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Credit unions must adjust their overdraft and non-sufficient funds fees policies if they want to remain competitive with banks, which increasingly have made changes to their programs, NCUA Chairman Todd Harper said Tuesday.
“Banks have worked in recent years to restructure their overdraft and NSF fee programs,” he told those attending the California and Nevada Credit Union Leagues’ REACH Conference. “The time has come for credit unions to do the same, if they want to remain competitive and live up to the statutory mission of credit unions of meeting the credit and savings needs of members, especially those of modest means.”
Harper added that financial institutions that rely on fee income from overdraft and NSF fees have concentration risk issues, which raise potential safety and soundness concerns.
Democratic ‘Junk Fee’ Campaign
Overdraft programs have become a thorny issue in the financial services industry. President Biden, CFPB Director Rohit Chopra and other Democratic policymakers have included overdraft and NSF fees in their campaign to eliminate so-called “junk fees.”
The NCUA board currently is controlled by Republicans, so it would be difficult for Harper to attack so-called “junk fees.” However, President Biden has nominated Tanya Otsuka, a Democrat, to replace Republican Rodeny Hood. If she is confirmed by the Senate, Democrats would control the board and Harper could push the agency to take a tougher position on fees.
In his speech, Harper cited two recent studies as evidence that credit unions must change their policies.
Credit Union Dependence on Fees
He said that the CFPB recently issued a report that said that about two out of three banks with more than $10 billion in assets have eliminated NSF fees. However, he said, that among 20 credit unions with more than $10 billion in assets, 16 continued to charge NSF fees.
“So, as it stands, credit unions — especially the largest ones — are behind the curve, Harper said. “And how can it be that banks, on this metric, are more consumer friendly than credit unions? That fact should give everyone in the credit union industry pause.”
Harper also cited a recent study that found that 114 state-chartered credit unions credit unions in California took in about $252 million in overdraft and NSF fees in 2022.
He said that of those credit unions, eight derived their entire positive net earnings from overdraft and NSF fees.
That report received wide distribution in Washington, D.C., with longtime credit union critic Aaron Klein, a senior fellow at the Brookings Institution, writing about it in Politico.
Harper said that research shows that NSF and overdraft fees fall disproportionately on underserved communities.
Troublesome Fees
He described the fees he said are particularly troublesome.
“Problematic overdraft programs include those that charge fees that aren’t reasonable and proportional, rely on systems that authorize positive and settle negative, or impose multiple representment or non-sufficient funds fees,” he said. “Multiple representment fees can be especially onerous as consumers foot the bill for both themselves and merchants, while financial institutions get paid multiple times.”
He said that credit unions that continue to maintain an overdraft program should consider features such as affordable lines of credit or short-term, small-dollar loans.
He warned, however, that as more financial institutions dramatically decrease or eliminate overdraft fees, consumers will begin to expect their financial institutions to follow suit.
Harper said that credit unions can offset the loss of revenue in creative ways.
“For starters, build your member base and create new loan products,” he said. “You can also originate a greater number of safe, fair, and affordable mortgages and other loans using alternative ways to identify the creditworthiness of your members. Once you make those loans, service them.”
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