TD Bank’s Overdraft-Fee Abuses Surge, Class Says

MANHATTAN (CN) - Despite recently paying $62 million to settle multidistrict litigation over its overdraft practices, TD Bank's "egregious" scheme to maximize such revenue continues, a federal class action alleges.

John Koshgarian filed the 34-page federal complaint against New Jersey-based TD Bank and its Canadian parent, the Toronto-Dominion Bank, on Dec. 31.

A New Yorker, Koshgarian filed as his first exhibit the March 2013 settlement that TD Bank reached in Miami regarding its overdraft practices.

Though that settlement covered a class period from 2003 to 2010, Koshgarian says the collection of excessive overdraft fees by TD Bank has continued.

"Significantly, defendants continue to assess overdraft fees based on the improper reordering of debit card transactions from highest to lowest amount and to assess fees even at times when customers would, but for the reordering, have sufficient funds in their account to cover all merchant requests for payment," the complaint states.

Many other banks were involved in the multidistrict litigation, which was captioned In re Checking Account Overdraft Litigation, but Koshgarian says TD Bank stands out as one of the few to "continue[] these practices even after it settled claims of wrongdoing based on these very same practices."

"In the era of electronic banking and the ubiquitous use of debit cards, the assessment of overdraft fees has become a major profit center for United States banks, including defendants," the complaint states.

Though banks used to waive the charge when their customers occasionally bounced checks, the era of overdraft-protection plans has for the last 20 years changed that protocol, according to the complaint.

Koshgarian says overdraft fees brought banks more than $17 billion in 2007.

"The number nearly doubled in 2008, as more and more consumers struggled to maintain positive checking account balances," the complaint states. "In 2009, banks brought in $37.1 billion in overdraft charges alone. TD Bank has over $200 billion in assets and over 1300 branches, and has been a notable beneficiary of these staggering overdraft charges."

Since those most likely to maintain low balances are often poor, Koshgarian says the effect on this class is disproportionate.

"Moebs Services, a research company that has conducted studies for the government as well as banks, estimates that 90 percent of overdraft fees are paid by the poorest 10 percent of banks' customer base," the complaint states. "Moreover, these fees have the tendency to create a domino effect, because the imposition of a fee on an account with a negative balance will make it less likely that the account holder's balance will reach positive territory, resulting in more fees."

Banks have the power to decline debit transactions when there are insufficient funds, or warn customers that an overdraft fee will be assessed if they proceed with the transaction, but they instead process the transactions to then charge an overdraft, Koshgarian says.

"Thus, defendants' automatic, fee-based overdraft scheme was and is intentionally designed to maximize overdraft fee revenue," the complaint states.

Koshgarian notes that overdraft fees can cost customers "hundreds of dollars in a matter of days, or even hours."

"Even more egregious, customer accounts may not actually be overdrawn at the time the overdraft fees are charged, or at the time of the debit transaction," the complaint states. "In these instances, defendants manipulate and alters the timing of the customer's transactions, in a manner inconsistent with Defendants' contractual obligations, in order to maximize overdraft fees imposed on the customer. Thus, it is through manipulation and alteration of customers' transaction records in a manner inconsistent with defendants' contractual obligations that defendants maximizes overdraft fees imposed on customers."

It was such "rampant abuse of overdraft charges by banks" that led the Board of Governors of the Federal Reserve System to institute notice requirements for banks concerning overdraft charges, according to the complaint.

Koshgarian says any overdraft fees TD Bank assessed on debit card transactions after Aug. 16, 2010, thus violated federal law, since the newly amended Regulation E (12 C.F.R. § 205.17) under the Electronic Funds Transfer Act, obligated banks "to obtain customers' affirmative consent before assessing overdraft fees on debit card transactions."

Katony, N.Y.-based attorney James Batson represents the class, which seeks an injunction and damages for bad faith, breach of contract, violation of the Electronic Funds Transfer Act, and other wrongs.

The complaint notes that TD Bank has 1,300 branches in the United States.

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