By Sheryl S. Jackson
The size of settlements for claims against credit unions over the past few years are significant. Three examples include: $1.8 million for a northeast credit union,1 $1.5 million for a western credit union2 and $16 million for a national credit union.3
There is no magic formula to completely protect a credit union from a lawsuit filed by an unhappy member, but there are ways to mitigate litigation risks, says David Park, NCCO, Senior Regulatory Compliance Counsel, NAFCU. “We expect to continue seeing litigation related to different types of fees charged by credit unions throughout the year, with most of those claims brought under state laws,” he says. “In many cases, the allegations are for breach of contract or unfair and deceptive trade practices.”
The most common situations that have resulted in litigation recently and are expected to continue or increase involve:
- Overdraft fees
- Insufficient or non-sufficient funds fees
- ATM fees
- Foreign transaction fees
Overdraft and insufficient funds fees represent a key focus on claimants and their attorneys, especially with the increased reliance on debit cards as retailers and consumers moved away from cash to payments that required less contact during the pandemic.
Approval and Settlement Timing Critical
“We are seeing more overdraft claims where debit card transactions might be approved at the time of the transaction, but when the transaction is settled with the credit union, other charges have reduced the account balance to the point an overdraft fee is charged,” says Park. The situation is referred to as “authorized positive, settled negative” and is a practice that has been described in some of the banking agencies’ supervisory highlights as being one that is unfair and deceptive, he adds.
Similarly, an insufficient or non-sufficient funds (NSF) fee poses risks related to presentment of the transaction for payment, says Park. “The problem occurs when the withdrawal or debit charge is first presented and an NSF fee is applied to the account, then the merchant resubmits the charge multiple times, which generates NSF charges for each attempt,” he says. “While the credit union sees each attempt as a separate transaction when presented, consumers and their attorneys say that each attempt is part of the same, original transaction.”
The same argument is made in cases against credit unions for ATM fees. When a member makes a balance inquiry at an ATM other than the credit union’s network of ATMs to make sure the withdrawal won’t exceed the balance available, and then withdraws money, there are sometimes two ATM fees applied — one for each action. “The claims allege that both actions are part of the same transaction, so only one fee should be applied,” explains Park.
As the retail industry becomes more global, and people order from online sites more frequently, it is often hard to tell where the retailer is located.4 This has led to claims filed against credit unions that charge foreign transaction fees, says Park. “Members are not surprised when foreign transaction fees are assessed when credit and debit cards are used outside the United States or Puerto Rico, but some members have been surprised to see those fees charged on purchases they made from their homes.”
Steps to Mitigate Risk
“The most important step a credit union can take to mitigate the risk of these types of lawsuits is to carefully and regularly review account agreements, disclosures and practices and determine whether everything aligns and complies with applicable law,” says Park. “All of these cases turn on what the account contract says, what policies and procedures require, what is required by law and what the member is told.”
A combination of reviews of agreements, disclosures, policies and procedures along with proper training for employees is essential to mitigate risk, points out Park. “Another way to reduce risk, at least in the context of overdraft litigation, is a step some institutions, especially large banks, are taking — eliminating overdraft fees,” he says. “This is a strategic issue for some financial institutions as they look at the risk of a large claim settlement and legal fees compared to collection of the fees.”
The choice to eliminate overdraft fees can be considered but is not required by the Consumer Financial Protection Bureau (CFPB) or the National Credit Union Administration (NCUA), says Park. “While there is a lot of uncertainty about what both agencies might do with respect to overdrafts, both agencies have indicated that this is an area on which they will focus.”
Another way to mitigate risk is to look at the level of CFPB complaints and other litigation and to comparatively assess your risk in those areas of higher risk. CFPB complaints have increased year over year for 2021 according to statistics compiled by WebRecon, a litigation research firm, says Park. While the level of Fair Credit Reporting Act and Fair Debt Collection Practices Act litigation has remained somewhat stable when looking at WebRecon’s analysis for 2020 and 2021, Telephone Consumer Protection Act litigation has significantly decreased.
The increased reliance on fintech companies and other third parties to provide technology to enhance services to members also poses a risk that credit unions should take steps to mitigate before entering any agreements, suggests Park. “Just as with any third-party relationship, NCUA requires that credit unions take certain steps to ensure that they understand the risks posed by outsourcing work to third parties,” he says. These steps include things like performing a risk assessment and considering how the proposed third-party relationship might affect the seven areas of risk that NCUA looks at in an exam. For those credit unions who partner with third parties that provide models and algorithms that might be used in decisioning, it is critical to be to explain how those decisions are made. “Understand how the algorithm works and conduct due diligence to be sure the supplier meets all regulatory expectations for credit unions.” While the upfront work is important, he also adds, “The credit union must also monitor the fintech’s ongoing performance and outcomes because the credit union can be held responsible for compliance failures.”
Overall, the best defense against growing and emerging risks is to go on the offensive. “Be proactive in reviews of agreements, disclosures, policies and procedures,” reiterates Park. “A credit union’s best defense against claims is proof that the member was informed and that the credit union’s actions aligned with the terms of the governing agreement, any disclosures provided by the credit union and applicable law.”
- Steward J. Digital Federal Credit Union settles $1.8M class action suit. American Banker. October 15, 2019. americanbanker.com/creditunions/news/digital-federal-credit-union-settles-18m-class-action-suit
- Strozniak P. American Airlines FCU to Pay $1.5 Million to Settle Overdraft Fee Dispute: California woman who filed the class action lawsuit will be paid a $15,000 service award. Credit Union Times. August 11, 2021. cutimes.com/2021/08/11/american-airlines-fcu-to-pay-1-5-million-to-settle-overdraft-fee-dispute/
- Buckley Firm. Parties File Unopposed Settlement Requiring Credit Union to Pay $16 Million to Resolve Insufficient Funds Fee Lawsuit. October 27, 2020. buckleyfirm.com/blog/2020-10-27/parties-file-unopposed-settlement-requiring-credit-union-pay-16-million-resolve-insufficient-funds-fee-lawsuit
- Strozniak P. Navy Federal Credit Union Faces Second Class Action Lawsuit Over Fees: Member claims she was unlawfully charged an international transaction fee for buying a product online from an overseas retailer. Credit Union Times. January 13, 2021. cutimes.com/2021/01/13/navy-federal-credit-union-faces-second-class-action-lawsuit-over-fees/