Avoiding the Pitfalls of Overdraft Protection Programs

Part 2 of my Class Actions Have Little Class Involved

Credit unions, along with other financial institutions, have offered overdraft protection programs for many years. These programs provide protection for customers in avoiding returned check fees and the embarrassment of denied transactions, and provide fee income to the credit union.

These programs have faced scrutiny as long as they have been in place. Areas of focus have been on:

• Re-ordering of transaction processing. Lawsuits arose from this practice with financial intuitions re-ordering, or sorting, of transactions posting to accounts. The re-ordering – clearing larger items before smaller ones – potentially increase the number of overdrafts and thus increase the totals fees paid for the overdrafts.
• Charging overdraft coverage fees for small transactions; where the overdraft fees outweigh the actual transaction amount.
• Fees being assessed on an account’s available balance rather than actual balance, and the disclosure – or lack of – on how the fees will be assessed.

The CFPB has been focused on overdraft protection since its inception. In June 2013 and July 2014, the CFPB issued reports on overdraft protection programs that included findings about overdraft fees and consumer usage of such programs.  New overdraft rules are expected in 2016.

In April this year, the CFPB fined Regions Bank $7.5 million for unlawful overdraft practices.   This fine was in addition to refunding consumers over $49 million in illegally charged overdraft fees.  The CFPB claimed that Regions failed to obtain required opt-in consent for some consumers, that Regions identified the violation but delayed fixing it for almost a year, and misrepresented its overdraft and non-sufficient funds (NSF) fees.

Also this year, the CFPB ordered FiServe and FIS to turn over anonymous information on NSF fees from credit unions using their hosted processing systems. The CFPB claims that the data is for research purposes only – to better understand the financial services marketplace.

Along with governmental focus, litigation continues to be a risk for these programs. Law firms continue to troll for class action opportunities.  A legal firm posted on social media, this summer, requesting that anyone who has been charged an overdraft coverage fee by a specific Washington State credit union to contact them, in attempt to initiate a class action suit.  Classaction.org also solicits individuals for these class action suits.

A quick Google search shows about 155,000 results for “overdraft class action.” Topclassactions.com list nine credit unions that they are “investigating”:  State Employees, Pentagon Federal, Boeing Employees, Alliant, Star One, First Technology, America First, Randolph Brooks, and Suncoast.  As long as they think there is money to be made, class action attorneys will continue to troll for cases.

Losses sustained from these suits may not be insurable if the credit union’s disclosures do not accurately and sufficiently describe the credit union’s overdraft practices.

Credit unions need to disclose, re-disclose, disclose that you are re-disclosing, and re-disclose your disclosure of re-disclosing. Disclosures should cover all aspects of the overdraft protection program, and match the process that the credit union follows when assessing a fee.  This should include the credit union’s re-ordering – if any/or not, whether fees are charged on actual or available balance, and adherence to member’s opt-outs.