Are Continuous Overdraft Fees Like Illegal Payday Loans?

Honolulu, HIMany consumer lawsuits over excessive overdraft fees focus on banks’ practice of reordering withdrawals to maximize what they can charge. The argument advanced by Linda Robinson in Robinson v. First Hawaiian Bank is different and relies on state usury laws. This opens new possibilities in the battle between consumers and banks and may prove to be important as federal financial protection for consumers seems increasingly under siege.

Linda Robinson alleges that First Hawaiian Bank deducted an overdraft fee from her debit card account because she had an “insufficient available balance.” Setting aside the interesting and important fight about the difference between a “balance” and an “available balance,” her next allegation is that the bank then deducted a “continuous overdraft fee” assessed for each seven-day period that her account had a negative balance. They dinged her twice -- maybe more than twice.

As the bank describes this, that would be a charge for the privilege of using their money. In normal parlance, that’s a loan. Financial institutions that make loans are permitted to charge interest. But both state and federal law limits the amount of interest that a financial institution can charge for a loan. These laws, called usury laws, vary from state to state and have recently floated into public awareness as a way of limiting the abuses of the payday loan industry. Robinson claims that the continuous overdraft fee on a relatively small overdraft exceeded the limits of Hawaii’s usury law. It was effectively a short-term loan that charged excessive and illegal interest.

The most recent legal scuffle was about whether state or federal interest limits should apply. In Robinson, the US District Court for the District of Hawaii came down squarely in favor of state limits. That’s good for the plaintiff in this case because the state limits are lower than the federal ones.

Without getting too far “inside baseball,” this is a good thing, though possibly limited for plaintiffs. It’s not a totally novel theory, having been used in Bank of America excessive overdraft fee litigation. It only works where there is a continuous overdraft fee and where the state limits on permissible loan rates are lower than the federal ones.

It opens up an important avenue for banking customers who believe that they are being overcharged, though. State consumer financial protection laws can provide a bulwark even when federal protections appear to be eroding.