EL SEGUNDO, Calif.-Just as legislation is introduced to address the onslaught of numerous lawsuits against financial institutions over ATM disclosures, credit unions may now face a new wave of legal action, this time regarding their overdraft practices.
A group calling itself classaction.org is soliciting credit union members all over the country to file new overdraft suits. The group has posted invitations on the Internet inviting members of Mountain America CU, Metro CU, Redstone FCU, Orange County CU, Trans CU, and SRP FCU, as well as customers of numerous banks, to serve as plaintiffs for potential suits.
If the action leads to lawsuits and eventual settlements from credit unions, several sources told Credit Union Journal they believe the result will go beyond financial damages and extend to damage to the CU community's reputation and also lead to greater scrutiny on overdraft programs by the Consumer Financial Protection Bureau, which has already stated it will be looking closely into overdraft practices.
Some sources, including CUNA, suggest this effort by classaction.org is not likely to produce successful lawsuits against credit unions, due in large part to the belief that CUs do not pool batch process transactions, and then post all of their transactions from the highest dollar amount to lowest, a practice that leads to more overdrafts. That practice has already forced numerous big banks to pay millions of dollars in settlements. Bank of America, for instance, paid out $410 million to settle its suit.
However, some credit unions may be engaging in the in batching of transactions, particularly debit, based on opinions by CU industry analysts. In a purported class-action suit filed in U.S. District Court for the Central District of Los Angeles, Cuthbert Shillingford claims the $750-million El Segundo, Calif.--based Xceed Financial FCU engages in the practice.
What's Being Alleged
The four-year member of Xceed Financial claims XFCU engaged in deceptive and unfair practices by re-sequencing his debit transactions in order to create overdrafts in his accounts. Shillingford said the practice of re-sequencing has caused him to pay fees on dozens of overdrafts by having his checking account depleted quicker than if the transactions were deducted in chronological order. He is seeking more than $5 million in damages for what he describes as a class of Xceed members that could number in the tens of thousands.
In an e-mail to Credit Union Journal, Xceed Financial CEO Teresa Freeborn stated, "As a not-for-profit, member-owned credit union, our business practices are member-centric. We are currently researching the matter and will take whatever action is in the best interest of our members."
It is uncertain whether Xceed was included in any of the notices posted on the Internet by classaction.org, based on Internet searches and reports from sources. It is also unclear, several sources stated, how classaction.org is selecting credit unions to be named for what some say is a growing list of financial institution defendants. A call to classaction.org requesting details on how it is selecting credit unions was not returned.
The $3.3-billion Redstone FCU in Huntsville. Ala., however, was named in a classaction.org posting, but CEO Joe Newberry said RFCU does not and has not engaged in high-to-low posting.
"Our overdraft program is an optional service that the member can elect to opt-in, and is fully compliant with NCUA rules and regulations and guidance from the Federal Reserve," said Newberry. "Our communication with members regarding overdrafts is very good. Members can elect to go online to check balances, and we send text and e-mail alerts. I feel very good about the program we have in place and it has been well received by members. I never understand these type of (legal) tactics, especially when we are committed to educating and informing our members regarding our overdraft program."
'May Have Grievances'
The online notices from classaction.org do not state the credit unions it names are engaging in deceptive overdraft practices, but suggests members may have grievances similar to those outlined in lawsuits filed against BofA, Wells Fargo, and other large banking institutions."
While sources shared concerns that credit unions, primarily large ones, are being randomly named by classaction.org Internet postings, others say possibly a small number of CUs may deserve the attention.
Michael Moebs, economist and CEO at Moebs $ervices in Lake Bluff, Ill., said his company's research consistently shows that 9% to 11% of banks and credit unions will "push the envelope" to find ways to generate more overdraft revenue. "I have no doubt there is an extremely small number of credit unions or community banks that could be pooling all of the batches they receive in one day, collectively as one big pool, and then posting from highest dollar to lowest."
Moebs said it is very difficult to detect whether an institution is engaging in the practice without some sort of look into its operations. "However, in instances when this practice is happening, when you take a look at how the financial institution's items are processed in total, what they are claiming on their website, and what you hear from them when you call them, you have to come to the conclusion they are not taking a member- or customer-friendly approach."
Expensive Strategy
It's very expensive for an institution to make the switch to this type of transaction processing, noted Moebs.
"You can be talking about millions of dollars, which is why when this processing change is completed, the institution will charge a very high, beyond-market price for overdrafts to pay for the cost," he said. "Most credit unions and community banks just don't have the resources to engage in this type of processing. If there was a combination of large CU, with poor control of expenses, and already high fee income, the possibility they would engage in this practice goes up."
Brad Mundine, senior manager of risk management at CUNA Mutual Group, said according to his latest review of NCUA guidelines, if a credit union is doing batching of transactions and then posting high to low, the practice does not appear to violate any NCUA rules or regulations. But it would bring reputational risk, he said.
"It also increases your exposure to litigation," said Mundine. "No credit union wants to be in headlines for stories that accuse you of having policies that manipulate member transactions in any way to maximize income."
