Banks and credit unions became more aggressive about marketing overdraft “protection” once they spotted checking overdraft fees an important source of revenue. It is an area still far less regulated than the payday lending industry. In terms of high cost for very small, short-term loans, however, they are roughly comparable. Savvy banking customers are catching on, though. Do big settlements portend the end of this particular hustle?
Lloyd v. Navy Federal Credit Union
According to the lawsuit, Navy Federal Credit Union would sequester checking account funds when members used their debit cards to cover a transaction, but would “hold” the amount until the transaction settled several days later. At that point, the company would debit the account for the transaction.
In effect, the credit union charged the same transaction twice, often resulting in a negative balance on which it would assess an overdraft fee.
Overdraft fees vary by institution, but they appear to constitute an increasing percentage of corporate revenue. The Consumer Financial Protection Bureau (CFPB) had already flagged this practice as pretty sketchy. The lawsuit is more to the point, alleging that the company violated its own contractual agreements when it assessed overdraft fees in this way.
On October 27, 2014, for example, Jenna Lloyd was assessed $20 overdraft fees for six transactions that settled that day, five of which were debit card transactions that were initiated on or prior to October 26. This was despite the fact that positive funds were deducted immediately for at least three of the debit card transactions on which she was assessed. The only reason any of the five debit card transactions that settled on October 27 incurred overdraft fees was because of a $260 ATM withdrawal that she made after the debit card transactions had already been initiated.
She did not dispute that credit union was within its rights to charge a fee on the $260 ATM withdrawal because it was authorized into insufficient funds. She did protest when the credit union reached back in time to charge fees on the prior debit card transactions.
A similar series of events had happened earlier on January 31, 2014. Ms. Lloyd was assessed three $20 overdraft charges for four transactions, three of which were debit card transactions. Positive funds were deducted immediately and held for at least two of the debit card transactions. The only reason any of the three debit card transactions that settled on January 31 incurred overdraft fees was because of a $400 ATM withdrawal that Jenna Lloyd made after some or all of the debit card transactions had already been initiated.
On February 18, 2014, Jamie Plemons was assessed three$20 overdraft fees for transactions that settled that day. Two were debit card transactions that were initiated on or prior to February 15, 2014. The positive funds were deducted immediately. The only reason any of the debit card transactions that settled on February 18 incurred overdraft fees was because of an $82.75 ATM withdrawal that Ms. Plemons made after the debit card transactions had been initiated.
As with Ms. Lloyd, she does not dispute that the credit union was within its rights to charge an overdraft fee for the $82.75 ATM transaction. The issue is with the fees on the previous debit card transactions.
Similar stories, over and over again
This pattern of events has been described repeatedly by litigants in excessive overdraft fee lawsuits. Successful lawsuits have led to awards or settlements involving credit unions, such as Digital Federal Credit Union and Landmark Credit Union. Banking giants like Wells Fargo and Bank of America have also been implicated.
$6.1 million in legal fees
READ MORE CREDIT UNION EXCESSIVE OVERDRAFT FEES LEGAL NEWS
The settlement has no weight as legal precedent but is likely to influence subsequent settlement negotiations, especially in circumstances where credit union agreements contain language similar to the customer agreements at issue in Lloyd .
The CFPB seems a sadly toothless tiger today, but the private plaintiffs’ bar may have done the job of holding off this particular consumer financial abuse. What happens next? The invisible hand of the market is endlessly inventive. The law and watchful consumers persist, as well.