Fifteen months after Minnesota-based TCF Financial revealed it could face legal action from federal regulators related to alleged unfair and deceptive overdraft practices, the Consumer Financial Protection Bureau has finally taken legal action against the bank.
The CFPB on Thursday announced its latest effort to rein in financial institutions using illegal and abusive overdraft policies to rake in millions of dollars in fees each year, accusing TCF Bank of tricking customers into its costly overdraft program by obscuring fees and creating loose definitions of consent.
TCF Financial, which operates 376 branches in Illinois, Minnesota, Michigan, Colorado, Wisconsin, Arizona, South Dakota, and Indiana, operates an overdraft program much like those at other financial institutions, charging on average $35 every time a customer overdrafts by spending or withdrawing more money than is averrable in their account.
However, the CFPB’s complaint [PDF] is not rooted in the amount of money TCF charges customers for overdrafts, but how the company presents the program to customers.
Under federal law, depository institutions are prohibited from charging overdraft fees on ATM and one-time debit card transactions unless consumers affirmatively opted in.
According to the CFPB complaint, TCF specifically designed its application process to make it seem as if overdraft protection was mandatory for new accounts, and obscured the fees associated with the program.
The complaint alleges that TCF determined through customer testing that if new customers were asked to opt-in to overdraft protection at the same time as they were being made to agree to the bank’s terms, more than twice as many people opted in.
With this knowledge, the company allegedly placed the opt-in decision immediately after a series of mandatory items the customer had to agree to in order to open a new account.
Brach employees then used bank-provided scripts that did not explain that the overdraft program was optional, or that it meant the bank would have permission to authorize transactions that would result in overdraft fees, the CFPB claims.
Employees were induced to follow the practice, the CFPB claims, because the bank offered bonuses to staff who got consumers to sign on to the program. For example, in 2010, managers at larger branches offered staff up to $7,000 in bonuses for getting a high number of new opt-ins.
Eventually, the bank phased out the bonuses, but regional managers created their own goals, requiring staff to achieve opt-in rates of 80% or higher for new accounts. If an employee failed to meet the goals, they could lose their jobs.
Still, because of the way the opening of an account was set up, the complaint alleges that most customers fell into the rhythm of initialing the terms of agreement, opting in to the program without proper information.
Additionally, the CFPB alleges that TCF adopted a loose definition of consent for existing customers in order to opt them into overdraft services.
The complaint alleges that TCF branch employees were given yet another script for contacting these customers. Instead of asking whether customers wanted to have their overdrafts covered for a $35 charge, the employees were instructed to ask customers if they wanted their “TCF Check Card to continue to work as it does today?”
In testimony to the CFPB, former bank employees tell the CFPB that when customers said “yes” to the question, it was taken to mean they had agreed to opt-in to the overdraft program.
However, the CFPB claims that many customers did not understand that by agreeing they were granting the bank permission to authorize transactions and charge them overdraft fees that they would otherwise not have to pay.
If a customer said “no” to the questions, employees were supposedly trained to use “overcoming objections,” such as creating hypothetical situations where the customer was in an emergency and needed to pay for something, but the transaction was declined unless they opted in.
Former employees tell the CFPB that they were instructed not to over-explain the program’s conditions or provide examples that highlighted the risks of overdraft protection.
The Bureau alleges that TCF’s overdraft strategy worked. By mid-2014 nearly 66% of the bank’s customers had opted in, more than triple the opt-in rate seen at banks of similar size.
To add insult to injury, the CFPB complaint claims that the bank’s CEO was so happy about the status, he named his boat “Overdraft.”
In all, the CFPB alleges that TCF’s overdraft practices violated the Electronic Fund Transfer Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Bureau is seeking refunds for customers, and penalties against TCF.
TCF’s overdraft practices first came to light when it announced in Nov. 2015 that it was under investigation by the CFPB related to how it administered its checking account overdraft program “opt-in” requirements.