1st Circuit: Overdraft Fees do not Qualify as Interest Under NBA

The U.S. Court of Appeals for the First Circuit affirmed a district court’s dismissal of a putative class action allegation that a bank’s sustained overdraft fees violated the National Bank Act (NBA) because they constitute interest at a rate above that allowed by Rhode Island, the state in which the bank is located.  The court held that the bank’s sustained overdraft fees are not interest under the NBA.

The plaintiff’s lawsuit alleged that the bank’s sustained overdraft fees “violate the NBA because they constitute ‘interest’ at a rate above that allowed by Rhode Island,” which caps interest rates at 21%.  The bank charges sustained overdraft fees where a customer remains overdrawn after the bank honored the customer’s check and charged the initial overdraft fee.  The district court dismissed the case, ruling that the sustained overdraft fees were service charges, not interest charges. The district court pointed to the “overwhelming majority of jurisdictions which have ruled that sustained overdraft fees are not considered interest under the NBA.”  The plaintiff appealed. 

The split three-judge panel found that the bank’s sustained overdraft fees did not constitute interest under the NBA and based on the OCC’s regulations interpreting the NBA.  The court also found that the OCC’s interpretive Letter 1082 “resolves the case,” in stating that “[c]reating and recovering overdrafts have long been recognized as elements of the discretionary deposit account services that banks provide.”  And per OCC regulations, the court agreed that “[d]eposit account service charges are not subject to usury limits.”  The panel stated that the agency’s interpretation in its 2007 Interpretive Letter is due “a measure of deference.”  The panel found the agency’s interpretation persuasive because “[f]lat excess overdraft fees (1) arise from the terms of a bank’s deposit account agreement with its customers, (2) are connected to deposit account services, (3) lack the hallmarks of an extension of credit, and (4) do not operate like conventional interest charges.”

The court’s dissenting opinion noted that the OCC interpretive letter was silent on the question of sustained overdraft fees.  The dissent reasoned that “[s]ilence, however, is not guidance” and continued to state that “I do not see how we can defer to an interpretation that the OCC never clearly made on an issue that it previously described as complex and fact-specific.”