We are aware of a recent increase in litigation surrounding overdraft disclosures and practices in the consumer financial industry, including credit unions. We are making resources available for credit unions to assist them with compliance and help manage their risk surrounding this litigation.
A handful of law firms have been actively seeking class action plaintiffs regarding credit union overdraft practices and disclosures through the use of websites and social media campaigns. Credit unions have responsible overdraft programs – they are often coupled with free financial education and counseling services to ensure credit unions members are informed of the benefits and uses of overdraft products. Credit unions also understand the importance of Regulation E, both for the protection of consumers and to establish safe harbors for the credit union industry.
In the past two years, litigation surrounding overdraft practices has been initiated against credit unions in at least 18 states. Some of this litigation may represent legitimate complaints, but other cases have been dismissed by court order. Of note, some of these cases ask the court to find that use of Regulation E’s model disclosures is insufficient under state unfair and deceptive acts and practices laws. This litigation risk may be why the National Credit Union Administration (NCUA) included overdraft compliance as a supervisory priority for 2018.
While this litigation risk is not new, the level of risk seems to be rising and evolving. For example, some of the most recent lawsuits dispute whether transactions are "one-time" or "recurring" debit card transactions. For example, users of the ride sharing services Uber and Lyft have sued banks claiming improper overdraft fees because these transactions were treated as recurring debits that are not subject to Regulation E's opt in requirements, as opposed to one-time debit card transactions which do require opt-in. This is despite Regulation E's provision allowing financial institutions to rely on how a third-party like a merchant codes a transaction – and allegedly, these transactions were coded as recurring. These cases frequently allege such discrepancies between disclosures, contractual language and credit union practices.
As a result, some credit unions have recently received demand letters plaintiff’s attorneys. Others have even been sued by firms. These kinds of demand letters may note that the firm has litigated cases where consumers were assessed overdraft fees after transactions were resequenced (e.g., a larger transaction is processed first leading to more fees), or fees were assessed despite the account having sufficient funds at the time the transaction was initiated. Demand letters or complaints filed may make several allegations, including but not limited to:
- violations of the EFTA and Regulation E, even where the credit union or bank used the Model Form;
- violations of state consumer laws such as California's Unfair Competition Law, New York's statute addressing deceptive acts and practices, or New Jersey's Consumer Fraud Act; and
- breach of contract due to unclear or ambiguous terminology in account agreements, such as lack of clarity as to how the credit union will determine that there are insufficient funds in the account.
Often, at the heart of the member's claim is that the agreement does not clearly state how the credit union will determine whether an account has sufficient funds. For example, some may use an available balance method, which accounts for pending transactions the credit union is obligated to pay and/or possible debit holds. Other credit unions may use an actual or ledger balance method, which accounts for settled but not pending transactions.
Demand letters may cite to several court cases where either banks or credit unions were unsuccessful in their efforts to have overdraft related lawsuits dismissed. Sometimes, the court denied financial institutions' attempts to dismiss contract law or state consumer law claims, concluding that there are terms that are unclear so further litigation is needed to resolve the issue. Some Regulation E claims have not survived a motion to dismiss because these kinds of claims must be made no more than one year after the violation. Overall, many courts seem willing to agree, at least as a preliminary matter, that an opt-in disclosure and/or account agreement was ambiguous as to how the financial institution would determine that an account had insufficient funds and as a result, assess overdraft or insufficient funds fees for various transactions. While plaintiffs have won many of these suits, and many others have settled out of court, there are relevant cases that are not cited in the demand letters. If your credit union has received a demand letter, please consider letting us know, as we are tracking activity in this area.
NAFCU is monitoring the litigation in this area. Where appropriate, NAFCU has filed as amicus curiae to defend the use of Regulation E’s model forms and to clarify the meaning and purpose of federal regulatory language.
For credit unions currently reviewing their overdraft disclosures and requirements for accuracy and compliance, NAFCU has the below resources available:
- NAFCU June 2018 Compliance Monitor Article: When Members Have Insufficient Funds -- Overdraft Requirements and Increasing Litigation Risks
- NAFCU February 2018 Compliance Monitor Article: NCUA Supervisory Priorities for 2018
- NAFCU Compliance Blog Post: Special Edition – Overdraft Litigation Risk
- NAFCU Compliance Blog Post: Overdrafts Still on the Radar
- NAFCU Compliance Blog Post: Overdraft and Bounce Protection Programs – Some Frequently Asked Questions
- NAFCU Compliance Blog Post: Regulation E Lesser Known ODP and Compulsory Use Provisions