Non-Sufficient Funds – Court Holds Bank Payments of Overdraft Amounts Are Not Extensions of Credit

Non-Sufficient-FundsThe Supreme Court of Iowa recently held that non-sufficient funds fees (“NSF fees”) charged by a state-chartered Iowa bank are not subject to the usury provisions of the Iowa Consumer Credit Code (“ICCC”) because the transactions at issue did not constitute extensions of credit.

The case, Legg v. West Bank, No. 14-0692, 2016 WL 275288 (Iowa Jan. 22, 2016), was a putative class action filed against West Bank by a married couple who held a joint checking account at the bank. In August 2009, September 2009, and May 2010, plaintiffs were charged NSF fees for four point of sale purchases made with their bank cards and one check, resulting in overdrafts to their checking account. West Bank charged plaintiffs $27.00 per overdraft, a fee based on market studies of the bank’s competitors. Plaintiffs argued that West Bank’s payment of the overdraft amounts constituted an extension of credit under the ICCC, and that the NSF fees were “finance charges” that exceeded the ICCC’s usury limitations, which only apply to “creditors … extending credit in consumer credit transactions” Iowa Code § 537.1108(1).

In response, West Bank filed a motion for summary judgment challenging plaintiffs’ usury claims on two separate grounds. First, the bank argued that its payment of overdraft amounts was not an extension of credit because its agreement with customers does not allow customers to defer payment once an advance is made. Second, the bank rejected the notion that the NSF fees were finance charges subject to the ICCC’s usury limitations, contending that they were charges for actual services provided by the bank to process insufficient funds transactions. The trial court denied West Bank’s motion, and the bank appealed.

The Supreme Court of Iowa reversed, finding that West Bank’s payment of the overdraft amounts did not constitute an extension of credit under the ICCC, and the bank’s motion for summary judgment on the usury claims should have been granted. Because the Court found that there was no extension of credit, it did not need to consider whether the NSF fees were a finance charge.

The Court stressed that the ICCC defines “credit” as “the right granted by a person extending credit to a person to defer payment of debt, to incur debt and defer its payment, or to purchase property or services and defer payment therefor.” Id. at §537.1301(16). Despite their contentions, the Court found that plaintiffs were never granted such a right: “This is because the overdraft is due and payable as soon as it is created; customers have no right or choice to defer the payment past the next deposit sufficient to cover the amount owed.”

Further, in response to plaintiffs’ reliance on cases holding that payment of an overdraft on checks is either an unsecured loan or an extension of credit, the court stated that the ICCC’s definition of credit “is much more narrow than the common law definition,” and that the legislature’s language will supersede any other definitions where it chooses to define a concept in a statute.

David Scheffel

David Scheffel

David has extensive experience in consumer financial services litigation and co-chairs Dorsey’s Consumer Financial Services practice. He defends financial institutions against individual and class action claims alleging discrimination, predatory lending, violations of the Truth in Lending Act, the Real Estate Settlement Procedures Act, the Fair Housing Act, the Equal Credit Opportunity Act, and disputes between lenders and securitization trusts.

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