MADISON, Wis.—A new wave of class-action lawsuits may be headed CUs’ way, and this time they target overdraft programs.
Some say the lawsuits could lead to large losses in court.
Moreover, losses sustained from the suits would not be insurable, according to CUNA Mutual Group, which recommends that CUs make sure disclosures sufficiently and accurately describe the credit union’s overdraft practices.
CUNA Mutual reports that it is aware of four credit unions in California that have been hit with the lawsuits regarding their overdraft practices, noting that the lawsuits are not all coming from one legal firm. According to CUNA Mutual, the lawsuits against the credit unions allege that the fees are being improperly assessed on the available balance instead of the actual balance, the CU’s fee structure has not been clearly communicated, and that members are not being provided with accurate available balance information.
Some CUs assess overdraft fees based on the members’ available balance, rather than on the actual balance. CUNA Mutual Group explained that the suits allege that this situation causes confusion and may mislead members because assessing the fee on the available balance could lead to situations where overdraft fees are assessed even though the actual balance may not go negative.
Large CUs The Target
Roger Nettie, CMG
Roger Nettie, senior risk consultant at CUNA Mutual Group, said it appears lawyers are currently going after large credit unions, declining to provide names of the CUs targeted and the law firms. McCune Wright LLP, based in Redlands, Calif., on its website addresses that it is representing plaintiffs in overdraft class-action lawsuits, including one against the $1.2-billion Orange County’s CU in Santa Ana.
“These suits are going after some of the very largest credit unions in California because the potential damages are bigger,” said Nettie. “If the credit union loses the case, it would have to go back over years of overdraft fees and recalculate what would have been each member’s overdraft fees if they were assessed based on the actual balance rather than the available balance. You are looking at tens of millions of dollars, likely, at each large credit union. There are a lot of dollars at stake.”
If the court deems the CU improperly collected the fees, Nettie pointed out that the revenue returned to members would not be covered by insurance.
“That is not an insurable exposure, as that is revenue the credit union was not entitled to,” said Nettie. “You can’t profit from something the court decided is improper.”
CFPB OD Attention
What may be fueling cases against CU overdraft programs, sources posited, is the CFPB’s focus on overdrafts, questioning whether the programs are fair to consumers. Nettie thinks that is the case, citing language from some of the recent overdraft lawsuits he has reviewed.
“I can say that is part of the attorneys’ strategy, because in the complaints they often lead in by talking about how regulators are saying some of these overdraft practices are not quite fair to consumers,” he said.
Sources agreed that the practice of assessing overdraft fees based on available balance versus actual balance is not unfair and would likely not lead a CU to lose a case in court. However, what may possibly allow plaintiffs to win, or gain settlements, is from the credit union not clearly communicating the fee structure and how available and actual balance works, as well as members not being provided with accurate available balance information in a timely manner.
In a Risk Alert to CUs, CUNA Mutual Group cited key claims the lawsuits make:
- The credit union improperly assessed overdraft fees based on the available balance rather than on the actual balance in the member’s account when the transactions clear the account.
- In assessing these fees, the credit union breached the account agreement, which either misstates when the credit union charges overdraft fees or fails to disclose how fees are calculated.
- The credit union 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 their members prior to the transactions.
Debit Transactions Causing Confusion
Sources indicated that members being confused about their available balance and then getting assessed an overdraft fee occurs most often due to signature debit card authorizations.
“Certainly, what gets most confusing for the member are debit transactions via signature,” said Nettie. “Holds on those transactions sometimes are days. Also when members look at their statement they do not see there have been holds on these transactions because the holds don’t show up on the statement.
“This is a challenge,” continued Nettie, “how can the credit union better disclose to members the difference between the actual balance and available balance, explain how funds are held, how debit transactions clear . . . That is the essence of these suits, which argue this information was not clearly disclosed and it is not fair to the member how the program was managed.”
Nettie reiterated that CU disclosures should sufficiently and accurately describe the credit union’s overdraft practices. “When you look at credit unions’ websites you see that some are doing a pretty good job of explaining how debit card transaction authorization holds get applied, how checks and ACH transactions clear. But the challenge is that there is not a standard regulatory-prescribed way to disclose this information.”
Better CU Disclosures
Michael Moebs, economist and CEO at Moebs Services in Lake Forest, Ill., sees overdraft program disclosures, or lack of them, as the avenue the legal teams will leverage to possibly win in court. Moebs said it is critical that CUs clearly explain to members how the overdraft program works, including debit card holds.
“Credit unions should reverse fees when these holds cause an overdraft, and encourage members to call Visa, MasterCard or Discover and complain about the hold times, and give members those phone numbers,” said Moebs, who explained Moebs Services provides CUs with a checking program that outlines how to clearly disclose overdraft practices. “Now that is good member service, and not a lot of that is being done.”
Nettie noted that one of the CUs slapped with an overdraft lawsuit has settled. Credit unions in recent years have faced a wave of ATM lawsuits in which law firms and plaintiffs sought quick settlements. Nettie is not is sure which route credit unions may take—fight or settle.
Michael Bell, Howard & Howard
“Taking this to a jury trial is a fairly risky proposition for a large financial institution that could be viewed as taking advantage of consumers,” said Nettie. “So the credit union may settle and not risk a trial.”
Nettie said the lawsuits could spread outside of California, saying the only thing that may be keeping them there right now is convenience for local lawyers.
Monitor Programs
Steven Van Beek, attorney at Howard & Howard, Royal Oak, Mich., told CUToday.info that these types of lawsuits demonstrate the importance of credit unions continually monitoring their programs, especially in areas, such as overdrafts, where regulators are focusing.
“A key to preventing—or defeating—an unfair or deceptive claim is demonstrating consistency in the credit union's agreement, communication to members and its actual practices. If there is a mismatch in any of these, the credit union's risk increases,” said Van Beek.
Another way credit unions can reduce risk is by properly handling
member complaints, added Van Beek.
“Rather than simply addressing the individual member complaint, credit unions should be sure to analyze their agreement, disclosures and practices to determine if there is consistency,” Van Beek said.
Michael Bell, attorney and counselor at Howard & Howard, added that an “aggressive, comprehensive and timely response to lawsuits of this nature is vital. Legitimate resistance sharply limits liability and the costs of defense. Plaintiffs look for weakness to exploit and said weaknesses must be eliminated."