Overdraft Fraud Suits Filed Against Seven More CUs
A San Jose, Calif.-based attorney has filed seven class action lawsuits against credit unions, alleging overdraft shenanigans.
Attorney Fernando F. Chavez and his counterparts in Alabama have filed suits against the $9.4 billion SchoolsFirst Federal Credit Union of Santa Ana, Calif.; the $6 billion Star One Credit Union of Sunnyvale, Calif.; the $1.3 billion Kern Schools Federal Credit Union of Bakersfield, Calif.; the $2 billion Educational Employees Credit Union of Fresno, Calif., the $8.4 billion Alliant Credit Union of Chicago; the $590 million Alabama Telco Credit Union of Hoover, Ala.; and the $1.25 billion America’s First Federal Credit Union of Birmingham, Ala. The lawsuits were filed between June 21 and June 26.
The $751 million Xceed Financial Federal Credit Union of El Segundo, Calif., was the target of a similar lawsuit in April.
Plaintiffs accuse the California-based credit unions of deceptive business practices that involve “the systematic manipulation and re-ordering of electronic debit transactions from the highest dollar amount to the lowest dollar amount…to maximize the amount of overdraft fees collected.”
The suit not only alleges re-ordering but also charges the credit unions published inaccurate and unreliable account balance information online, by phone and by ATM; delayed posting transactions; charged exorbitant overdraft fees; failed to disclose overdraft practices; and engaged in deceptive advertising campaigns.
Specific legal complaints include fraud, negligent misrepresentation, unjust enrichment, breach of fiduciary duty and violation of the Unfair Business Practices Act and Professions Code. If the parties fail to reach an early settlement, conferences on the cases are scheduled for late August and early September.
The court documents appear to be a cut-and-paste job based upon Closson vs. Bank of America, a 2011 lawsuit that resulted in a $410 million settlement. On June 26, the Boston-based Citizens Bank settled its overdraft class action lawsuit for $137.5 million. The $30 billion Citizens was part of a broader class action suit that reportedly involves more than 30 banks.
Rick Heldebrant, president/CEO of Star One, told Credit Union Times his institution does not reorder transactions nor does it order them largest transaction to smallest during processing. Heldebrant said Star One has not been served any legal papers, but he looked up the court documents online after reading about the case in the media. He said the allegations in the suit are false.
Like Heldebrant, Kern Schools President/CEO Steve Renock said he has not been served any papers nor has he seen the complaint. However, Renock said he “believes the allegations are not correct at this time.”
Renock would not say if Kern Schools reorders transactions to maximize overdraft income or in which order transactions are processed. He said he was advised by credit union attorneys to not speak on the matter until the lawsuit has been reviewed, but he said, “We treat all members fairly and believe all fees are appropriate.”
If the accused credit unions are maximizing overdraft income, it doesn’t show in their financial performance reports. All but two reported fee and operating income to average assets below peer averages during first-quarter 2012. Star One reported only 0.16% fee income to average assets, compared to the peer average of 1.38%. Alliant’s fee income was only 0.19% of average assets.
Kern Schools was the lone exception, reporting 2.39% fee income to average assets. According to 5300 reports published on the NCUA’s website, Kern Schools collected $4.78 million from fees and $2.8 million in other noninterest income, which includes CUSO revenue.
Renock and Chief Operating Officer Matt Davidson were unable to respond to questions about fee income at press time.
The lawsuits come as the Consumer Financial Protection Bureau is researching overdraft practices and collecting information from financial service providers and the public.
In May, Rep. Carolyn Maloney’s (D-N.Y.) introduced HR 5691, the Overdraft Protection Act, which would severely limit the ability of financial institutions to collect overdraft fees and require new disclosures. Industry trade associations say due to partisan support, the bill has little chance of passing.
However, NAFCU Vice President of Legislative Affairs Brad Thaler speculated that Maloney, who has championed overdraft reform for years, introduced the bill to give the CFPB guidance as they consider stricter overdraft regulations.
The bill would expand current courtesy pay opt-in requirements to include paper checks, ATM withdrawals and recurring ACH payments. It would also require the disclosure of coverage and fees, both at the time of original opt-in and again when an overdraft fee is charged, require that overdraft fees be “reasonable and proportional” to the cost of the transaction, cap fees to one per month and six per year and ban the ordering of transactions to maximize overdrafts.
Overdraft fees would also be defined as finance charges subject to Truth in Lending Act disclosures if the bill were to pass as written.
In 2011, class action lawsuit Closson v. Bank of America resulted in a $410 million settlement. According to the settlement website, Bank of America was forced to pay up to $78 to customers who could prove they had an account at BofA, had account accessibility through a debit card, check card or another other card used for debit purchases, and paid at least one insufficient funds fee, overdraft fee, returned item fee, over-limit fee or similar fee related to a debit card transaction between 2000 and 2007.