Overdraft Protection Disclosures – Verify ‘Opt-In’ Compliance Now

By Tim J. Filer, John T. Drake, Foster Pepper PLLC

Over the past six months, several credit unions in the Western U.S. have been sued in putative class action lawsuits alleging violations of Regulation E’s “opt-in” rule for overdraft protection programs.  Now is a good time to double-check your credit union’s compliance in this area.

By way of refresher, Regulation E is a federal rule that implements the Electronic Funds Transfer Act (“EFTA”).  Among other things, Regulation E requires financial institutions to obtain a customer’s affirmative consent to enroll in overdraft or courtesy pay programs covering ATM withdrawals and non-recurring debit card transactions.  This requirement is commonly referred to as the “opt-in” rule.

Obtaining a member’s consent may sound simple enough, but Regulation E imposes several detailed requirements.  Members must receive a stand-alone disclosure that:

  • Is in writing (or in electronic form if the member agrees);
  • Is segregated from all other disclosures and agreements;
  • Identifies the specific overdraft service to which it applies;
  • Gives the member a means of providing consent; and
  • Explains that consent can be revoked at any time

The disclosure must conform to specific content and format requirements.  It must be “substantially similar” to a model disclosure form drafted by the Federal Reserve Board.  (This form, known as Model Form A-9, was designed to inform consumers of their rights in simple, easily understandable language.)  The disclosure must include: 

  • A “brief description” of the overdraft service;
  • The dollar amount of any applicable fees;
  • The daily limit (if any) on the number of fees a member can be charged;
  • An explanation of the member’s right to give or withhold consent; and
  • A list of alternative means of covering overdrafts.

Litigation under the EFTA can be expensive.  If class-wide liability is proven, a court can award statutory damages of up to $500,000, plus costs and reasonable attorney’s fees.  

Many of the recent class action cases also allege consumer protection and breach of contract claims on the theory that members have not been provided with clear information about how their credit union’s overdraft services actually work.  One common allegation is that members are not told that deposit holds and debit card authorization holds count against the amount of funds they have available to commit to new transactions. 

So in addition to your Regulation E opt-in disclosures, you may want to review the provisions in your membership and account agreements on these topics.  There is no time like the present.

Strategic Link is the NWCUA’s wholly-owned service corporation, using the power of collective action to provide the Association’s member credit unions with exclusive, high-quality, competitively-priced products and discounted services. Try our new CU Match Up tool to find the right partner for your credit union’s business needs. Contact Director of Strategic Partnerships Craig Reed at creed@nwcua.org today to find out how Strategic Link can help your credit union save money while meeting its goals in 2016 and beyond.

Posted in Compliance News.