Since its creation in 2010, certain members of Congress have been desperate to thwart the Consumer Financial Protection Bureau (CFPB)  by repeatedly passing bills to limit the CFPB’s power.  Generally throwing a fit, these congressmen claim that the CFPB is a “run-away regulator unlike any other in American history.”


A case decided last week by the Ninth Circuit Court of Appeals, Gutierrez v. Wells Fargo Bank, shows why the CFPB is so important, how its predecessor (the Office of the Comptroller of the Currency) failed the American public, and why we should view anyone opposed to the CFPB with deep suspicion.


The Gutierrez case arises from a change Wells Fargo made to the processing of debit card transactions back in 2001. Wells Fargo claimed in its brochures that, when a consumer used a debit card, the money was “immediately” and “automatically” deducted from their accounts, and admonished customers — with the type of blatant hypocrisy only a true scoundrel can muster — “remember that whenever you use your debit-card, the money is immediately withdrawn from your checking account.  If you don’t have enough money in your account to cover the withdrawal, your purchase won’t be approved.”


In reality, Wells Fargo waited until the end of each day, when it would re-order the transactions to create as many overdrafts as theoretically possible, and then charge the customer a fee for each bank-manufactured overdraft.  As the Ninth Circuit explained:


As an illustration, consider a customer with $100 in his account who uses his debit-card to buy ten small items totaling $99, followed by one large item for $100, all of which are presented to the bank for payment on the same day. Under chronological posting or low-to-high posting, only one overdraft would occur because the ten small items totaling $99 would post first, leaving $1 in the account. The $100 charge would then post, causing the sole overdraft.

Using high-to-low sequencing, however, these purchases would lead to ten overdraft events because the largest item, $100, would be posted first—depleting the entire account balance—followed by the ten transactions totaling $99. Overdraft fees are based on the number of withdrawals that exceed the balance in the account, not on the amount of the overdraft.

When high-to-low sequencing is used, the fees charged by the bank for the overdrafts can dramatically exceed the amount by which the account was actually overdrawn. For example, Gutierrez incurred $143 in overdraft fees as a consequence of a $49 overdraft, and Erin Walker incurred $506 in overdraft fees for exceeding her account balance by $120.


If you or I lied about how we were handling someone else’s money so that we could tack on additional fees, we would be sued and prosecuted for fraud. But Wells Fargo is a national bank, and so the rules are different.


The rules that apply to banks, derived from the National Bank Act of 1864 (“NBA”), 12 U.S.C. § 1 et seq., are vague, creating an unfortunate ambiguity that national banks have exploited, by way of the Office of the Comptroller of the Currency (“OCC”), a federal agency they effectively controlled. As the Fourth Circuit recently explained in Epps v. JP Morgan Chase (a case in which JP Morgan violated Maryland law relating to the sale of repossessed cars, yet another instance of a national bank preying on the financially vulnerable), the NBA authorizes national banks to exercise “all such incidental powers as shall be necessary to carry on the business of banking.” 12 U.S.C. § 24. Congress also authorized the Office of the Comptroller of the Currency (“OCC”) to promulgate regulations implementing the NBA. See 12 U.S.C. § 93a.


It’s in the Office of the Comptroller of the Currency — which had most of the responsibility for these types of consumer finance issues prior to the creation of the CFPB — where the problem started. Instead of enacting regulations that protected consumers, the OCC enacted regulations that protected banks by “pre-empting” state consumer finance laws.


It didn’t matter if a state like California passed a law prohibiting fraudulent practices by banks; if someone, including a state attorney general, tried to sue the bank for violating those laws, the bank would cry “pre-emption,” and ask the Court to dismiss the case. (I’ve complained about pre-emption in other contexts, too; it is often a tool used to deny consumers legal relief.) In 2003, for example, the OCC claimed its dismal mortgage regulations “pre-empted” state predatory lending laws, and even sued to stop states from investigating or regulating the practice.


In the Gutierrez case, Wells Fargo claimed that its fraudulent and deceptive re-ordering of withdrawals was not just legal under federal law, but that the OCC’s regulations — which are still the law, until the CFPB gets fully established — prohibited states from doing anything to protect their own citizens. Specifically, 12 C.F.R. § 7.4002(a), which was promulgated by the OCC, says:


(a) Authority to impose charges and fees. A national bank may charge its customers non-interest charges and fees, including deposit account service charges.

(b) Considerations.

(1) All charges and fees should be arrived at by each bank on a competitive basis and not on the basis of any agreement, arrangement, undertaking, understanding, or discussion with other banks or their officers.

(2) The establishment of non-interest charges and fees, their amounts, and the method of calculating them are business decisions to be made by each bank, in its discretion, according to sound banking judgment and safe and sound banking principles. A national bank establishes non-interest charges and fees in accordance with safe and sound banking principles if the bank employs a decision-making process through which it considers the following factors, among others:

(i) The cost incurred by the bank in providing the service;

(ii) The deterrence of misuse by customers of banking services;

(iii) The enhancement of the competitive position of the bank in accordance with the bank’s business plan and marketing strategy; and

(iv) The maintenance of the safety and soundness of the institution.


And then there’s this additional section of the regulation: “(d) State law. The OCC applies preemption principles derived from the United States Constitution, as interpreted through judicial precedent, when determining whether State laws apply that purport to limit or prohibit charges and fees described in this section.” That’s the provision the OCC, and the national banks, use to shut down state regulation and consumer fraud lawsuits.


In short, the most the OCC requires of banks is that they charge fees “in its discretion, according to sound banking judgment and safe and sound banking principles.” It’s a pathetic regulation to begin with, but one that at least implies the need for “sound banking judgment” and “sound banking principles,” which presumably don’t include the fraudulent practice of secretly pretending to change history just to charge consumers more, right?


Shockingly, the OCC already looked at this issue a decade ago, and went out of its way to bless this systematic fraud by the banks. As the Ninth Circuit recounted:


OCC letters interpreting § 7.4002 specifically consider high-to-low posting and associated overdraft fees to be a “pricing decision authorized by Federal law” within the power of a national bank. OCC Interpretive Letter No. 916, at *2 (May 22, 2001); see also OCC Interpretive Letter No. 997, at *3 (Apr. 15, 2002); OCC Interpretive Letter No. 1082, at *2 (May 17, 2007). The OCC has opined that “a bank’s authorization to establish fees pursuant to 12 C.F.R. 7.4002(a) necessarily includes the authorization to decide how they are computed.” OCC Interpretive Letter No. 916, at *2 (May 22, 2001).

Accordingly, the OCC has determined that a national bank “may establish a given order of posting as a pricing decision pursuant to section 24 (seventh) and section 7.4002.” Id. In sum, federal law authorizes national banks to establish a posting order as part and parcel of setting fees, which is a pricing decision.


In other words, the OCC looked at this appalling high-to-low posting process — in which a bank falsifies a consumer’s transaction history to charge a higher fee — and said it was lawful, “sound,” appropriate, and that state laws couldn’t say otherwise. Notice the first date there, May 22, 2001, just a month after Wells Fargo changed its policies. Indeed, you can see OCC Interpretive Letter 916 yourself, which notes that it is in response to an inquiry from February 2001.


This was business as usual, the OCC and the national banks working hand in glove to cheat you.


In Gutierrez, the Ninth Circuit saw all that and held that California can’t tell Wells Fargo to stop using “high-to-low,” and can’t even make the bank give back the money it stole from customers on that basis. (The Court did hold, however, that the OCC’s power doesn’t extend to Wells Fargo’s marketing about its deposits, and so the bank could be liable on those grounds. I assume Wells Fargo will try to appeal that to the Supreme Court. Thankfully, they may not find shelter there — to Justice Scalia’s credit, he broke with the five other Republican appointees and ruled against the OCC and the national banks in Cuomo v. Clearing House Ass’n, LLC, 129 S. Ct. 2710 (2009), partly limiting the OCC’s power to stop certain state laws.)


Of course, Wells Fargo isn’t alone in dreaming up ways to prey upon the most financially insecure members of society. All the national banks are in the game, and it’s a huge profit center, nearly $20 billion a year in overdraft fees alone. TD Bank, for example, had a nice business going where it would freeze accounts for the benefit of creditors, charge customers for the privilege of freezing their accounts (while also charging overdraft fees), and then wouldn’t bother to follow federal and New York law relating to account freezes. That case was dismissed earlier this year.


Alas, Gutierrez might be one of the last consumer class action cases of its kind. The only reason the case was allowed to proceed in court and as a class action was because Wells Fargo had — perhaps tactically, perhaps inadvertently — waived its right to arbitration. Given the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), which gave preferential treatment to corporations trying to force arbitrations and preclude class actions, it seems unlikely any national bank will do anything other than force arbitration and preclude even class actions in arbitration, making them impossible to  litigate, because the costs of the case exceed the potential value for each consumer.


Which means the CFPB is, most likely, our one and only hope to apply to national banks the same sort of basic principles of fairness and fair dealing that we expect and enforce in our own lives. The agency is in the process of taking over responsibility from the OCC for the regulation of the largest banks, and has already started preparing regulations for overdraft practices and filing enforcement actions against banks. Contact your Representative and Senators today and ask them which side they’re on.