Don’t Overlook Your Overdraft Practices

September 23, 2020 at 9:23 am Leave a comment

As many credit unions across the country are painfully aware, class action lawsuits alleging improper disclosures of overdraft opt-in programs are all the rage. A 50-page consent order the CFPB entered into with TD Bank provides yet another example of how financial institutions can run afoul of this seemingly straightforward regulatory requirement. When it comes to enticing members to opt in to ATM protection programs, it’s not just what you disclose, but when you disclose it that matters. 

Under 1005.17 (b), a financial institution cannot charge a fee for paying an ATM or one-time debit transaction pursuant to an overdraft service unless it first provides the consumer with a written notice of the option (which can be provided electronically to consumers that consent to being notified this way) and it gives the consumer a reasonable opportunity to consent or opt-in to the service. 

TD Bank had a fairly typical overdraft program. When new members applied to open accounts, they would be given three overdraft options for their checking accounts. One, a standard overdraft option which covered transactions not protected under 12 CFR 1005.17 (b), such as checks, ACH transactions and recurring debit card transactions; two, the option to cover ATM transactions covered by regulations; and a third option – to decline all overdraft protections. 

To me, the most intriguing defect cited by the CFPB is the fact that consumers would be asked about the program they wanted to utilize without first being given a written notice of the opt-in option. Instead, the employee opening the account would print out a form reflecting the member’s choice, along with the written opt-in notice. The CFPB concluded that this did not constitute compliance with the requirements, under which members must be provided the notice prior to being asked whether or not they wanted to opt-in to overdraft protections. 

This is the kind of nuanced distinction which can easily be overlooked. Now that the CFPB has provided a road map for regulators and litigators alike, I think it is worth your time to double check your credit union’s practices against this order. Remember, the CFPB considers regulatory actions as binding precedents when it comes to the interpretation of the regulations it oversees.

Entry filed under: Compliance, 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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