The following is an article reprinted with permission from the Winter 2007 edition of The WWR Letter:
Collecting Delinquent Courtesy Pay/Overdraft Protection Accounts
By: Matthew Young, Esquire
Courtesy pay programs, also referred to as “bounced check protection” and “overdraft protection” have become a recent trend in the credit union (“CU”) industry. The popularity of these programs is not surprising, since they have the potential to benefit the CU as well as its members. CUs benefit from this program by offering a revenue generating opportunity through fees charged when the CU covers a member’s overdraft. Members benefit from this program to the extent that a CU covers any overdraft on the members’ accounts, thereby avoiding bounced checks, unsuccessful point of sale transactions or denied automatic teller machine (“ATM”) transactions.
In facilitating this program, however, the CU must ensure that it does not create a separate contractual agreement with its members to pay overdrafts, since a separate agreement with members may trigger the Truth in Lending Act (“TILA”), thus requiring requisite disclosures.*
Unfortunately, not having a separate agreement in place for a courtesy pay program may limit the CU’s ability to enforce the courtesy pay fees that a member may incur as a result of utilizing the program. Courts may be reluctant to award specific courtesy pay fees if the same cannot be supported by a direct contractual arrangement with the member and the CU. The only contract the CU has at this point is the Member Agreement and the terms in the Agreement discussing fees generally. A CU should first try to collect these fees through the process of offset on any other accounts the member has at the CU. If the CU needs to sue the member on courtesy pay balances, it should provide to its legal counsel the CU’s account terms setting forth fees charged for overdrafts pursuant to the courtesy pay program, a copy of the member policy discussing such fees, and the Member Agreement when placing a delinquent account for collection.
A courtesy pay program also affects a CU’s ability to collect statutory damages and attorneys’ fees for negotiating a check with insufficient funds. In Ohio, CUs have an ability to collect treble damages and attorneys’ fees for any losses it sustains as a result of a member passing a bad check or deposit.** This recovery is based on the notion that passing a bad check is considered a theft offense once the member is made aware of the situation and does nothing to remedy it. However, where a CU extends courtesy pay protection to an account, overdrawing on the account via a non-sufficient funds check cannot be considered a theft offense since, in essence, the CU has acquiesced to the overdraw by virtue of its courtesy pay program.
In short, by offering courtesy pay or overdraft protection programs, the CU can benefit and so can its members. However, when weighing the costs and benefits for such a program, CUs must be mindful of their potential inability to collect courtesy pay fees associated with the program should an account progress to litigation. Further, when offering overdraft protection programs to members, CU’s must be aware of their inability to collect liquidated damages and attorneys’ fees that might otherwise be available to them when a member negotiates a bad check.
Matthew M. Young is an Associate in the Credit Union department of the Brooklyn Heights operations center. He can be reached at (216) 739-5726 or firstname.lastname@example.org.
* For additional information, see: Porter, John B.C. Fall 2004. Recent Trends in Courtesy Pay or Bounced-Check Protection Programs. The WWR Letter. http://weltman.com/publications/?a=1&scid=25and Porter, John B.C. Fall 2005. Amendments to TISA Target Courtesy Pay Programs. The WWR Letter. http://weltman.com/publications/?a=1&scid=25
** If your CU is located outside of Ohio, check with local counsel relative to your state’s laws addressing this issue.