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Tompor: 2 big Michigan credit unions hit with lawsuits regarding overdraft policies
September 17, 2017
"Attention: Credit Union Members," state the bold red letters in a newspaper ad.
"Has your credit union assessed multiple overdraft charges when you believed you had a sufficient balance?"
The ad by the Michael B. Serling law firm seeks victims of "multiple overdraft charges" much like the Birmingham firm advertises to help victims of mesothelioma and lung cancer caused by asbestos exposure.
Overdraft fees aren't life threatening. But many consumers would be shocked at how checks can be re-ordered and processed at some banks and credit unions, disproportionately affecting minorities, younger people and lower-income consumers. The fees can really rack up.
"It is a harmful practice that can make one overdraft turn into five, six, seven overdraft fees," said Thaddeus King, officer with the Pew Charitable Trusts' consumer finance project.
Financially strapped consumers who overdraw checking accounts using their debit cards and checks can pay more than $400 a year in overdraft fees relating to ATM cards and debit cards, according to a report by the Consumer Financial Protection Bureau.
Consumers must voluntarily sign up for overdraft coverage for point-of-sale purchases with a debit card or transactions using the ATM. But signing up — without understanding how fees can be triggered — often can drive up costs, consumer advocates say.
More than a dozen credit unions across the country — including two of Michigan's largest credit unions, Advia Credit Union in Kalamazoo and United Federal Credit Union in St. Joseph — have been hit with lawsuits challenging whether their members have been misled about what can trigger overdraft fees.
Practices being challenged include:
- Taking transactions out of the order they're made. Some financial institutions have a policy of processing the highest payment, such as a mortgage, first before smaller debit card transactions. That can lead to more overdraft fees if you're signed up for overdraft coverage and you use a debit card frequently, for example, for coffee, lunch or other small purchases.
- Failing to properly disclose how "opt-in" practices can work. Simply put, things work a little differently with debit cards and many consumers still don't know that. Consumers, for example, cannot be charged fees for overdrafts on ATM and most debit card transactions unless the consumer has agreed in advance to "opt-in" for such coverage.
- Failing to explain how balances are calculated. Do customers or credit union members understand the terms for when an overdraft fee on a debit card could be triggered? Did the credit union disclose how balances are calculated and when transactions are viewed to be cleared?
"You're unaware and you're being deceived into what circumstances can put you into overdraft status," said Philip J. Goodman, a Birmingham attorney and of counsel with the Michael B. Serling, P.C. Law Firm.
The cases involving the two Michigan credit unions are seeking class-action status. The Advia case is in the U.S. District Court for the Western District of Michigan, Southern Division in Grand Rapids. The United Federal Credit Union case is in U.S. District Court, District of Nevada. The credit union is headquartered in Michigan but has a sizable operation in the Reno area.
The $1.4 billion-Advia Credit Union, which ranks No. 9 in asset size among Michigan credit unions, has branches in Southgate, Port Huron, New Baltimore, Brownstown, Marysville, Battle Creek, Plainwell, Kalamazoo and elsewhere.
Advia operates in three states, Michigan, Illinois and Wisconsin. Early this year, Advia announced plans to buy a small bank, Peoples Bank in Elkhorn, Wis. Last year, Advia acquired Mid America Bank in Janesville, Wis.
United Federal Credit Union, which was founded by five Whirlpool employees in 1949, has grown to more than $2 billion in assets. It has branches in Benton Harbor, Berrien Springs, Holland, Niles, St. Joseph and elsewhere.
United Federal has a network in Michigan, Arkansas, Indiana, North Carolina, Nevada, and Ohio. It acquired the Griffith Savings Bank in Indiana in 2012. United Federal Credit Union ranks as the fifth largest credit union in Michigan based on assets.
The suit against Advia asserts that Advia charged overdraft fees for transactions when there was enough money in the account to cover the transactions.
Becky Pinkston-Poling, the plaintiff named in the Advia Credit Union case, claims she was harmed by a simple $7 debit card transaction.
"Just to give one example," the lawsuit noted, "on June 27, 2015, plaintiff had a balance of $30.48 before a $7 debit card transaction was posted to her account, leaving her with a balance of $23.48."
The lawsuit claims that Pinkston-Poling, a Kalamazoo resident, had enough money in her account to cover the transaction. But she ended up being charged a $32 overdraft fee on the $7 transaction because of how Advia calculates balances.
The suit noted that the credit union uses what is called an "available balance." The available balance would be lower than the actual balance because it subtracts anticipated debits in the future and would not include deposits that have not yet cleared based on its funds availability policy.
Consumer advocates maintain that overdraft fees have turned into a "highly lucrative profit center" for some financial institutions.
Under federal regulations that went into effect in 2010, banks cannot charge overdraft fees for debit purchases and ATM withdrawals without a consumer's earlier consent or without an "Opt-In."
But quite often, when opening a checking account, a representative at the bank or credit union will put a piece of paper in front of a consumer to "Opt-In" for coverage relating to a debit card. Many consumers agree to such coverage because it seems sensible. Consumers often don't want to be embarrassed by being turned down for a purchase if their account is running a tad short.
Many consumers don't realize there is no fee for a declined debit card transaction or ATM transaction if you don't "Opt-In."
But many financial institutions maintain that their customers are told what it means to opt in for overdraft coverage with a debit card.
"With nearly half of Americans unable to meet a $400 emergency expense, overdraft is a voluntary service which provides consumers access to short-term liquidity," said Richard Hunt, president and CEO of the Consumer Bankers Association in a news release.
Michael M. Bell, an attorney and partner at Howard & Howard in Royal Oak, represents both Advia and United Federal Credit Union, as well as Marietta, Georgia-based LGE Community Credit Union, in cases involving overdrafts.
Bell said he fully expects that more cases are yet to be filed against credit unions.
"Our clients firmly believe they have done nothing wrong," Bell said. "Clients take great pride in that they care about their customer-members."
In general, some say financial institutions might not want to take on the cost of litigation and could be more willing to reach a settlement agreement. In Michigan, there were 244 credit unions with a total of $58.7 billion in assets, as of March 31.
Earlier in July, for example, the second-largest credit union in the Tampa Bay area —the MidFlorida Credit Union — agreed to pay $2.375 million to settle a class-action involving overdraft fees, according to the Credit Union Times. The case hinged on disclosure materials.
In March, Huntington Bank agreed to a $15.9-million settlement over how FirstMerit Bank posted debit card transactions from highest to lowest purchases — not in chronological order — which allegedly led to more overdraft charges for a time from 2005 to 2010.
Akron-based FirstMerit was merged into Huntington in August 2016. Huntington said in an earlier statement that FirstMerit compiled with applicable laws. It simply agreed to the settlement.
Huntington said its policy is to post debit card transactions in the order in which the customer spends the money. Huntington also promotes a 24-hour grade period where the bank will waive overdraft fees if the consumer takes the appropriate action. If a customer's account is overdrawn at the end of the day, for example, the customer can make a deposit by midnight the next day to avoid fees. The overdraft fees would be waived as long as the account balance on that next day is overdrawn by less than $5 after posting all transactions.
Earlier this year, TCF Bank took on regulatory fire over how the bank allegedly made overdraft coverage seem mandatory when it was not. TCF Bank is challenging the claims made by the Consumer Financial Protection Bureau in the bureau's complaint.
"We believe that at all times our overdraft program complied with the letter and the spirit of all applicable laws and regulations, and that we treated our customers fairly," said Mark A. Goldman, senior vice president, director of corporate communications for TCF Bank, based in Wayzata, Minn.
In recent years, multi-million dollar settlements involving overdraft practices have been reached at Bank of America, Comerica, PNC Bank, Wells Fargo and others.
While it's possible to recover some money lost to overdraft fees as a result of a settlement, the payouts do vary. Many times, the settlement is based on a percentage of how much the individual consumers seeking claims lost to overdrafts in a set time frame.
In the past several years, some banks have been rolling out various kinds of changes to their overdraft programs after pressure from Pew and others. Some banks limit, for example, how many overdraft fees can be charged in one day.
Bank of America, for example, said it now declines debit card transactions at the point of sale if there's not enough money in the account to cover the purchase. At the ATM, the bank alerts customers multiple times that the transaction might cause an overdraft and result in a fee.
The bank said it posts all deposits first before processing any withdrawals, which are generally posted in chronological order, said Betty Reiss, a spokesperson for Bank of America. There is a cap of four overdraft charges per day.
In general, consumers need to realize that not every bank needs to follow the same rules. It's wise for consumers, particularly younger consumers or those with smaller balances, to review statements to better understand how charges seem to be processed and deposits are posted.
The lawsuits filed in these credit union cases quote some of the same statistics, such as that a 25-year-old is significantly more likely to pay an overdraft penalty than a 65-year -old. And more than 50% of customers assessed overdraft fees earned under $40,000 a year. Nonwhites are 83% more likely to pay an overdraft fee than whites.
The stats were originally released in a June 2014 report from the Pew Charitable Trusts titled "Overdrawn."
The Pew study includes another key stat that the lawsuits don't quote: Consumers who have a credit card are 34% less likely to pay an overdraft penalty than those who do not have a credit card.
Altogether, consumers spend about $15 billion a year in overdraft fees. About 9% of checking accounts are held by consumers who are viewed as "frequent overdrafters" — those who attempt to overdraw their accounts more than 10 times in a 12-month period, according to the federal watchdog agency.
People who face repeated overdraft fees paid 79% of all overdraft fees, according to the Consumer Financial Protection Bureau.
Plaintiff attorneys maintain that certain credit unions can use what's called an 'available balance' in a manner that understates the actual balance and triggers overdraft fees.
It's possible, for example, that an "available balance" will be lower than the amount the customer thinks is in the account because there's a hold placed on deposits that have not yet cleared.
"I believe it's intentionally confusing because the banks and credit unions make a bunch of money on it," said Richard D. McCune, of McCune Wright Arevalo, an California attorney who has represented consumers in class-action cases involving overdraft fees.
McCune said many younger consumers are no longer writing checks. They're using debit cards and they may be making small purchases when they have $50 or $60 in an account, he said. The bank authorizes the payment, but the transaction doesn't clear immediately, leading the consumer to think he or she has more money in the bank that actually exists.
"I've told this story 100 times and it's still confusing," McCune said. He noted that a California judge in an earlier case called the practice "bookkeeping manipulation."
The digging into the numbers is likely to continue, along with the criticism of high fees and unexpected outrageous charges on some consumers who can least afford it.
Contact Susan Tompor: firstname.lastname@example.org or 313-222-8876. Follow her on Twitter @Tompor.