Financial institutions

A cautionary case about the use of disclosure models by financial institutions

“A good role model is a guide, not a gospel. It must be relevant to the facts. That’s what should have happened here. – Hon. Stephanos Bibas

The district court for the District of Delaware issued an opinion reprimanding a Delaware credit union for failing to ensure that a disclosure template accurately described its policies. (Miller v. Del-One Fed. Box, No. 1:21-CV-01433-SB, 2022 WL 2817875 (D. Del. July 19, 2022)). The district court’s finding serves as a warning to all financial institutions that use Regulation E model language in their disclosures or otherwise rely on model language provided by regulators.

In Miller, a credit union’s overdraft policy was broader than the Regulation E definition of “overdraft”, because the credit union’s policy considered upcoming bills to determine the amount available in its customers’ accounts. For this reason, a customer could have an overdraft on their account despite having sufficient funds to cover the expense – a situation that would not be considered an overdraft under the definition of Regulation E.

Upset that the disclosure template provided by the credit union did not accurately describe its policy and practices, the customer sued the credit union for violation of Regulation E and Delaware’s Consumer Fraud Act.

The Court interpreted the requirement in Regulation E – that the credit union must give its customers “a written notice…separate from all other information, describing [its] overdraft service” – to mean that all relevant information about the overdraft policy must be contained in the disclosure. For this reason, the Court concluded that it was not relevant for the credit union to accurately describe its policy in other documents provided to the customer.

The credit union further argued that it was protected from potential liability because it used the disclosure language model of Regulation E. However, the Court noted that Regulation E provides protection from liability. for allegations that the disclosure was not made the right way. form when financial institutions use the appropriate model clause. However, the regulations do not provide liability protection for claims that the substance of the disclosure was inaccurate, as was the case here.

In short, the Court allowed the customer’s claims to sue the credit union despite the fact that the credit union used model Regulation E language in its disclosure and found it irrelevant that the overdraft policy was accurately described. in other documents provided to the client. “If a bank charges overdraft fees only when the customer spends more money than is in their account, the model language may be accurate.” In this case, since the credit union charged overdraft fees not only when the customer spent more money than was in the account, but also when a hypothetical overdraft might arise in light of the future bills, the disclosure was inaccurate despite using the Model E. Regulation language and therefore the credit union was potentially liable.

In light of this recent ruling, financial institutions should heed the Court’s warning and review their use of standard language to ensure it accurately reflects current policies and practices.

Armstrong Teasdale lawyers represent financial institutions in a wide range of regulatory, transactional and litigation matters, including advice on compliance matters involving Regulation E. Please contact your usual AT lawyer or one of the authors listed here below for advice regarding your specific situation.