Overdraft - NSF fee litigation

Consider including binding arbitration language with a class action waiver to the member account agreement. Such language can be used to prevent these situations from becoming class action lawsuits. The “class action waiver” should also be added to the governing law section of the member account agreement. Work with legal counsel to develop this language so that it is enforceable and so that it does not impair your ability to initiate collection activity of amounts owed to the credit union through the court system.

If you assess overdraft/NSF fees based on the available balance rather than the actual (ledger) balance, ensure your member account agreement clearly describes the balance calculation method along with examples of transactions that impact the available balance (e.g., check holds and preauthorization holds) and that overdraft/NSF fees are calculated on the available balance.

In describing debit card preauthorization holds, some account agreements fail to disclose the impact an intervening debit (e.g., an ATM withdrawal or check clearing the account) has on the available balance and that an overdraft fee could be assessed when the debit card transaction posts to the account taking it negative.

Ensure the member account agreement discloses the mechanics of a signature-based debit card transaction. When describing debit card preauthorization holds, the account agreement should clearly explain how an intervening debit impacts the available balance and that an overdraft fee could be assessed when the debit card transaction posts to the account taking it negative.

If you charge an NSF fee on resubmitted transactions that you previously returned, ensure your member account agreement and fee schedule clearly discloses multiple NSF fees may be charged on the same transactions. When referring to NSF fees in the member account agreement and fee schedule for items presented for payment to the credit union, avoid using terms such as NSF fees will be assessed “per item,” “per transaction,” or “for each transaction.” Instead use a more descriptive term such as “per presentment,” “per submission,” “for each presentment,” or “for each time a check, ACH or debit transfer [and any other type of item] is presented or payment is otherwise requested.” The terms may need to be modified depending on your processes and terminology used.

Credit unions using Reg E’s Model A-9 opt-in form should revise it to address the available balance method for calculating overdraft fees. This can be accomplished by incorporating the terms of the account agreement by reference, which describes the available balance method for calculating overdrafts, into the opt-in form. Consider using the following language:

An overdraft occurs when you do not have enough money in your account to cover a transaction, but we pay it anyway. Please refer to [the Account Agreement] for a more thorough explanation of factors that determine when an overdraft occurs and when you may incur a fee for overdrawing your account. The terms of [the Account Agreement] are incorporated herein, and both this document and [the Account Agreement] are meant to be interpreted together.

LOANLINER^® has updated the Overdraft Services Consent form (opt-in form) to include risk mitigating language.

Some credit unions have changed their overdraft privilege/courtesy pay programs by switching from a fixed overdraft limit that applies to all members to a dynamic limit which can vary from member to member.

Dynamic overdraft limits are calculated based on several data points, such as length of membership, average daily balance, and specific deposit activity to name a few. The automated feature in calculating dynamic overdraft limits means a member’s limit could change from day-to-day and it could even be reduced to $0 (no limit) if the eligibility criteria are no longer met.

The Federal Deposit Insurance Corporation (FDIC) Consumer Compliance Supervisory Highlights addresses the risks associated with dynamic overdraft limits. FDIC examiners identified several financial institutions that converted their overdraft privilege/courtesy pay programs from a fixed overdraft limit to a dynamic limit. The examiners expressed concern with how the conversions were implemented and cited potential UDAP violations under Section 5 of the FTC Act. Examiners found that financial institutions engaged in deceptive acts or practices by failing to disclose sufficient information about the change from a fixed overdraft limit to a dynamic limit. Some institutions did not provide any information to their customers about the change.

Specifically, the FDIC stated institutions failed to disclose key changes such as:

• Replacing the fixed overdraft limit with a dynamic limit that may change as frequently as daily.
• Use of a new dynamic overdraft limit that may be, at times, lower or higher than the fixed limit to which customers had become accustomed.
• Suspension of the overdraft limit when it falls to $0 and how such a change may result in transactions being returned unpaid due to insufficient funds.

The FDIC recommends:

• Providing clear and conspicuous information to existing customers so they have advance notice of how the change from a fixed overdraft limit to a dynamic limit will affect them.
• Clearly disclosing that a customer’s dynamic overdraft limit is established based on a number of variables, how the limit may change (including the frequency of change), and that the limit may be suspended or reduced to $0 when eligibility criteria are no longer met.
• Notifying customers of changes to their dynamic overdraft limit in real time, so they have an opportunity to adjust their spending behavior to avoid overdraft/NSF fees.

It is believed that plaintiff attorneys often search credit union websites to review member account agreements looking for disclosure language on how credit unions assess overdraft and NSF fees. Publishing your account agreement on your public-facing credit union website is not required; therefore, you should strongly consider removing it.