Overdraft fees continue to be a sore spot for consumers, and plaintiff attorneys continue to respond by pursuing class action lawsuits relating to these fees.
Most credit unions weren’t affected by the wave of lawsuits against institutions that sequenced transactions to produce the greatest number of fees—that wasn’t widely practiced in our industry.
But credit unions could be swept up in a new potential wave of overdraft-related suits. The litigation targets institutions that base fees on “available” instead of “actual” balances without clearly disclosing how this works.
In contrast to the transaction sequencing risk exposure, the available/actual balance suits may affect the majority of your members.
Uninsurable damages to a credit union from such litigation could easily run into the millions of dollars.
Lawsuits have alleged that financial institutions improperly charged fees based on available balances rather than on actual balances.
For example, check holds and debit card authorizations cause delays that can trigger an overdraft fee even when the member’s actual balance hasn’t gone negative.
In assessing these fees, the lawsuits contend, a financial institution has breached the account agreement because it either misstates when it charges overdraft fees or fails to disclose how fees are calculated.
Another allegation is that a financial institution has misled members as to when fees will be charged by failing to clearly define “available balance,” or by failing to disclose the available balance to members prior to the transactions.
The loss exposure from these suits is serious because the loss isn’t insurable if the overdraft fees are found to be improper or unlawful.
Also, financial institutions may have to devote considerable resources to calculating how many fees were improperly assessed. They may have to determine, for example, whether some fees were caused by the cascading effect of an initial overdraft fee that was assessed based on an available balance.
Currently, no regulation specifically governs whether to assess fees on the available balance or the actual balance. So, the key to mitigating your risk will be making sure that your contract language is accurate and understandable.
Take these steps to make this happen:
• Understand how fees are being calculated and confirm that your contracts (e.g., account agreements), along with additional material (e.g., written policies and procedures) accurately describe your practices.
This may require an explanation of debit hold authorizations and available balance. Consider providing examples of these calculations in your materials.
• Ensure that your materials explain how transactions clear the account, and whether transactions are sequenced in a particular order.
In general, avoid any sequencing of transaction amounts from high to low.
• Verify that your practices accurately follow your disclosures.
• Make sure, if fees are calculated on available balance, that you provide members the available balance information whenever balances are disclosed (via online and mobile banking, audio response, ATM, etc.).
• Verify that members have given you affirmative consent to charge overdraft fees as required by the opt-in rules of Regulation E.
It’s critical to work with an attorney experienced in these matters to craft your disclosure language, and any written materials about these fees that appear on your website or promotional materials.