5 minutes
Credit union overdraft protection programs have endured a long, slow strangling for years. The Consumer Financial Protection Bureau’s recent grip on overdraft programs is sure to squeeze these programs further. Is it time to just return NSF items and abandon member convenience and protection? Not yet, but credit unions will continue to feel increased regulatory and legal pressure that will cut off consumer benefits and diminish fee income. This article examines the historical and recent regulatory and legal pressures that are slowing killing these programs.
Interagency Guidance
Since 2001, the federal banking agencies have expressed concerns about overdraft programs. At that time the agencies, acting individually, issued letters or guidance to their regulated institutions. The agencies chose not to issue regulations for overdraft services; rather, they opted to issue guidance, which then was truly voluntary. With interest rate margins crushing institutional profits, fee income from overdraft programs was a lifeline. Consequently, consultants and providers heavily marketed analytical software and overdraft programs to maximize credit union overdraft fee opportunities.
By 2005, the regulatory agencies began to collaborate on the common compliance issues and risks of the industry. They became more concerned with misleading marketing, weak disclosures and questionable overdraft features. For the first time, they issued interagency guidance on overdraft practices. This guidance identified historical and traditional overdraft programs, and addressed (1) safety and soundness concerns, (2) legal risks, and (3) best practices. The best practices provided positive examples of how overdraft program features should be marketed and communicated, as well as disclosure and program features.
The interagency guidance provided the first uniform list of key overdraft features to be disclosed and fairly marketed. Many credit unions have used the interagency guidance as a model for deposit contract terms for overdraft programs with very few member disputes. Some credit unions have not fared as well.
Litigation and Class Action Lawsuits
As early as 2010, credit unions were facing lawsuits from individual members and member class actions based on specific overdraft calculation features and an apparent lack of disclosure. The unfair claims centered on a program practice of re-sequencing transactions that resulted in higher overdraft fee income. Coupled with inadequate disclosures, these practices made for easy unfair and deceptive practices and breach of contract claims under California law.
Similar lawsuits against banks targeted such practices as the high-to-low posting of debit card transactions, which tended to create multiple overdrafts and increase fees. Despite lengthy deposit contract provisions of HTL posting order, the courts faulted the bank’s advertising and found the failure to disclose the effects of HTL posting as an unfair advertising practice.
Recently, CUNA Mutual Group issued a risk alert warning credit unions of continued class action lawsuits with unfair overdraft practices. (This is available to those with a CUNA Mutual Group Protection Center login.) Again, the issue is a combination of technical overdraft calculation features and lack of clear disclosure of such features. Specifically, the calculation of overdraft fees based on the “available” balance rather than the actual balance, without clear disclosure, has been asserted as unfair.
CFPB
The greatest pressure against overdraft programs, recently and for the future is the CFPB. A federal agency established to protect consumers certainly intends to protect consumers from overdraft programs. CFPB inherited the 2010 Reg E rule to require a challenging opt-in process for consumers to accept ATM and debit card overdrafts and fees. The credit union must provide a three-step opt-in process of a disclosure, consumer opt-in acceptance, and confirmation before any overdraft fees on ATM and debit card transactions can be imposed.
In June 2013, CFPB completed and reported on its self-study of the impact of overdraft practices on consumers. (This discusses the opt-in requirement in section 4.) The report concluded that consumers who opt in for overdraft coverage end up paying more fees and experience more involuntary account closures than consumers who decline to opt in. It does not take statistics to support these conclusions; overdraft protection benefits come with a price. CFPB’s report was rather self congratulatory about the benefits of its 2010 opt-in rule, but also outlined the agency’s continued concerns about overdraft policies and practices, including:
- calculating available funds;
- transaction processing and posting order;
- overdraft coverage limits;
- pay/return decisions; and
- linked account protections.
Unfortunately, CFPB’s overdraft protection report is likely the blueprint of proposed overdraft rules that the CFPB has publicly announced for mid-2015.
In April 2015, CFPB issued its first overdraft protection enforcement order in a classic overdraft over-reaching case with Regents Bank. The agency found the bank charged overdraft fees on ATM/debit card transactions without the proper Reg E opt-in. The bank’s failed opt-in was not on checking accounts, but on “linked savings accounts” that became overdrawn and subject to overdraft fees. The bank has refunded $59 million in overdraft fees and incurred a $7.5 million civil penalty.
In preparation for upcoming overdraft protection rules, CFPB has also flexed its authority by issuing an order to Fiserv, Brookfield, Wis., seeking data about the company’s hosted account processing settings for clients’ overdraft programs.
The future for credit union overdraft programs is not good. Credit unions face increased litigation threats over fair overdraft features, calculations and disclosures. More problematic, CFPB is using all its regulatory authority to squeeze overdraft programs. With a comprehensive study of overdraft practices in hand and digging deeper for more information from processors, the agency is building and shaping the data to support strong, new overdraft regulations this summer. Credit union overdraft programs may not survive the chokehold of the new regulations.
Brian Witt is a shareholder in the law firm of Farleigh Wada Witt, Portland, Ore., which specializes in serving the financial service industry and financial institutions nationwide. Witt represents credit unions on corporate, operational, compliance, and financial service delivery matters. Practicing law for over 30 years, he has presented education and training for national and state trade associations and has developed extensive compliance resources for: member response management; vendor management and contract reviews; information security programs; security response guidelines; online delivery of financial services; advertising compliance; and credit union consumer and business lending. Additionally, Witt is an active member of the credit union, consumer finance and cyberspace law committees of the business section of the American Bar Association
