Central State Bank is the subject of a class action lawsuit over the fees charged to its customers. (Photo via Google Earth)
A second Iowa-based bank is being sued over the fees charged to its customers.
Late last year, Bankers Trust, headquartered in Des Moines, was hit with a class action lawsuit over a controversial set of fees charged to its customers.
This week, Central State Bank, headquartered in Coralville, was sued over its alleged practice of imposing multiple overdraft fees on single transactions. Attorneys for the plaintiff allege Central State Bank has used such fees to generate “substantial revenue, to the tune of tens of millions of dollars,” while seeking to “turn its customers’ financial struggles into revenue.”
Central State Bank has yet to file a response to the lawsuit, and company officials there were not available for comment Friday. The bank has locations in Coralville, Cedar Rapids, Elkader, Marquette, Swisher and Walford, and has assets of more than $470 million.
The lawsuit has been filed on behalf of a single customer, David Gray of Clayton County, but is seeking class-action status on behalf of hundreds of customers. Attorneys for the plaintiff say the case involves more than $5 million in potential damages.
In court filings, attorneys for the plaintiff note that in 2021, the largest financial institutions in America charged customers almost $11 billion in overdraft fees. Customers who carried an average balance of less than $350 paid 84% of those fees.
More recently, financial institutions such as Bank of America, Capital One, Wells Fargo and Alliant have announced plans to phase out such fees, which are sometimes called nonsufficient-funds, or NSF, fees. Those fees are imposed when purchases are made and the customer’s account balance can’t cover the expense.
According to the lawsuit, Central State Bank imposes a $32 “overdraft item charge” on transactions even when there is enough money in the customer’s account to cover the expense. The bank is also accused of unlawfully maximizing “its already profitable fees” through a “deceptive and contractually prohibited practice” of charging multiple nonsufficient-funds fees and overdraft fees on a single transaction.
Unbeknownst to consumers, when Central State Bank reprocesses a check for payment after it was initially rejected for insufficient funds, the bank “chooses to treat it as a new and unique item that is subject to yet another fee,” the lawsuit claims.
The reprocessing allegedly occurs when a store or vendor for whom the payment was intended resubmits a claim for payment after it was rejected for nonsufficient funds. Because claims for payment can be resubmitted and then reprocessed without any involvement by the account holder, consumers have no control over the process.
On the issue of disclosure, the lawsuit claims Central State Bank’s contract with customers allows the bank to either reject a transaction when there are nonsufficient funds in an account or simply pay the vendor while charging the bank’s customer a $32 overdraft fee in either instance.
In actual practice, the lawsuit claims, Central State Bank “regularly assesses two or more $32 or $30 fees on an item,” in violation of the contract. In this manner, one transaction can allegedly lead to $96 in fees.
Gray alleges, for example, that on March 20, 2023, he attempted to make two separate payments, each for more than $300, by check. Central State Bank rejected both transactions due to nonsufficient funds in Gray’s account and charged him two overdraft fees of $30 each. Two days later, the bank allegedly tried to process the two transactions again, rejected them again, and charged two more overdraft fees of $30 each.
In addition to seeking class action status for their case, attorneys for Gray are seeking damages for breach of contract and are asking the court to order the bank to discontinue the use of such fees. Gray is represented by the West Des Moines law firm of Shindler, Anderson, Goplerud & Reese.
Bankers Trust also sued over fees
Last December, a federal lawsuit was filed against Bankers Trust, alleging that its practice of charging overdraft fees on debit-card transactions authorized by the bank itself was barred by banking regulations.
That lawsuit centers on the bank’s use of fees applied to so-called “Authorize Positive, Settle Negative” transactions, or APSN transactions.
The practice works this way, according to the lawsuit: The moment a purchase is made from a merchant using a debit card, the bank immediately reduces the customer’s checking account balance by the amount of that purchase. The bank also sets aside the full dollar amount of the purchase, holding that money in reserve for the merchant.
However, the bank will then impose a $33 overdraft fee on the transaction if, days later when the bank forwards the reserved funds to the merchant, the customer’s funds are depleted and the account shows a negative balance.
Essentially, the fee isn’t applied only to the transactions for which there are no funds; it’s also imposed on transactions for which the bank is actually holding a customer’s cash in reserve to ensure payment.
Bankers Trust, which is Iowa’s largest privately held community bank, has responded to the lawsuit by arguing that its customer contracts permit the collection of such fees.
1n 2022, the federal government’s Consumer Financial Protection Bureau fined Regions Bank $191 million, finding that it “acted unfairly and abusively” in violation of the Consumer Financial Protection Act of 2010 by assessing “surprise fees” that were not disclosed in customer contracts.
Also in 2022, the Federal Deposit Insurance Corporation determined that one bank’s practice of assessing more than one fee on the same transaction was a “deceptive and unfair act,” and called for such practices to be halted entirely.
In 2023, the Consumer Financial Protection Bureau criticized banks’ imposition of multiple fees on single transactions when it stated that “institutions engaged in unfair acts or practices by charging consumers multiple NSF fees” and that the practice “caused substantial monetary harm to consumers totaling millions of dollars.”