CUNA Notes Rising Risk of Overdraft Litigation CUNA/Leagues have been tracking overdraft-related suits and demand letters, which have evolved significantly over the past few years. "Overdraft litigation" is actually a convenient umbrella term for several different types of legal allegations and fact patterns. In fact, many of you may remember demand letters alleging mere "vagueness" in account agreement or improper re-sequencing of transactions. Background In the most recent cases, the plaintiffs' attorneys are asserting claims grounded in State laws governing breach of contract but may also allege violations of Regulation E or a state consumer protection law. Often, these claims hinge on the credit union's member agreement or overdraft opt-in disclosure being inconsistent with the actual overdraft/NSF practices at the credit union. Generally, the practices in question have largely fallen into a few different buckets: Authorize Positive, Purportedly Settle Negative (APPSN): The suit asserts breach of contract and unjust enrichment based on credit unions' assessment of overdraft fees on transactions that were authorized at a time when the member had sufficient funds, even though the member subsequently had insufficient funds at the time of settlement. The plaintiffs argue the credit unions' account agreement does not authorize an overdraft fee in that situation – not that the practice is necessarily illegal. Available Balance / Actual Balance: The suit asserts breach of contract and unjust enrichment based on credit unions' calculations of account balances at the time of posting and settling. The plaintiff will allege the credit union used the member's available balance – including pending holds – and as a result, charged overdraft fees when the customers had a sufficient ledger balance to cover the transactions. The plaintiffs argue the credit unions' account agreement does not authorize an overdraft fee in that situation – not that the practice is necessarily illegal. Multiple NSF Fees on Single Transaction: The suit asserts contract-based claims alleging a credit union's NSF fee process breaches its account agreement when the credit union assesses more than one NSF Fee on represented transactions, arguing that multiple transactions constitute a single item or transaction. Regulatory/Litigation Advocacy On the regulatory front, we have regularly discussed overdraft practices with the Bureau and highlighted the growing problem of frivolous overdraft litigation. As part of the CFPB's RFA Review of the 2009 Overdraft Rule, CUNA made several recommendations related to the Model Form A-9 in Regulation E, which has been the subject of litigation, including calling on the Bureau to act to provide credit unions a more express safe harbor. CUNA recently sent a follow-up letter on this subject and Jim Nussle has a call scheduled in the near future with CFPB Director Kraninger to discuss the topic (among others). On the litigation front, earlier this year, CUNA filed an appellate-level amicus brief in a case involving a credit union that allegedly charged multiple NSF fees. The credit union had secured a motion to dismiss at the District Court level but the plaintiff appealed the Court's decision to the 4th Circuit. The case has yet to be resolved. In addition, on the Model Form A-9 issue, CUNA joined with the Georgia League to file an amicus brief arguing Regulation E's safe harbor provision should block these suits for entities using the Form A-9. Ultimately, the 11th Circuit did not agree. In that case, the Court interpreted the safe harbor to be for "proper form" rather than "adequate disclosure." We continue to review cases for opportunities to file supporting briefs that could help to build a body of legal precedent that would assist credit unions in fighting these suits. On the compliance side of the coin, CUNA would also note that there are several measures credit unions could take now to help mitigate the risk of an overdraft suit. These measures range from removing any account agreements and disclosures from the public-facing section of the credit union's website to adopting an arbitration agreement with a class action waiver, which some credit unions have used to successfully avoid costly class actions. Back in 2017, CUNA and the leagues joined and won the fight to invalidate the CFPB's restrictive Arbitration Rule through the passage of a Congressional Review Act resolution of disapproval. These types of class action suits are exactly the reason why we wanted to ensure arbitration remained a "tool in the toolkit" for credit unions. While arbitration agreements and class action waivers are not a silver bullet, they may prove helpful in reducing costs and perhaps cutting these suits off at the pass. Related Resources: Here are recent CUNA Mutual Group Risk Alerts related to overdrafts: CUNA Mutual Group Risk Alert: CUs Face New Threats of Lawsuits Related to Overdraft Fees (May 2020) Overdraft / NSF Fee Demand Letters and Lawsuits Continueopens a pdf (May 5, 2020) Spike in Overdraft / NSF Fee Demand Letters Witnessed By Credit Unionsopens a pdf (Aug. 27, 2019) Overdraft / NSF Fee Lawsuits Again Target Credit Unionsopens a pdf (April 4, 2019) Credit unions Face Overdraft Fee Lawsuitsopens a pdf (July 18, 2018)
