Missouri Court Finds that Overdraft Fees are Money Well Spent

ABSTRACT: The Missouri Court of Appeals for the Western District promptly affirmed the trial court's holding that a local bank's overdraft fee was not "interest," and, therefore, was not subject to the state's usury cap.

Last month the Court of Appeals for the Western District of Missouri held that a Missouri Bank’s overdraft fee charged as part of its overdraft protection service (called “the Bounce program”) did not violate the state’s usury rate, thereby affirming the right of it and other banks to charge such fees in Missouri for debit/checking transactions.

A class action was filed against Hawthorn Bank alleging that its fee charged to customers for debit card overdrafts, which ranged from $25 to $30 per overdraft, was excessive and usurious. Plaintiffs’ counsel argued that the overdraft fees are, in essence, interest charged to the customer, and that they are therefore subject to Missouri’s usury limit.

Notably, the customers had the option to opt in or out of the overdraft protection service offered by Hawthorn Bank, and one of the named plaintiffs had even sought out a checking account with Hawthorn precisely because of its Bounce program. Both named plaintiffs understood that they could have the service cancelled at any time.

Hawthorn Bank argued, and the trial court agreed, that Mo. Rev. Stat. § 362.111, which permits banks and trust companies to assess fees and service charges against its customers, applied in that case. The Court of Appeals affirmed the lower court’s holding on the basis that § 362.111 exempts service charges and fees from the state’s usury laws. The Court also rejected the plaintiffs’ argument that the Bounce program created a binding loan contract permitting interest to be charged, as Hawthorn had expressly advised its customers that it would pay overdrafts at its discretion and could not guarantee that it would always authorize and pay the transactions.

The Court additionally found that the fees charged by Hawthorn Bank were reasonable as compared to those charged by other financial institutions within the state. The Court further recognized that the customers enrolled in the optional Bounce program were receiving substantial benefits from the service, such as coverage of overdrafts, providing notices to the customer, and providing customer service pertaining to the program, at the expense of the bank, thus justifying the fees being charged.

The Court of Appeals’ holding in Hawthorn provides reassurance to banks offering such overdraft protection services in Missouri, as the right to collect fees for those services has been upheld.

The opinion may be found here.