TIP: A Delaware federal court’s recent decision should get the attention of all U.S. credit unions that charge fees for overdraft protection. The court allowed a class action lawsuit to continue because a federal credit union in Delaware failed to adapt a federal model notice to accurately describe its overdraft practices.
Background
In Miller v. Del-One Federal Credit Union, the credit union charged an overdraft fee in two situations:
- Where a member lacked funds in their account to cover a transaction and the credit union paid it; or
- Where a member had sufficient funds in their account to cover a transaction but, after subtracting upcoming and scheduled payments (like a monthly water bill or mortgage payment), the credit union determined that the remaining balance available would not be enough to cover the transaction. In this situation, the credit union charged an overdraft fee even if the member deposited funds to cover the future payments and even if the credit union did not pay the transaction.
Decision
The court concluded that the plaintiff had stated a plausible claim that the notice did not accurately describe the credit union’s overdraft service in a clear and readily understandable way. According to the court, “[o]rdinary consumers would likely understand the phrase ‘do not have enough money in your account’ to refer to a literal shortfall of cash, not the possibility of one.”
The court rejected the credit union’s argument that it could not be held liable for using the model language because Reg. E includes a safe harbor for financial institutions using the model form. The court observed that Reg. E did not require the credit union to quote the model form verbatim but only required it to use a notice that was “substantially similar” to the model notice. The court commented that the model language might be accurate if a bank charged overdraft fees “only when the customer spends more money than she has in her account.” However, according to the court, the template would not be accurate “when, as here, a bank looks at upcoming payments to calculate overdraft.” The court sided with the plaintiff, finding that the credit union failed to revise the model form to explain its overdraft procedures accurately.
The credit union also argued that its overdraft protection practices were accurately explained by the opt-in notice form in combination with two other documents provided to members. The court rejected that position, finding that all information regarding the credit union’s overdraft policy should have been included in the single opt-in form.
Take-aways
In light of the Delaware decision, credit unions should examine their opt-in notices to see whether the language they use accurately describes the situations where an overdraft fee may be charged. Consider adapting the official overdraft opt-in form from Reg. E to reflect not only your credit union’s overdraft policies but also to describe all associated overdraft procedures in one document. (Keep in mind that the final product is still supposed to be “substantially similar” to the model notice.)
This decision was from a federal trial court, not from an appeals court and not from a court in the 7th Circuit (which includes Wisconsin). If this case is appealed, the results could be different. In addition, there is no guarantee that a court (even a federal court) in Wisconsin would reach the same conclusions. The League will advise if we hear of further developments on these issues.
Resources
For information on Reg. E’s opt-in notice requirements for overdraft protection services, see The League’s ii Release No. 0120. It includes the CFPB’s model notice form as Exhibit D. Also see our Topics A to Z page on Overdraft Protection for additional resources.