The NAFCU Journal: Rising Overdraft Litigation Risk

By Brandy Bruyere, NCCO, Vice President of Regulatory Compliance, NAFCU

Over the past year, NAFCU has received many questions about overdraft disclosure requirements. This is in part because it is one of the National Credit Union Administration’s (NCUA) supervisory priorities for 2018, but it’s also due to lawsuits filed against banks and credit unions that claim overdraft or insufficient funds fees were improperly assessed.

First, it is worth reviewing federal requirements. Section 1005.17 of Regulation E sets forth requirements 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.” This does not include overdraft lines of credit or services that transfer funds from another one of the consumer’s accounts. Generally, the rule 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; provides 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. Regulation E contains a Model Form, which a credit union can tailor.

Federal regulations and guidance are not the only considerations when appraising a credit union’s overdraft program. State consumer protection laws and contract law principles can come into play as well, which has led to increased litigation risk over the past few years. Numerous banks have settled class-action lawsuits involving overdraft fees, as have many credit unions. 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. Specifically, 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 that do require opt-in.

Additionally, a law firm has recently been aggressively targeting credit unions, even seeking out credit union plaintiffs using the website While this site has since been taken down, it was active for several weeks and went so far as to even name some of the institutions the firm is specifically targeting. The firm's efforts reportedly also include seeking out potential plaintiffs through advertisements on social media aimed at credit union members. As a result, many credit unions have received demand letters from this firm. Others have even been sued, either by the firm operating the website or other firms litigating in this area.

These kinds of demand letters may note that the firm has litigated cases in which consumers were assessed overdraft fees after transactions were resequenced (e.g., a larger transaction is listed 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 Electronic Funds Transfer Act 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 ambiguous terms 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 claim is that the member’s account agreement does not clearly state how the credit union will determine whether an account has sufficient funds. For example, some credit unions 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.

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. For example, a Georgia credit union won its motion to dismiss an overdraft lawsuit. In this case, the member claimed the account agreement stated the actual balance would be used to determine whether there were enough funds in the account to cover transactions, but the available balance method was used. The court granted the credit union’s motion to dismiss, but the member appealed the case. NAFCU joined an amicus brief in support of the credit union, but that appeal is still pending.

Many credit unions have asked how to tackle this issue. If a credit union has concerns about whether its current practices might present litigation risk, consulting with outside counsel may be helpful for seeking guidance on what kinds of terms courts have found to be ambiguous in the credit union’s operating jurisdiction. Outside counsel may also be able to assist in drafting different language that could help reduce litigation risk or secure a better outcome should the credit union receive a demand letter. Also, credit unions that receive demand letters or are served with a complaint have notice obligations to their insurers, but they can also benefit from discussing repercussions of litigating versus settling with the credit union’s attorney. While litigation risk for overdrafts is increasing, credit unions may benefit from a proactive approach to the issue.

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From the September-October 2018 edition of The NAFCU Journal magazine.