How Safe Are You From Overdraft Lawsuits?

October 3, 2017 at 10:10 am 1 comment

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Just because you use a model form when asking members if they want to opt-in to overdraft protections, don’t assume that your credit union is safe from being sued over the adequacy of these disclosures. That is my takeaway from the latest case I have seen. It joins a growing body of litigation in which members are being allowed to sue credit unions for providing inadequate account balance disclosures which lead to unnecessary overdraft fees.

First some background, with apologies to those of you who already know most of this. There are two basic methods for calculating account balances: the actual or ledger balance method refers to all money currently in a member’s account. In contrast, the available balance method refers only to those funds actually available for use by the member. A second key point to keep in mind is that 12 CFR 1005.17 stipulates that opt-in disclosures for overdraft protections shall be “substantially similar” to model form A9. My guess is, this is the form your credit union uses. The Electronic Funds Transfer Act shields credit unions from liability for any failure to make disclosures improper form provided that the model form is used.

The most recent example I have seen involving this type of litigation is Gunter v. United Federal Credit Union (Dist. Ct. Nevada 2017). In this case, a member wanted to bring a class action lawsuit against the credit union on behalf of persons who were charged an overdraft fee even though the member’s actual balance was equal to or greater than the transaction causing the overdraft. Gunter also wanted to sue on behalf of members who opted into the credit union’s program and were charged an overdraft fee, contending that the overdraft disclosure provided did not describe the credit union’s balance procedures properly.

The credit union argued that since it used the appropriate model form, it was shielded from the member’s lawsuit. It argued that if it included language different from that provided in the model form, it ran the risk of losing its safe harbor against precisely these types of lawsuits. The language, the member argued, should have been included in the disclosure, would have meant that the form used by the credit union would no longer be substantially similar to the form mandated by the regulators.

But the court disagreed. Its logic should send a shiver down the spine of any compliance officer relaxing in their safe harbor. “United could have explained that it authorizes overdrafts based on available balance rather than actual balance without violating Regulation E because Regulation E expressly requires financial institutions to describe their overdraft services. Presumably that description must be accurate and not misleading. United implicitly contends that it would have faced liability for including such a description because its opt-in agreement must be “substantially similar” to Model Form A-9, id. § 1005.17(d), but such a description would not destroy substantial similarity. In fact, such a description would further the purpose of the regulation to help consumers understand the overdraft services their financial institutions offer.”

This decision is not binding in New York but if the court’s logic catches hold, model form language could become a breeding ground for future litigation. Personally, I would discuss this case and other similar litigation next time you catch up with the vendor who provides your account disclosures. In the meantime, make sure that you understand what account method your credit union uses and that your disclosures give your members adequate notice of this method.

Entry filed under: Compliance, Legal Watch. Tags: .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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