A recent order by a Washington, D.C. district judge is providing new insights about exactly which parts of the wording in credit union overdraft agreements may be fueling a string of class-action lawsuits across the country.
The thoughts contained in U.S. District Judge John Bates’s Oct. 21 order are significant because the lawsuit, which was filed against NASA Federal Credit Union almost a year ago, is one of more than a dozen nationwide making similar claims: that credit unions are incorrectly using available balance rather than actual balance to assess overdraft fees. Upper Marlboro, Md.-based NASA FCU has $2 billion in assets and 136,000 members.
According to the order, which threw out all but one of the plaintiff’s claims, much of the trouble flowed from a single sentence in NASA FCU’s opt-in agreement. That sentence stated that an “overdraft occurs when you do not have enough money in your account to cover transactions, but we pay it anyway.” The wording led to months of wrangling over the meanings of “enough” and “account,” as well as the plaintiff arguing that because the word “available” does not appear in the sentence, the actual balance applied.
How the court interpreted the language revealed what appears to be another determining factor in evaluating overdraft disclosures: the wording of examples in other parts of the documents.
“The Credit Union provides examples of when a customer might find herself without ‘enough money in [her] account to cover a transaction’— such as when she ‘inadvertently miscalculate[s] [her] available balance,’ or ‘when funds from a recent deposit are not available,’” the judge wrote. “By specifically invoking the phrase ‘available balance,’ the opt-in agreement makes clear that balance will be used in calculating overdrafts and imposing fees. There is no competing reference to an actual or ledger balance. Under the terms of the opt-in agreement, then, overdrafts are a function of the available balance; when the Credit Union pays an overdraft, the customer must pay an overdraft fee.”
Stuart Richter, who is one of the lawyers representing NASA FCU, said he was pleased with the court’s order and encouraged credit unions to beef up and customize their disclosures where warranted.
“The first thing you’ve got to do is analyze how you process all different kinds of transactions,” he said. “Make sure you’re absolutely, 100% certain how the transaction is processed. Then you’ve got to include in your disclosure some description of how that’s done. Not everybody processes transactions in the same way. So it’s really critical that they analyze how it’s done, and then they’ve got to make their disclosures comport with what they’re doing.”
Richter said he has helped author more detailed overdraft disclosures for many of his clients; they often include paragraph-long definitions of “actual balance” and “available balance,” as well as detailed examples of how each works. “Available balance is used to determine when your account is overdrawn” and also explicitly appears, along with a lengthy example illustrating how the process works. Single-spaced and in nine-point font, the disclosures span two pages; a section titled “How Transactions are Posted to Your Account” is alone over 700 words long.
“By suggesting new disclosures, we are certainly not saying the old disclosures our clients have used are in any way inaccurate or misleading. The model disclosures we have drafted are a belt-and-suspenders approach. We don’t think they are necessary but it can’t hurt to add them,” Richter noted.
Though the judge threw out most of the claims against NASA FCU, one still remains: the plaintiff alleged NASA FCU never gave her a separate opt-in notice for its overdraft program as Regulation E required, meaning she may have never opted into the overdraft program in the first place.
“We’re going to continue to defend the remaining claim,” Richter said.
