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Home » Delaware federal district court holds use of overdraft notice template
did not shield credit union from Regulation E or state law liability


DELAWARE FEDERAL DISTRICT COURT HOLDS USE OF OVERDRAFT NOTICE TEMPLATE DID NOT
SHIELD CREDIT UNION FROM REGULATION E OR STATE LAW LIABILITY

By John L. Culhane, Jr. & Michael R. Guerrero on July 26, 2022
Posted in Litigation and Court Decisions, Overdrafts

A Delaware federal court has refused to dismiss a class action complaint filed
against a credit union that alleges the credit union violated Regulation E and
the Delaware Consumer Fraud Act (CFA) even though the credit union’s overdraft
opt-in notice tracked the language in the Regulation E model notice.  The
decision should serve as a reminder to financial institutions of the need to
make sure their opt-in notices accurately and fully describe their overdraft
policies.  This is particularly imperative in the current environment where
overdraft practices are the subject of heightened scrutiny by the CFPB and state
banking regulators.

In Miller v. Del-One Federal Credit Union, the credit union charged an overdraft
fee in two circumstances.  One circumstance was where a customer did not have
sufficient funds in his or her account to cover a transaction and the credit
union paid the transaction.  The second circumstance was where a customer had
sufficient funds in his or her account to cover a transaction but, after
subtracting the amount of  future payments such as a monthly water bill or
mortgage payment, the credit union determined that the remaining balance
available to the customer would not be sufficient to cover the transaction.  In
that second circumstance, the credit union charged the customer an overdraft fee
even if he or she deposited sufficient funds to cover the future payments and
even if the credit union did not pay the transaction.  The credit union had
provided the plaintiff with an opt-in notice that tracked the language in the
model notice found in Regulation E, Appendix A-9.  That language states that “An
overdraft occurs when you do not have sufficient money in your account to cover
a transaction, but we pay it anyway.”

The plaintiff alleged that the credit union violated the requirements in
Regulation E that an opt-in notice must “describ[e] the institution’s overdraft
service” and required disclosures must be “clear and readily understandable.” 12
C.F.R. Sections 1005.17(b)(1)(i), 1005.4(a)(1).  As an initial matter, the court
rejected the credit union’s argument that the court should consider other
documents it gave to the plaintiff that, according to the credit union, clearly
explained its overdraft policy even if the notice was ambiguous.  The court
stated that it could not consider the documents because they were not integral
to the plaintiff’s complaint and that, in any event, they could not be integral
because Regulation E requires the opt-in notice to be “segregated from all other
information.” 12 C.F.R. Section 1005.17(b)(1)(i).  The court read this
requirement to mean that all relevant information about the credit union’s
overdraft policy had to be in the body of the notice. 

The district court concluded that the plaintiff had stated a plausible claim
that the notice did not accurately describe the credit union’s overdraft service
in a clear and readily understandable way.   According to the court, “[o]rdinary
consumers would likely understand the phrase ‘do not have enough money in your
account’ to refer to a literal shortfall of cash, not the possibility of one.”
The court observed that Regulation E did not require the credit union to quote
the model form verbatim but only required it to use a notice that was
“substantially similar” to the model notice.  The court commented that the model
language might be accurate if a bank charged overdraft fees “only when the
customer spends more money than she has in her account.”  However, according to
the court, the template would not be accurate “when, as here, a bank looks at
upcoming payments to calculate overdraft.”

The court rejected the credit union’s argument that it could not be held liable
for using the model language because 15 U.S.C. Section 1693m(d)(2) shields bank
from liability for “any failure to make disclosure in proper form if [they]
utilized an appropriate model clause.  According to the court, the credit
union’s argument “confuse[d] form with substance.”  While the credit union might
be shielded from a lawsuit about the notice’s configuration, the plaintiff was
challenging the notice’s content or substance.

The district court also concluded that the plaintiff had stated a plausible
claim under the Delaware CFA.  The court rejected the credit union’s argument
that the plaintiff’s claim should be treated as one for breach of contract
rather than fraud because the plaintiff was effectively objecting to having been
charged an overdraft fee that was not authorized by the opt-in notice. 
According to the court, the plaintiff’s claim was based on an alleged failure to
disclose important information rather than a broken promise.  As such, the court
considered it to be a “classic fraud argument, not a breach of contract one.”

In light of this decision, we recommend that financial institutions examine
their opt-in notices  to determine if the language used in the notices
accurately describes the circumstances under which an overdraft fee is charged. 

Tags: overdraft
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