Posts tagged ‘overdraft’

Don’t Overlook Your Overdraft Practices

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.

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

You Should Know About These Cases

ADA Suit Another Victory for Credit Unions

Credit unions got another important legal victory yesterday when the Court of Appeals for the Sixth Circuit held that persons outside of a credit union’s field of membership did not have authority to sue a Michigan credit union for alleged ADA website violations. The decision is the third by a federal circuit appellate court to make such a ruling, further solidifying a defense for all credit unions facing these lawsuits.

I am going to assume that if you read this blog, you know the basic arguments and issues involved. I will only reiterate what I always reiterate when it comes to these ADA cases. Most importantly, if a member from within your field of membership was to bring a lawsuit alleging a website ADA violation, these cases would not offer a defense to the claim. In addition, these cases do not address the ultimate issue, which is whether or not the ADA mandates that websites be accessible to disabled persons.

Beware of Overdraft Cases with a Twist

A few months ago, I highlighted a lawsuit that was filed against a New York credit union that offered a new twist on the ubiquitous overdraft fee litigation that has been brought against credit unions and banks for a few years now. In the more traditional overdraft litigation, the issue is whether or not the financial institution has accurately described the method it will use to determine when there are insufficient funds in an account, triggering an overdraft. This is the difference between a ledger balance and available balance method of determining availability. Either approach is acceptable, but must be properly disclosed.

Many of your members enter into agreements with businesses whereby the businesses are allowed to make ACH withdrawals from their accounts on a monthly basis. While credit unions properly disclose that these payment requests may result in NSF charges, what happens when the business sends out repeated ACH payment requests seeking the same payment? The litigants are arguing that repeated NSF charges for the subsequent transactions are not authorized by the account agreements. Much of this litigation is just starting, but I have read a couple of complaints. Bottom line, this is one you should definitely run by your attorney, especially if your credit union is large enough to be an attractive class action target.

Gillibrand Announces She’s Dropping Out: Did You Know She Dropped In?

New York Senator Kirsten Gillibrand became the latest candidate to announce she was dropping out of the ludicrously overcrowded field of democrats lining up to take on President Trump in 2020. You know your presidential campaign did not get off the ground when most people did not realize you were running until you announced you were ending your campaign.

My Unsolicited Sports Recommendation

It’s been a while since I made a totally unrelated sports comment in my blog, but yesterday the Meier brothers went to Queens to watch third round US Open tennis. I know many of the blog’s readers are sports fans, and this is certainly something I would put on your sports bucket list, even if you are just a mildly interested tennis fan. It’s a great environment, and you can jump in and out of several matches if you go early on in the tournament.

On that note, peace out.

August 29, 2019 at 9:15 am Leave a comment

Overdraft Confusion Continues

It’s not like litigation over overdrafts is new. Nevertheless, litigators, banks and credit unions continue to play a game of legal chicken when it comes to debating just what account agreements mean.

The latest example of this confusion comes courtesy of Navy Federal Credit Union which decided to settle a class action lawsuit brought against them in California alleging that it violated its account agreement. An issue in this case was the following language explaining that “an overdraft occurs when you do not have enough money in your account to cover a transaction but we pay it anyway.”

What’s so confusing about that? Well, in an earlier decision decided by the Court of Appeals for the 2nd Circuit which has jurisdiction over New York – Roberts v. CapitalOne, N.A. 719 Fed. App. !x33 2017 – the court held that plaintiffs could bring a claim for breach of contract as well as deceptive practices under New York law because the language is reasonably susceptible to two different interpretations. As the second circuit explained “it is equally reasonable to understand the term “Overdraft” as referring to Capital One’s election to make a payment, which would occur at the time of authorization (as asserted by Roberts), or as referring to the payment itself, which would occur at the time of settlement (as asserted by Capital One). Because this fundamental definition is “subject to more than one reasonable interpretation,” it is ambiguous.”

I’ve said it before and I’ll say it again there’s been enough legal guidance on this issue to avoid costly litigation or at least put your credit union in a darn good position to win it. Check your agreement if you haven’t done so already and see how it measures up against these and the other cases I have referred to periodically.

New York Not Going To Pot

In yet another example of why it’s a good thing I don’t bet for a living, it appears that New York will not be legalizing recreational marijuana before the end of this session. Although some of its proponents may disagree, Governor Cuomo explained yesterday that right now there are not enough votes in the Senate to get legalization through that Chamber this year. While I’m surprised you’re not going to see movement on it this year, if the Governor is correct, this is good news even if you want to see further legalization take place. It makes absolutely no sense for states to move on further legalization until the federal government gets its act together on this issue.

June 4, 2019 at 9:05 am 1 comment

Account Transaction Fees Under The Microscope in NY and the CFPB

The bill I’m going to talk about today provides you a sense of how much things have changed in the Legislature now that the democrats are in full control of the senate chamber. Yesterday, the Assembly passed A1940 which is cosponsored by Assemblyman Zebrowski and Senator Sanders, both of whom share their respective Chamber’s Banks Committees. If the senate ultimately passes the bill which is currently on the senate floor and it is signed into law, it will require all state chartered banking institutions to provide members with basic banking accounts who are 65 years of age or older with twelve account transactions a month without incurring a fee.

To understand why I find this bill significant we have to take a trip down memory lane. In 1994, the banking industry successfully lobbied the Legislature to remove interest rate caps on most consumer loans. In return for this concession, banks agreed to provide lifeline banking accounts. This requirement is codified in section 14-F of the banking law which mandates that state chartered banks and credit unions offer low cost banking accounts with certain minimum features including a minimum number of eight free consumer transactions from demand deposit accounts. The goal is to minimize the number of ATM transactions for which a fee is charged. Since at least the late 90’s I have seen legislation in the Assembly that would increase the number of consumer transactions. The bill would even pass sometimes in the Assembly but be ignored by the senate. In other words, legislation which has been bouncing around for over two decades is now alive and well. One question which the legislation raises is how exactly institutions are going to be able to identify transactions being made by senior citizens and increase the number of fee free transactions for that specific group.

CFPB Details Plans For Regulatory Review

It wasn’t too long ago, let’s say 2016, that I would have been less than enthusiastic about an announcement by the CFPB that it was laying the ground work for a ten year review of all the regulations it has promulgated. After all, one of the reasons I became increasingly frustrated by the old regime was that it became increasingly obvious that while it said it was committed to an open minded facts driven approach to regulation, the reality was, it had an ideological agenda and simply used research to confirm its own biases but now under new leadership, I have some good news to report.

Under Section 610 of the Regulatory Flexibility Act, the CFPB is required to review its regulations at least once every ten years to assess their impact on “small entities”. This means that the CFPB will be asking for feedback in the coming year on all of those regulations it has promulgated, taking into account the following considerations:

  1. The continued need for the rule;
  2. The nature of public complaints or comments on the rule;
  3. The complexity of the rule;
  4. The extent to which the rule overlaps, duplicates, or conflicts with Federal, state,or other rules; and
  5. The time since the rule was evaluated or the degree to which technology, market conditions, or other factors have changed the relevant market.

The CFPB also announced that the first regulation it will be reviewing under this framework is none other than the debit overdraft transaction regulations amending regulations which were promulgated by the Federal Reserve and took effect in 2009. These are of course the regulations which require credit unions and banks to get a consumer’s affirmative consent before charging for overdraft protection on ATM transactions. Maybe there’s something we can do about the number of lawsuits this regulation has created? On that note, have a good day.

 

 

May 14, 2019 at 8:59 am Leave a comment

Why You Should Read About This Case

You may have seen the news this morning that ESL Credit Union based in Rochester, New York is being sued by a consumer seeking to bring a class-action lawsuit over its returned item practices and disclosures. I just finished reading the complaint and I suggest that all of you credit union lawyers and compliance people do the same. It presents an interesting twist on the type of overdraft claims credit unions and banks have been seeing over the last five years.

My faithful blog readers are probably sick and tired of my increasingly large volumes of posts talking about lawsuits alleging that a credit union misrepresents how it determines how much money is available in an account before charging an overdraft fee for paying a check. This is not one of those cases. In Susan Roy v. ESL Federal Credit Union the plaintiff is claiming that ESL both violates its account agreement and commits an unfair and deceptive practice by failing to clearly differentiate between overdraft fees and returned item fees. In addition, the consumers allege that the credit union lacked the authority to repeatedly seek to process payments returned because of insufficient funds.

In the factual scenario highlighted in the complaint, the member Ms. Roy, attempted a $34 transfer to PayPal using an ACH transaction. The payment was rejected for insufficient funds and the credit union charged a $37 returned item fee. On two other occasions, ESL tried to process the same transaction and each time it was rejected an additional $37 fee was charged. In all, the plaintiff was charged $111.

The allegations center on the proper interpretation of ESL’s account agreement. On the one hand, ESL’s fee schedule does say it will charge $10 for returned items. On the other hand a separate section of the same agreement explains that overdraft/insufficient funds fees will be charged at a rate of $37. The plaintiffs allege that ESL’s account documents are too ambiguous and that they should be interpreted in the manner most favorable to the consumer. They also allege that ESL had no authority to charge multiple fees stemming from the same transaction.

There are arguments to be made against every one of these allegations. I’m not suggesting that ESL did anything wrong. Right now the lawsuit is nothing more than a single complaint. The reason why I’m highlighting this case is because you would be well advised to make sure someone in your credit union reads the complaint and compares its allegations to your own credit union practices. These cases really happen in isolation and account language doesn’t vary all that much between financial institutions.

 

March 15, 2019 at 9:34 am 1 comment

Why A CFPB Overdraft Settlement Is Good News For Credit Unions

Image result for cfpbLast week the CFPB settled a lawsuit brought against TCF National Bank in 2017 alleging that the bank used high pressure and deceptive sales practices to get new customers to opt-in to overdraft protection when opening new accounts.

Even with the new, friendlier CFPB, these settlements should be scrutinized by compliance people to make sure that your credit union is not engaging in similar practices. Still, the settlement says as much about the radically different approach the CFPB is taking to enforcement actions as it does about properly implementing your debit card overdraft opt-in procedures.

As I’m sure almost everyone reading this blog knows, financial institutions must obtain a consumer’s consent before charging them overdraft fees on debit card purchases and ATM withdrawals. The old CFPB was constantly looking for ways to expand and strengthen these protections.

This lawsuit reflected this aggressive approach. At the core of the CFPB’s complaint was its assertion that members were deceived into believing that they had to agree to overdraft protection in order to open new accounts. For instance, the bank refined its overdraft pitch to ask members for their consent to overdrafts only after they were given a list of conditions to which they had to agree in order to open up an account. As explained by one bank employee in the CFPB’s initial complaint:

“Most of the Account Agreement is things they need to sign to continue the account opening process. We created an environment for them in which they trusted us and that we were friendly enough and that we were already pointing and initial or signing. At this point it is a different part of the Account Agreement process in which they don’t have to sign for this account to stay open for them. I think because I was reading a script to them and they had a trust in me they would just assume that if I wanted them to initial, it was something they had to do.”

The bank’s sin in the eyes of the CFPB was compounded by the fact that employees were given incentives to meet overdraft opt-in goals. The result was that 77% of consumers opted-in to overdraft protections.

This is classic Cordray style enforcement. While the bank complied with the letter of the law, the CFPB used its UDAP powers to claim that the bank was nonetheless acting illegally by aggressively pitching overdraft protections. It was precisely this kind of open-ended legal assault that drove so many of us nuts.

Under the settlement agreed to last week with the 2018 model CFPB, the bank stipulates that it does not and will not require its employees to generate a specific number of opt-ins or penalize them for failing to reach overdraft goals. It also agreed to pay $25 million in restitution to impacted consumers and a $5 million civil penalty. But the settlement is also note-worthy for how much less prescriptive it is than previous CFPB settlements. It includes a single paragraph in which TCF, its employees and agents stipulate that they may not violate federal statutes outlawing deceptive and abusive practices.

Gone are the days, at least for now, where the settlement includes a long list of compliance changes that TCF would’ve had to make to fix their overdraft opt-in procedures. This is good news for those of us who believe that companies should be held accountable for violations of the law as it is written as opposed to violations based on how regulators believe it should be interpreted.

 

July 26, 2018 at 8:52 am Leave a comment

Overdrafts Continue To Trip Up Financial Institutions

Overdraft litigation is alive and well. Recently, the United States District Court of New Hampshire refused to dismiss a punitive class action brought against Northeast Credit Union involving claims that the credit union did not adequately disclose the way in which it determines how much money is available in a member’s account. As a result, the member claims that persons are made liable for overdraft charges to which the credit union is not entitled. This litigation is by no means unique to credit unions but it does represent an ongoing problem that can be mitigated if the appropriate disclosures are in place.

The facts in Walbridge v. Northeast Credit Union, No. 17-cv-434-JD, 2018 BL 77521 (D.N.H. Mar. 07, 2018) are fairly typical. Walbridge alleges that on March 15, 2016, he had an actual balance in his Northeast checking account [*2] of $111.09. He made a debit card payment of $32.43, which left a balance of $78.66. Northeast, however, determined that he had insufficient funds and charged an overdraft fee of $32.00. Northeast then assessed additional overdraft fees of $32.00 on March 29 and March 30, 2016. Walbridge contends that the overdraft fees were improper.

As I explained in this earlier blog, there are two basic methods for calculating fund availability in accounts. The actual or ledger balance method refers to all money currently in a member’s account or the available method which refers only to those funds actually available for use by the member minus pending debits. Almost all these cases argue that the actual balance method is deceptive or not adequately disclosed by the financial institution since it makes a member think that they have more money available for debit transactions than they actually do.

But remember, no court has argued that one method is legal and another method is not. What is getting credit unions in trouble is that they fail to adequately disclose how their accounts are calculated. For instance, contrast this case with a ruling by a Federal court in DC which rejected claims that NASA Federal Credit Union’s Account Disclosure Statements were ambiguous.

The bottom line is this: Courts have come to differing conclusions based on very similar language. However, one commonality is that the more accurately and plainly you can describe your balance calculation method, the safer you will be. Given the continuing presence of this litigation, I would once again take a look at your disclosures and make sure they accurately describe the method your credit union uses and puts your member on notice when overdrafts are charged.

There’s Big Money In Credit Freezes

This just doesn’t seem right to me. Krebs on Security reported last week that nearly 20% of Americans froze their credit after the Equifax data breach at a collective cost of $1.4 billion to the consumer. That’s right, Equifax made more than a billion dollars off of a breach of its systems. Interestingly, Krebs also reported that the younger you are, the more likely you were to freeze your credit. 32% of millennials, 16% of GenExers, and 12% of baby boomers froze their credit. I would have reversed these numbers.

March 26, 2018 at 9:20 am 1 comment

Overdraft Overkill: The CFPB Gets Ready To Strike Again

Those tricky little devils at the CFPB are at it again. Last week they unveiled prototypes for updated disclosures informing consumers of the right to opt out of overdraft protections for ATM and debit transactions. These aren’t binding but proposed regulations probably aren’t far away.

This is a perfect example of a remedy in search of an illness. The only institution of which I am aware that really thinks the existing opt-out notices need to be updated is the CFPB which has been charged by Congress with investigating overdraft practices.

I’ve always been paranoid when it comes to the CFPB’s overdraft analysis. We have to allow for the possibility that the ultimate goal of the Bureau is to require the affirmative consent of consumers before extending any overdraft protections to them at all.

Call me paranoid but I don’t think these prototypes are much of an improvement over the existing forms in the appendix to Regulation E, unless your goal is to conflate ATM overdraft protection with more general overdraft protections.

The prototypes were released in conjunction with the Bureau’s annual analysis of overdraft activity. The report reveals what it always does, which is that a relatively small group of users disproportionately use overdraft services.

If you have faith in the aggregate commonsense of the American public, this demonstrates that some people choose to use overdrafts because they like to know that their mortgage is going to be paid or that they won’t be embarrassed when they go to pay at Starbucks. To others, this is another example of a predatory financial system taking advantage of a vulnerable population.  After all, if the average financial consumer was as smart as the people running the CFPB, they would never avail themselves of overdraft protections.

 

 

 

August 8, 2017 at 9:53 am Leave a comment

King Richard Strikes Again!

King Richard is at it again.

In the latest example of the almost  dictatorial powers he exercises over virtually every consumer product in the country, CFPB Director  Richard Cordray  yesterday took to browbeating banks and credit unions by strongly encouraging them to offer cheaper account options that don’t include overdraft protections and admonishing them to do a better job reporting information to the credit bureaus. His performance demonstrates why Congress has to work with the next president to vest the Director’s powers in the hands of an appointed board.

In a letter to the CEOS of the nation’s largest banks the Director made the case for low-cost accounts:

“Right now, much of the industry presents consumers with a binary result – either an applicant passes a standard screening process to obtain an account after identifying any credit risks posed by the applicant’s history of misuse or mishandling of some prior account, or the applicant is blocked from accessing the banking system altogether. There is, however, a third possibility, which is to offer all applicants a lower-risk account (whether a checking account or a prepaid account) whereby the applicant cannot pose the same level of risk to the institution. Accordingly, the same applicant need not be screened out of the banking system by applying the same risk thresholds that are used to determine eligibility for a standard checking account.”

(Incidentally low-cost accounts have been around in New York since 1994 when the legislature passed a law requiring banks and credit unions to offer low-cost accounts. Today consumers meeting certain conditions are entitled to accounts with at least eight fee free transactions a  month.  N.Y. Banking Law § 14-f ;  3 NYCRR 9.7).  it’s not clear to me what exactly New York institutions should be doing that they are not doing already.)

In his speech he  combined this heartfelt appeal for cheaper accounts   with a warning that “Through our supervisory work, we have found that some of the largest banks lack the appropriate systems and procedures to furnish accurate information on millions of accounts”  As a result, the bureau issued  a bulletin warning banks and credit unions that they must meet their legal obligation to have appropriate systems in place with respect to accuracy when they report information, such as negative account histories, to the consumer reporting companies. More effort and rigor are needed to make sure  that the risks consumers actually pose to potential financial providers can be evaluated correctly.”

Why do I think the CFPB went too far yesterday? It prides itself on being a data driven organization. But  I find it incredibly hard to believe that the financial industry writ large is systemically ignoring the Fair Credit Reporting Act.  I find it even harder to believe that this systemic indifference is so pervasive that it  is a root cause for  why there are so many unbanked consumers  in this country.

It also prides itself on being heavily influenced by advocates of behavior economics such as Cass Sunstein the author of Nudge.  But  The CFPB is no  longer nudging; it is telling institutions what products they should offer and why.  It is becoming increasingly clear that the  Bureau  is driven only by the data that leads it in  the direction it wants to go.

At its core , there is a lack of understanding that banking is like any other business.  It costs money to safely hold people’s money and those costs have to be accounted for.

http://www.consumerfinance.gov/newsroom/prepared-remarks-of-cfpb-director-richard-cordray-at-a-field-hearing-on-checking-account-access/

 

 

 

February 4, 2016 at 9:32 am Leave a comment

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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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