer deference because the extended overdraft fees “unambiguously qualify as interest” under Section 7.4001. According to Judge Eid, any overdraft covered by a bank is an “extension of credit” for purposes of Section 7.4001 and, unlike initial overdraft fees, extended overdraft fees qualify under Section 7.4001 as “a payment compensating a creditor” for such extension of credit.
The plaintiff will undoubtedly attempt to use the panel split to his advantage should he seek rehearing en banc. Overdraft fees continue to be challenged in class action lawsuits and remain a focus of the CFPB and federal banking regulators.
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