By Yuka Hayashi 

WASHINGTON -- The federal consumer finance watchdog expanded its crackdown on overdraft fees, suing a Minnesota-based bank Thursday for allegedly luring customers into costly penalties by using illegal marketing practices.

The lawsuit against TCF National Bank is part of a broader campaign by the Consumer Financial Protection Bureau against overdraft fees, a significant source of revenue for many banks and credit unions and a drain on consumers, particularly those who live paycheck to paycheck.

By announcing the suit one day before President-elect Donald Trump takes office, the controversial agency -- a creation of the Obama administration after the financial crisis -- also signaled its intention to continue its aggressive law enforcement practices, even as Republicans hope to curb its powers under the new administration.

The CFPB has been in a rush to bring enforcement actions since December, a move, according to experts, that reflects its desire to cram in as much work as possible before the new Republican administration comes in with an agenda to rein in the agency. On Wednesday, it sued Navient Corp. , a student loan servicing giant, for allegedly obstructing borrowers' repayments.

Both Navient and TCF issued strongly worded statements objecting to the CFPB actions, indicating they hope for a more favorable treatment under the new administration.

In recent years, federal regulators have pushed banks to rein in overdraft services, which can be a convenient tool for many, but imposes disproportionately heavy burdens on lower-income consumers who overdraft frequently. A Federal Reserve rule that took effect in 2010 prohibited banks from charging overdraft fees for ATM withdrawals or most debit card transactions unless the consumer has signed up for such services ahead of time. The CFPB is in an early stage of writing a regulation to make it even harder to charge overdraft fees, to banks' dismay.

At TCF, "hundreds of thousands" of customers used overdraft services, the CFPB said.

The CFPB alleges that TCF designed its account application process to obscure fees and make overdraft seem mandatory for new customers to open accounts despite federal rules requiring banks to receive customer consent before enrolling them into such programs. Like many other banks, TCF charges about $35 in an overdraft fee every time it makes a payment to cover the transaction when the customer's account lacks sufficient funds.

TCF said in a statement it rejects the CFPB's claims. "We believe we have strong, principled defenses to the CFPB's complaint," the bank said, accusing the agency for relying on unrepresentative data and mischaracterizing its practices.

The CFPB's complaint depicted far-reaching marketing efforts at TCF encouraged by senior managers to steer customers into overdraft programs, similar to the CFPB's allegations last year against sales practices at Wells Fargo & Co. TCF's strategy included bonuses paid to branch staff for getting a high number of customers to opt in for overdraft services, with some managers imposing opt-in goals for branch employees.

The CFPB alleged that TCF's strategy was so successful that by mid-2014, two in three customers of the bank had opted in to overdraft services, a rate more than triple that of other banks, the CFPB said. Bill Cooper, a longtime chief executive who has become chairman in 2015, even named his boat the "Overdraft" and senior executives had parties to celebrate reaching milestones in getting customers to opt in, the agency said.

"By linking opt-in rates with an employee's performance goals instead of consumer preference, the bank instituted a culture of pushing consumers into overdraft services," CFPB director Richard Cordray said on a call with reporters.

Mr. Cordray said TCF also adopted a loose definition of "consent" to opt in existing customers and pushed back on consumers who challenged opting in.

Mr. Cordray attributed the bank's tactics to its hefty reliance on revenues from overdraft fees in the absence of strong operations in other products and services such as mortgages and credit cards.

The lawsuit, filed with the U.S. District Court for the Middle District of Pennsylvania, seeks redress to consumers, injunctive relief to stop unlawful practices, and civil money penalties as deemed appropriate, the CFPB said.

TCF National Bank, based in Wayzata, Minn., operates 360 retail branches in seven states mostly in Midwest.

Write to Yuka Hayashi at yuka.hayashi@wsj.com

(END) Dow Jones Newswires

January 19, 2017 17:25 ET (22:25 GMT)

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