In Tims v. LGE Community Credit Union, the Eleventh Circuit upended how numerous banks think about their Overdraft Protection (“ODP”) obligations under Regulation E. In the wake of Tims, though, with some thought and clarification, banks can still use the Regulation’s model form to satisfy those obligations.
The Tims Decision
Carol Tims sued LGE Community Credit Union (“LGE”) for charging overdraft fees on two items drawn against her deposit account when the available balance in the account was insufficient to cover the items, but her ledger balance was sufficient. Among other things, Ms. Tims claimed the credit union breached the terms of its agreement with her, which was reflected in part by the written consent she gave to participate in LGE’s ODP program. She also claimed the consent violated the ODP provisions of the Electronic Fund Transfer Act (“EFTA”) and its implementing regulation (“Regulation E”).
To obtain Ms. Tims’ consent to participate in ODP, in compliance with Regulation E, LGE used the form of consent promulgated by the Federal Reserve Board (the “Fed”) and adopted by the Consumer Financial Protection Bureau (the “CFPB”) (the “Model Form”), which read, “An overdraft occurs when you do not have enough money in your account to cover a transaction, but we pay it anyway.” Ms. Tims argued that this form language indicated the “ledger balance” method of determining account balance, while LGE argued the language indicated the “available balance” method. Reading the Model Form together with the terms of the deposit account agreement, the trial court agreed with LGE.
The Eleventh Circuit reversed, finding the language of the agreement between Ms. Tims and LGE – consisting of the Model Form signed by Ms. Tims, the deposit account agreement, and LGE’s funds availability policy, read together – was ambiguous and did not clearly establish the parties’ intent with respect to balance calculation method. As a result, the Eleventh Circuit held that Ms. Tims stated a claim for breach of contract and violation of Regulation E.
Notably, the Eleventh Circuit reached this conclusion notwithstanding its observation that LGE used the Model Form, and that Regulation E expressly provides a safe harbor from EFTA liability where an institution uses “an appropriate model clause,” and mandates notice of ODP terms be “substantially similar to” the Model Form.
After Tims, What To Do?
After Tims, are institutions like LGE – who use the Model Form to satisfy their EFTA/Regulation E requirements – simply out of luck? A close reading of Tims indicates otherwise. Importantly, the Eleventh Circuit found there was an agreement between depositor and depository, but that it was ambiguous. This is critically important, as Regulation E prohibits charging ODP fees without the affirmative consent of the consumer. In recognizing that LGE had an agreement with the consumer, the court implicitly recognized that LGE obtained an effective affirmative consent, and simply left open a question regarding the consent terms. That is, the court could not determine from the face of the agreement whether the parties agreed to follow the available balance method or the ledger balance method when determining sufficient funds.
As a result, the Eleventh Circuit’s holding and reasoning also suggests a solution for depositories utilizing the Model Form: Remove the ambiguity. By clarifying the terms of its ODP, institutions should be able to resolve Tims-like claims. Consumers who dislike the clarified terms can simply revoke their consent and discontinue participating in the ODP.
While the Tims decision is challenging – logically and operationally – its holding suggests a solution. Institutions who rely on the Model Form for ODP compliance should revisit their disclosures to clarify the terms of its program and satisfy the EFTA and Regulation E.
Chris Couch is a partner in McGlinchey Stafford’s Financial Institutions practice, where he advises banks and boards of directors on corporate compliance, operational risk, and commercial lending matters.