It’s a one-two punch; the first move makes an overdraft more likely, and the second makes it vastly more profitable for the financial institution.
Reordering Checking Account Transactions
Many excessive overdraft fee lawsuits describe how the second practice works. Over a short period of time, usually a day or a day plus a weekend and/or holiday, a bank or credit union will hold debit transactions. After that period has elapsed, the institution will reorder those transactions from highest to lowest amount.
Imagine, for example, you used your debit card to pay $8 for lunch, then paid $30 to go out with co-workers, took a cab home for $28, and finally did a little online shopping for a total of $124. Sadly, you have only $130 in your checking account. You feel like an idiot, but figure the $35 overdraft fee for the final transaction was part of the price of a full day. No more shopping under the influence, though.
If your credit union cleared the debit transactions from highest to lowest amount, the fun was quite a bit more expensive. The $124 charge would clear, but the $30 transaction would not. Neither would the $28 or $8 charges. That would be three $35 overdraft charges for a total of $105. Your account balance is now negative $171. It could get much worse very quickly if your bank charges continuing overdraft fees.
For credit unions like SCU, overdraft fees are a major source of profits. According to a 2010 report, overdraft fees comprise 6 to 7 percent of the gross revenue of credit unions. Further, those fees are more likely to be assessed against the accounts of the most vulnerable customers – the young, the underpaid and the racially marginalized. The brutal truth is that these charges are not likely to be for cocktails and an Uber. They are for food and rent.
Although Domann alleges on information and belief (meaning that evidence will have to be developed through discovery) that SCU engaged in transaction reordering, his lawsuit also brings to light two practices that appear to make overdrafts more likely. These set up the situation for SCU to make money on multiple overdraft charges.
The first of these involves ignoring federal regulations that require that customers affirmatively opt-into “overdraft protection” agreements, which permit banks to charge fees. Since 2010, Regulation E of the Electronic Funds Transfer Act requires that customers affirmatively agree to pay a charge when the bank honors an ATM or debit card transaction even though there are insufficient funds in the account. Given the choice, many customers would rather have the charge declined, rather than run the risk of spiralling, out-of-control overdraft fees. SCU’s forms and agreements do not appear to comply with these requirements, so customers are never given the chance to protect themselves from the credit union’s money-making practice.
The second, an accounting technique SCU used to calculate whether a customer had sufficient funds in his or her account to cover charges, is a bit more complicated. SCU used an artificial balance calculated on the basis of actual money in the account, less holds for anticipated future expenses that might or might not occur and less deposit holds.
Unlike the reordering example given above, a customer might be charged an overdraft fee or multiple fees when there was always enough money in the account. Matthew Domann describes several instances of just this:
• On February 9, 2017, he had a positive balance of $85.51 in his checking account when he made a debit card purchase for $4.63, leaving him with a positive balance of $80.88. SCU nonetheless charged him a $25 overdraft fee.
• On February 10, 2017, he had a positive balance of $55.88 in his checking account when he made a debit card purchase for $11.27, leaving him with a positive balance of $44.61. Again, despite the fact that he had sufficient funds in his account to cover the transaction, SCU assessed a $25 overdraft fee against his account.
• With regard to his business account, on November 7, 2017, Domann had $78.27 in the account when he engaged in a one-time debit card transaction for $2.10. SCU hit him again with a $25 overdraft fee.
This is different from reordering transactions, and perhaps more insidious.
READ MORE EXCECESSIVE OVERDRAFT FEE LEGAL NEWS
Have Credit Unions Been Getting a Free Pass on Overdraft Fee Abuses?
The common myth is that credit unions are kinder and more customer-friendly than banks because they are not-for-profit organizations that exist to serve their members. It was largely on this basis that the Credit Union National Association successfully argued for the delay of consumer overdraft protection regulations that would have addressed some of the issues raised in Matthew Domann’s excessive overdraft fees lawsuit.
Studies suggest, however, the median overdraft fees charged by credit unions are not significantly less than the median overdraft fees charged by banks. Is it time for another look at both the practice of transaction reordering and the underlying accounting machinations that make this practice so profitable for credit unions?