Death by Delay – CFPB Defers Credit Union Overdraft Regulations into Indefinite Future

Washington, DC On May 10, 2018, the Consumer Financial Protection Bureau (CFPB) quietly scuttled proposed consumer overdraft protection regulations, moving them to the inactive list until some undefined, unknown day in the future when a permanent director is named. Meanwhile, banks and credit unions continue to rake in fees through questionable practices, including some arguably strained definitions of phrases like “not enough money.” Fortunately for consumers, the plaintiffs’ bar soldiers on, pursuing excessive overdraft fees lawsuits on their behalf.

Background for Excessive Overdraft Fee Regulation

In 2017, consumers paid $34.3 billion in overdraft fees. The CFPB has collected detailed information about this phenomenon since 2011, releasing reports in in 2017, 2014, and 2013. The 2017 Data Point report concluded, among other things, that:

• Frequent over drafters, although not numerous, accounted for more than three quarters of all overdraft and NSF fees;
• They also tend to have more limited access to credit than non-over drafters, have lower credit scores and are less likely to have access to a general purpose credit card;
• They also tend to have lower median balances in their checking accounts; and
• Those who choose overdraft protection for card-based transactions tend to pay more for overdrafts than those who do not.

In other words, overdraft fees disproportionately hurt poor and unsophisticated consumers . This territory has already been thoroughly explored.

The modest remedy proposed by the CFPB was a simplified disclosure form, designed to make it easier for consumers to understand the costs and risks of optional overdraft protection.

This is the reform that industry groups managed to spike.

The Credit Union National Association (CUNA), in particular, argued that credit union members are unlikely to be frequent over drafters and that the effort to simplify overdraft protection agreements would somehow make it less convenient for consumers to opt into this potentially expensive account feature. CUNA celebrated the de-activation of this consumer protection effort as a ”win”.

What Credit Unions Must Disclose about Overdraft Fees Today

The obligation of banks and credit unions to disclose the details of their overdraft fee arrangements remains essentially unchanged from what it was in 2010. In 2010, federal regulations under the Dodd-Frank law began requiring financial institutions to obtain a consumer’s consent before charging overdraft fees on most debit card transactions and ATM withdrawals.

The CFPB’s current A-9 model customer agreement form is several pages long and is often further customized by many banks and credit unions. It is safe to assume that not all consumers read it carefully before they make their decisions. Furthermore, the terms of art used in the banking industry may not be readily understood by the average checking account customer eager to get in, set up an account and get back to the other chores of the day.

Consumers who do not choose overdraft coverage will generally have debit card purchases and ATM withdrawals declined with no charge if their account does not have enough funds to cover the transaction at the time they attempt it.

In addition to debit card transactions and ATM withdrawals, consumers may overdraw accounts through checks, online bill payments, or direct debits from lenders or other billers. Banks and credit unions can charge overdraft fees on these transactions without express permission from a consumer because they are not covered by the 2010 rule.

Class Action Lawsuits Focus on Unclear Forms

Given this background, it is not surprising that excessive overdraft fee lawsuits have zeroed in on the issue of unclear forms and inadequate disclosure. These are essentially breach of contract lawsuits.

Walbridge v. Northeast Credit Union , pending in the U.S. District Court of New Hampshire, is typical in this respect. The plaintiff brought a lawsuit, claiming that the credit union breached its account agreement by charging him an overdraft fee on the basis of the available balance in his account rather than the ledger balance.

At particular issue were the provisions, incorporated in the credit union’s version of the standardized Form A-9 that read, “An overdraft occurs when you do not have enough money in your account to cover a transaction, but we pay it anyway.” The form further provided, “At its sole discretion, [Northeast] may honor items presented for payment or authorization against your account even if there are insufficient funds in your account.” The court concluded that there were reasons to keep the lawsuit alive over plausible disagreement about what the phrases, “enough money,” and “insufficient funds,” really meant.

People, who simply use their checking accounts and debit cards to buy the things they need, can be forgiven for feeling that this difference seems pretty arcane -- very far down in the legal weeds. But federal courts are not designed to do the work of legislatures or regulatory agencies. When circumstances require them to do so, the results are rarely elegant. This is what happens when litigation becomes the path to justice for consumers, when the other, more obvious regulatory solutions are endlessly thwarted.