Compliance Blog

In the past few years, credit unions have faced increasing litigation risk from plaintiffs’ attorneys filing class action lawsuits, particularly in the area of various fees that may be assessed to both members and nonmembers. Some risks are ongoing such as overdraft and insufficient funds fees lawsuits.  NAFCU is aware of some recent class action litigation trends that are worth keeping an eye on. Overall, these lawsuits seem to fit in more with a general trend, where claims focus on account agreements. This includes whether the contractual language was clear enough for consumers to understand how and when fees would be imposed, and if the agreement created a contractual right to assess the fees.

First, there are banks and credit unions that have been targeted by plaintiffs’ attorneys regarding foreign transaction fees. Regulation Z requires disclosure of these fees on the credit card side. For debit cards, Regulation E has a broad requirement to disclose any fee imposed to make an electronic fund transfer (EFT). These suits claim that consumers are incurring a foreign transaction fee on either credit card or debit card transaction for purchases made while physically in the United States, but to a merchant located overseas. These kinds of lawsuits claim that account agreements do not clearly allow for these fees to be assessed when the member conducts the transaction from within the United States.

For example, Citibank was hit with a lawsuit on this topic in 2019. The bank’s agreement said “[w]henever you use your Citibank® Banking Card outside of the U.S. and Puerto Rico to get cash at an ATM or to purchase goods or services…” (Emphasis added.) The argument is that most consumers would probably not think that buying things online from overseas vendors would lead to such fees. Some account agreements are clearer that these kinds of fees do not require being physically overseas to be assessed. Some credit unions choose not to assess these kinds of fees. Recently, NAFCU members discussed this issue on our Compliance, Risk & BSA Network, join the conversation here.

Second, there are plaintiffs’ attorneys attempting to build suits against financial institutions regarding balance inquiry fees assessed at out-of-network or “foreign” Automatic Teller Machines (ATMs.) Regulation E requires ATM operators to provide notice that a fee may be imposed when a consumer initiates an EFT or makes a balance inquiry. For these kinds of cases, plaintiffs’ attorneys are looking for situations where a fee was assessed for a balance inquiry, or where consumers paid fees both to check their balance and then subsequently withdraw funds,  essentially paying two fees. Capital One recently settled a similar suit, where consumers paid a fee to check their account balance, and a second fee for using an out-of-network ATM. Similar to other kinds of suits challenging fee assessments, these claims also assert that account agreements did not clearly state there was a separate fee for conducting balance inquiries. For example, some ATM notices, account agreements and fee schedules list balance inquiry fees separately, which can help make it clearer that more than one fee could be incurred. Or in a related issue, perhaps use of the word “foreign ATM” may not be clear to a consumer that what is meant is out-of-network as opposed to an overseas ATM.

Finally, NAFCU continues to hear from credit unions regarding overdraft and insufficient funds fees. A newer wave of demand letters and suits focus on what is known as an “authorized positive settled negative” transactions, which were flagged by banking regulators in 2019 as discussed in this past NAFCU Compliance Blog post. These are situations where a financial institution authorized a debit card transaction at a time that the consumer had a positive available balance, like at a cash register or gas pump.  Before the debit card transaction settles through the payment system, some other transaction posts like a check the consumer wrote or some preauthorized transfers from third parties. These might be processed overnight, so when the authorized positive debit card transaction clears on the next day, there are now insufficient funds in the account, triggering an overdraft or NSF fee. The plaintiffs’ claims target overdraft or NSF fees for these kinds of debit card transactions that were approved before those other debits came through in the interim.

Often times, these kinds of suits are not litigated far enough to determine whether the claims are legitimate, as fighting a case can be expensive. Credit unions may file a motion to dismiss a lawsuit, but in considering these motions courts generally view the allegations in the light most favorable to the plaintiff. Many states have similar standards for reviewing a motion to dismiss. Viewing a case in this way, multiple courts reviewing overdraft and NSF claims have determined an agreement was not clear about fees being assessed. As a result, in most cases, credit unions have not won their motions to dismiss, or only won on some of the issues in play. When a claim survives a motion to dismiss, the next phases of a lawsuit can become quite expensive. Rather than continue to litigate, some credit unions may decide that it may be more cost-effective to settle the case even if they believe they are legally in the right. In other words, the merits of plaintiffs’ claims in some of these cases are not necessarily fully analyzed by a court before the case is settled.

Overall, potential ambiguities in account agreements and disclosures particularly with regard to fees are a source of litigation risk. As far as the account fee risks, many credit unions periodically work with forms vendors and outside counsel to identify developing litigation risks and clarify some language in terms of risk mitigation.

We Need Your Help! NAFCU is seeking  member feedback on the CFPB's recent rule on RESPA creating a temporary COVID-19 emergency pre-foreclosure review period that would prohibit mortgage servicers from making the first notice or filing required for judicial or non-judicial foreclosure until after December 31, 2021. More information available here.

Also, FinCEN wants to hear feedback on what your credit union is doing to share BSA/AML compliance resources under previous guidance. Please reach out to Kaley Shafer, kschafer@nafcu.org, Senior Regulatory Affairs Counsel,  if your credit unions is currently sharing resources.