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#2109616 - 12/05/16 03:52 PM State Usury Laws - Charging a Daily Overdraft Fee
Monster Offline
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I stumbled across the following Q&A while looking for other guidance, do any other experts agree with this answer? Does this mean South Carolina (and maybe GA?) banks cannot charge a $5.00 overdrawn daily fee?


Question



On the Federal Reserve's Web site, they have an example of an explanation of overdraft services that a bank might send. In that explanation, they include this: "Also, if your account is overdrawn for 5 or more consecutive business days, we will charge an additional $5 per day." I also understand that Bank of America is charging this exact fee. Our bank is considering charging this fee, are there any hurdles or obstacles we must overcome to charge this fee?


Answer



As of 3/22/2010

I wish the Fed had not used that in its example because it ignores the variety of state usury laws. The example must be adapted for state law and actual custom and usage.

I\'m concerned that some Texas banks might think that the Fed is approving a daily fee. Alternatively, some banks may adopt the Fed\'s example without noticing that the fee is in the example or without knowing that charging this fee may be usurious.

The Texas case that we call Tony\'s Tortilla Factory (because that\'s the name of one of the parties) holds that a one-time charge on an overdraft is not interest because the formula for interest is:

PRINCIPAL X RATE X TIME = INTEREST.

With a one-time charge, there isn't principal, rate, or time; therefore, there is no interest.

If instead you charge $5 per day after the account is overdrawn for 5 business days, you do have principal (the amount of the overdraft), time (one day or more), and rate ($5 per day). If $5 per day is more than 18% per year, then it is usurious. On a $50 overdraft, you could charge $0.02 per day.

By my calculation, in Texas, you may charge $5 per day for overdrafts, but only if the overdraft is $20,277.76 or more.

So, how does BOA get away with charging this fee? They are using another state's laws.

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#2109752 - 12/05/16 11:50 PM Re: State Usury Laws - Charging a Daily Overdraft Fee Monster
rlcarey Online
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I can't answer your question, but that is a court case from Texas and it would have no bearing on the laws in other States.
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#2109759 - 12/06/16 12:33 PM Re: State Usury Laws - Charging a Daily Overdraft Fee Monster
Monster Offline
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Thanks Randy, I always appreciate your guidance. I actually asked a version of this question in the GA forum (https://www.bankersonline.com/forum/ubbthreads.php/topics/2109687/1) and it looks like it may still be considered applicable there based on RR's response. I really struggle with state laws (especially GA) and I'm not even very familiar with usury - it's always been calculated automatically in our systems and this is the first time I've worked for a bank that charges the daily fee.

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#2109761 - 12/06/16 12:48 PM Re: State Usury Laws - Charging a Daily Overdraft Fee Monster
rlcarey Online
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Galveston, TX
All I can say is that usury is usually a very complicated issue within most State laws. Much depends on things, such as what "Z" pointed out in the Texas analysis presented above, like what is the definition of interest. Many times it is not clear in the law or regulation and the definition may be established through case history in various State civil lawsuits. As such, the only person I would rely on for an opinion would be that of legal counsel that is familiar with the usury laws, regulations, and case history in the State in question.
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#2109966 - 12/07/16 03:59 PM Re: State Usury Laws - Charging a Daily Overdraft Fee Monster
Rocky P Online
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Gila - the SC Bankers Association has an expert attorney (John Moore with Nelson Mullins) who either wrote, or assisted in writing the law. Since there may be UDAAP and regulatory sanctions, it might be best to contact SCBankers and go through them. (John is an excellent reference and one of the nicest persons you will ever meet!)
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#2139071 - 07/21/17 03:09 PM Re: State Usury Laws - Charging a Daily Overdraft Fee Monster
waldensouth Offline
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FINALLY ABOVE the gnat line
In GA you need to look at State Attorney General's opinions. There can be no daily fee on ODs as it is based on the length of time the OD is outstanding. That is ruled interest and can be subject to usury. It also applies to commercial/business accounts.
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#2139343 - 07/25/17 11:58 AM Re: State Usury Laws - Charging a Daily Overdraft Fee Monster
Monster Offline
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Rocky/Walden, I'm glad I randomly scroll through old posts because ever since my posting history disappeared I have a hard time keeping track of issues I've commented on (still can't seem to get the notify of new post thing to work).

Rocky- I believe our bank works with him, and has said the same thing!

Walden, could you provide a link for me to review? We also have locations in GA so I need to iron this out.

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#2139344 - 07/25/17 12:02 PM Re: State Usury Laws - Charging a Daily Overdraft Fee Monster
Monster Offline
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Actually, I think I found it. https://law.georgia.gov/opinion/2003-9

Having locations in a different state, but we're chartered by SC - do we have to follow these for GA? Originally I thought we of course had to but an attorney told us (at least for the dormant fee timing/charges) we didn't have to follow GA code since we had the SC charter.

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#2139357 - 07/25/17 12:44 PM Re: State Usury Laws - Charging a Daily Overdraft Fee Monster
John Burnett Offline
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Cape Cod
Go back to that attorney and ask whether the deposit contract has to include a statement that it's subject to SC law. It could default to the law of the place where it's signed (the branch office) rather than the place of the bank's legal domicile.
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