On Compliance: Avoiding a UDAAP lawsuit

CUs must analyze and enhance overdraft disclosures to reduce risks.

The Dodd-Frank Act’s creation of the Consumer Financial Protection Bureau and the addition of the “abusive” test in the “unfair, deceptive or abusive acts or practices” clause has resulted in an ongoing increase of compliance costs for credit unions. However, the focus on UDAAP is not limited to regulatory compliance risks. Financial institutions, including credit unions, have been targeted in class action lawsuits alleging inadequate disclosures of overdraft protection programs. As with UDAAP claims, the best approach for credit unions to avoid such allegations is to closely analyze their overdraft programs and disclosures and, as necessary, enhance the information provided to members.

Available Balance
Many credit unions use the “available balance” (which considers transactions authorized but not yet cleared) to determine whether to pay a particular transaction and also whether to charge a non-sufficient funds fee (when returning an item) or an overdraft fee (when paying an item). Lawsuits allege that the usage of the available balance was not clear and, thus, the overdraft fees were improper because the member’s actual balance was positive.

Importantly, using the available balance is allowed. And, there are no regulatory requirements outlining how and when a credit union is required to disclose its usage of the available balance. Rather, the overarching UDAAP standard results in the need to ensure the CU’s overall overdraft program—including usage of available balance—is upfront, clear and transparent to members.


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