A little “actual balance” vs. “available balance” sleight of hand
Under the customer agreements with its members, the credit union promised that it would only assess an overdraft fee when it paid a transaction that resulted in a negative balance. However, WSECU’s actual practice was to make an automatic decision about whether to assess an overdraft fee based on an artificial internal calculation of “available balance” rather than the “actual (or ledger) balance”. Baked into the cake was that the available balance was generally smaller than the actual balance.
The available balance was the actual balance minus anticipated debits and credits in the future that might or might not occur. The result was that WSECU charged members overdraft fees when members actually had enough money in their accounts to pay for the transactions charged.
For an individual customer, that might mean a painful and annoying few bucks over and over again. For the credit union, with many customers, it became real money.
On June 18, 2015, for example, Todd Wodja had a beginning balance of $395 in his checking account. He withdrew $300 from an ATM, leaving a balance of $95. He was, nonetheless, charged a $27 overdraft fee. He believes that this happened many times. Furthermore, this kind of improper assessment reduced his balance and caused additional overdrafts for which further overdraft fees were assessed. It was a vicious cycle.
It is not entirely clear how many customers or transactions were affected by this practice, but WSECU is the second largest credit union in the state of Washington with approximately 200,000 members.
Already on the radar
The Consumer Financial Protection Bureau (“CFPB”) has been concerned about the harm that excessive overdraft fees do to consumers and the particular issue of the actual balance/available balance discrepancy since 2015. When the balance calculation method is not adequately disclosed, the CFPB has found that the use of the available balance method instead of the ledger balance (actual balance) method is a deceptive practice. It reportedly results in “customers being misled” because this information is “material to a reasonable consumer’s decision-making and actions,” and consumers are thereby “substantially injured.” Overdraft and NSF fees now generate over 50 percent of all fees and constitute 11.6 percent of net income for credit unions.
The perception that banks and credit unions have filled their pockets by taking advantage of millions of customers through deceptive overdraft fee practices has triggered lots of litigation over the past few years. Successful lawsuits have led to awards or settlements involving banking behemoths like Wells Fargo and Bank of America. Credit unions, like Digital Federal Credit Union and Landmark Credit Union, have come under fire, as well.
Financially vulnerable customers make easy pickings
Perhaps the ugliest part of the story is about who gets hurt by these practices. The customers who are assessed overdraft fees are the most financially vulnerable and the most likely to forego the opportunity for upward mobility that banking represents. Younger, lower-income, and nonwhite account holders are among those more likely to be assessed overdraft fees. A 25-year-old is 133 percent more likely to pay an overdraft penalty fee than a 65-year-old. More than 50 percent of the customers assessed overdraft fees earned less than $40,000 per year. Nonwhites are 83 percent more likely to pay an overdraft fee than whites.
More than half of those who were assessed overdraft fees do not recall opting into an overdraft program, and more than two-thirds of customers would have preferred the financial institution decline their transaction rather than assessing them a very large overdraft fee.
Is this the end?
READ MORE CREDIT UNION EXCESSIVE OVERDRAFT FEES LEGAL NEWS
It hardly seems like the end of the road for excessive overdraft fees lawsuits, however. The recent headline “Credit Unions Need to Lawyer Up for 2019,” is pretty telling. If anything, the number of settlements suggests that banks and credit unions have a diminished appetite for vigorous and protracted lawsuits. They may be eager to settle.
This is not always an easy choice. Credit union customers who believe that they have been unfairly affected by excessive overdraft charges should take notice and seek legal assistance.