Does My Credit Union Properly Explain Its Overdraft Policy?  What State Laws Are Preempted? And What The Heck Do These Two Questions Have To Do With Each Other?  

May 21, 2020 at 11:13 am 1 comment

These are two of the most important questions with which credit unions have to grapple.  Preemption has come to the fore as federal credit unions weigh how to respond to state level laws and regulations on issues ranging from fee waivers to mortgage forbearance.  Meanwhile, one of the most common class action lawsuits over the last four years involves variations on the claim that credit unions and banks are not properly disclosing their overdraft practices.

As luck would have it, there is another recent decision  which gives me an opportunity to provide guidance on both of these issues.  As painful as it is to me to admit, you have better things to do than read my blog all day.  I will talk about the overdraft issue today and the preemption issue tomorrow.

As readers of this blog know, in order to charge overdraft fees on debit card transactions you must first get a member to affirmatively opt-in to receiving the service and properly disclose the conditions triggering an overdraft charge.  In a nutshell some credit unions determine whether an account is overdrawn based on the amount of money in the account at the time the transaction is authorized by the member while others determine whether an account is overdrawn at the time the transaction is settled.

Plaintiff attorneys have scrutinized account agreements and brought lawsuits claiming that financial institutions are either mischaracterizing how they determine when an account is overdrawn or engaging in unfair and deceptive practices because of these vaguely written disclosures.

In refusing to dismiss the most recent case, the court explained that a jury could conclude the credit union’s account agreement is too vague.  Specifically the court noted that:

The Contract does not use the terms “authorization” or “settlement” to help explain when an overdraft fee can be imposed, it does not link the concepts of authorization or settlement to the mechanics of when an overdraft fee is assessed, and it does not provide examples showing how a consumer could incur an overdraft fee at the time of settlement.

One of the few good things about all of this litigation is that we are now getting pretty good guidance as to what constitutes acceptable language.  Your assignment for today is to take a look at the decision of Chambers v. Nassau Federal Credit Union (U.S.D.C. September 21, 2016).  This is perhaps the leading example of how financial institutions should properly disclose their overdraft policies.  If your credit union’s policy does not comport to this language, give your attorney a call.

One more point which has nothing to do with this specific case…  I know everyone is looking to save money and cut costs, but many credit unions are too large not to use a third party to prepare, scrutinize and update your account agreements.  Your agreements are sophisticated contracts that deal with an increasingly sophisticated and varied range of laws and services.  Your members might be the nicest people in the world, but there are people out there who make a living out of spotting mistakes in your agreements and making your credit union pay the price.

Entry filed under: Compliance, Legal Watch, Regulatory. 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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