A divided panel of the United States Court of Appeals for the Tenth Circuit ruled in Walker v. BOKF, National Association that the extended overdraft fees charged by BOKF did not constitute “interest” within the meaning of the National Bank Act (LNB). The Tenth Circuit’s decision on what it called “a first impression issue in this circuit” follows similar decisions by the First and Fifth Circuits.
The plaintiff had a current account with the BOKF. When presented with an item that exceeded the plaintiff’s account, BOKF elected to pay for the item and charged the plaintiff an initial overdraft fee of $34.50. On the sixth day after the overdraft, BOKF starts charging an extended overdraft fee of $6.50 per business day. The Plaintiff’s account remained overdrawn for nearly two months, resulting in the imposition of 36 separate overdraft charges totaling $234.00.
In his putative class action lawsuit, the plaintiff alleged that because the extended overdraft fee was “interest” under the NBA, the fee was usurious under NBA Article 85. (Plaintiff did not dispute the initial overdraft charge.) Section 85 allows a national bank to charge “interest at the rate permitted 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 extended overdraft fee charged by BOKF were usurious because the fees resulted in 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 fee did not constitute interest under the NBA and therefore was not subject to Oklahoma’s rate limit.
In upholding the District Court’s dismissal of the complaint, the Tenth Circuit first identified two OCC regulations regarding charges that qualify as “interest” under the NBA. The first regulation is 12 CFR Section 7.4001 which defines “interest” for NBA purposes as “any payment compensating a creditor or potential creditor for an extension of credit, the provision of a line of credit, or any default or breach by a borrower of a condition on which credit was extended. The second regulation is 12 CFR 7.4002 which states that banks may also charge “non-interest charges and fees, including deposit account service charges.”
The Tenth Circuit also identified a 2007 OCC interpretative letter which, as the court described, “for the first time directly addressed the issue of whether the fees charged by a bank in connection with the payment an overdraft could be considered “interest” under the NBA. The letter was written in response to a bank’s request for clarification regarding the legality of its overdraft fee structure. The bank charged an initial overdraft fee in the form of a flat fee which depended on the number of overdrafts during the previous 12 month period and an ongoing overage fee in the form of a flat fee per business day of the fourth through eleventh calendar day that an account was overdrawn.
In its letter, the OCC said the bank’s ability to charge both initial and ongoing overdraft fees was “expressly reaffirmed” by the authority in section 7.4002 for banks to charge “fees and non-interest charges, including charge deposit account service.” The OCC also stated that as long as the bank follows the factors listed in Section 7.4002 when setting fees, “there is no prudential impediment to the bank exercising its discretion to charge fees and non-interest charges, such as the overdraft charges 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 charges constituted interest or non-interest charges and that the OCC’s determination in its interpretative letter that overdraft charges extended were “deposit account service fees” under section 7.4002 was a reasonable interpretation. Based on these findings and its conclusions that the OCC’s interpretation (1) was an authoritative interpretation, (2) was within the substantive expertise of the OCC, and (3) reflected fair judgment and thoughtfully, the Tenth Circuit found that the interpretive letter was entitled to deference under the standard established by the United States Supreme Court in Auer vs Robbins.
In her dissent, Judge Eid said she would consider BOKF’s extended overdraft fee to be “interest” under section 7.4001 and therefore under NBA Article 85. In his view, there was no reason to invoke auer deference because the extended overdraft fee “shall be unambiguously considered interest” under section 7.4001. According to Judge Eid, any overdraft covered by a bank is an “extension of credit” for the purposes of section 7.4001 and, unlike initial overdraft charges, extended overdraft charges qualify under section 7.4001 as “ a payment compensating a creditor” for such an extension of credit. .
The plaintiff will no doubt attempt to use the panel split to his advantage if he asks to be heard again. bench. Overdraft fees continue to be challenged in class action lawsuits and remain a focus of concern for the CFPB and federal banking regulators.