Thursday, October 27, 2016

UDAAP and the Freezing of Delinquent Members Electronic Access to Accounts

The Consumer Financial Protection Bureau (CFPB) accused Navy Federal Credit Union of engaging in "Unfair, Deceptive or Abusive Acts or Practices" (UDAAP) by freezing members electronic access to their accounts after they became delinquent.

Some within the credit union industry have stated that the CFPB's action is usurping a "long standing legal interpretation is that an FCU may limit services to a member who has caused a loss" so long as the member retains the right to vote at the annual meeting and maintain a share draft account.

However, I believe these concerns are overblown. The enforcement order is specific to Navy, not to the industry. Navy can no longer impose electronic account restrictions on members, who become delinquent or overdraw their accounts; beause its practices were unfair and not abusive.

Credit unions can still freeze electronic access to accounts; but need to ensure their practices are fair.

Critics of the CFPB have accused the agency of regulation through enforcement action. I agree with that observation; but it is not going to change any time soon. Therefore, it is important to read the enforcement order and do your due diligence, especially if you are a credit union with at least $10 billion in assets.

Here are some examples of unfair practices from the order.
  • Navy froze members access to the accounts without providing adequate notice to the members.
  • The electronic account restrictions prevented members from adding travel alerts through mobile platforms.
  • The electronic account restrictions disabled the member's ATM and debit cards as well as all ATM functions.
  • Navy did not make exceptions for accounts containing protected federal benefits, such as Social Security income or veterans’benefits.
Furthermore, the order found that injuries to members were not reasonably avoidable because policies and practices regarding electronic access and service restrictions were not adequately disclosed at the time the account was opened. This means that credit unions need to look at their account opening process to ensure that members have adequate disclosures.

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