Special Edition – Overdraft Litigation Risk
Written by Brandy Bruyere, Vice President of Regulatory Compliance, NAFCU
We do not typically blog on Tuesdays, but after hearing from several credit unions, we wanted to share some information on overdraft rules and provide an update on litigation risk in this area. While these kinds of lawsuits are not new, a couple of law firms have set up a website specifically aimed at credit union members who have been charged overdraft or insufficient funds fees on their accounts. There is a reportedly a coinciding social media marketing campaign to source potential plaintiffs as well, using ads on Facebook and similar. These ads encourage consumers to contact the firm to discuss, with an aim towards filing class action lawsuits.
It is worth reviewing what Regulation E requires. Section 1005.17 sets forth federal regulatory for "overdraft services," meaning "…assess[ing] a fee or charge on a consumer's account…for paying a transaction (including a check or other item) when the consumer has insufficient or unavailable funds in the account." The term does not include overdraft lines of credit or services that transfer funds from another one of the consumer's accounts. Section 1005.17(b) prohibits a credit union from assessing a fee "for paying an ATM or one-time debit card transaction" unless the credit union provides: a written notice describing the credit union's overdraft service; a reasonable opportunity for the member to affirmatively consent or opt-in, and provides the member with confirmation of consent in writing along with a statement regarding the right to revoke consent.
Section 1005.17(d) details the content requirements for the notice, with Model Form A-9 included, which the commentary clarifies that a credit union can tailor, including deleting inapplicable words or portions or making additions that reflect services offered.
One firm named on the website aimed at credit union members as potential plaintiffs has sent demand letters to credit unions in multiple states. The demand letters tend to name a member of the credit union who would represent a proposed class of members who have allegedly been improperly assessed overdraft fees when their accounts held enough funds to cover the transactions. The letter may also claim that the credit union's account agreement is vague. The letters also generally cite to several federal district court cases that were found in plaintiffs' favor. However, not all courts have reached the same conclusion. For example, a district court in Georgia dismissed a case against a credit union in 2017. While the plaintiff appealed that case, it is pending before the Eleventh Circuit Court of Appeals and NAFCU joined an amicus brief in support of the credit union. Overall, many of the lawsuits in this area focus on whether the account agreement was specific enough, and may also be rooted in state consumer protection laws depending on the situation.
If your credit union has received such a demand letter, it is important to meet notice requirements in applicable insurance policies. It may also be helpful to reach out to the credit union's counsel. Also, if you have recently received a demand letter on overdrafts, please email me at firstname.lastname@example.org as this will help us track this important issue.