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.