Class Action Alleges University & State Employees Credit Union Charges Improper Overdraft Fees

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University & State Employees Credit Union has been hit with a proposed class action over its alleged practice of charging overdraft fees on transactions that do not actually overdraw a customer’s account and multiple fees on a single transaction.

According to the 42-page amended complaint, the California-based credit union uses “accounting tricks” to improperly charge overdraft fees on accounts that contain sufficient funds to cover a particular transaction. More specifically, the lawsuit alleges University & State Employees uses an account’s artificial “available balance”—an internal balance for risk management calculations that takes into account anticipated future activities —to assess overdraft fees, rather than the account’s actual balance.

Thus, the credit union sometimes improperly charges an overdraft fee when an account contains enough funds to cover the transaction at issue, according to the suit. While not only unfair, this practice is also not disclosed in University & State Employees’ account agreements, the case contests.

Moreover, the lawsuit argues that the defendant further “manipulate[s] checking accounts to increase profits” by charging an insufficient funds (NSF) fee each time a single transaction is reprocessed. Per the suit, the credit union’s contracts with customers neither disclose nor permit this practice of assessing more than one fee on a single item.

The lawsuit states that University & State Employees Credit Union—a financial institution with eight branches that serves California state and university employees and others in the counties of San Diego, Sacramento, Yolo, Alameda and Santa Clara—enters into a contract with each customer, entitled “Deposit Account & Services Agreement.” Per the suit, the defendant discloses in the account agreement that it will only charge an overdraft or NSF fee when an account does not contain sufficient funds to cover a transaction.

Importantly, nowhere in the credit union’s account agreement does University & State Employees disclose that it will determine whether to assess an overdraft fee using the funds available in an account after deducting holds on deposits and pending debit card transactions, the lawsuit states. The case claims that the defendant nevertheless charges a $27 or $33 overdraft fee based not on an account’s actual balance but an artificial “available” balance that takes these holds into account.

“Here, Defendant charges expensive overdraft and NSF fees when the artificial ‘available balance’ is negative but the account contains as much or more money than has been requested,” the complaint relays. “Defendant’s practice of charging overdraft and NSF fees, even when there is enough money in the account to cover a transaction presented for payment, is inconsistent with the Account Agreement.”

The lawsuit goes on to criticize University & State Employees Credit Union’s apparent practice of charging more than one overdraft or NSF fee on a single transaction. Per the case, the defendant charges the first fee when a transaction is initially processed and then an additional fee if the same item is presented again for reprocessing. 

The suit says the credit union’s account documents state only that a single fee will apply per “Returned Item[].” According to the case, a single electronic transaction is not a new item each time it is reprocessed, especially when the customer has taken no action to initiate this reprocessing.

The lawsuit claims that the defendant’s overdraft and NSF fees—which amount to $27 for the first five items in a 12-month period and $33 for the sixth and following items in a 12-month period—“bear no relation” to the credit union’s risk of loss or the cost of administering the overdraft program, but are instead a way for University & State Employees to charge customers an interest rate in the thousands.

Initially filed in San Diego County Superior Court, the lawsuit was removed to California’s Southern District Court on April 4, 2022.

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