ALEXANDRIA, Va.–Two consumer groups and one credit union have sent a letter to the NCUA board saying the Interim Final Rule on Overdraft Policy that was tabled during the May board meeting fails to meet the needs of members, even though it is “desperately” needed, and states the overdraft practices of many CUs is “detrimental” to members.
As CUToday.info reported, NCUA Chairman Rodney Hood put the proposal forward but it was defeated by a 2-1 vote when board members J. Mark McWatters and Todd Harper voted against it.
In the letter from the Center for Responsible Lending (CRL), Self-Help Federal Credit Union, Self-Help Credit Union, and the National Consumer Law Center (saying it was writing on behalf of its low-income clients), the organizations wrote, “Unfortunately, the proposal fails to offer members relief from overdraft fees so desperately needed during the COVID-19 crisis, while subjecting members to additional risks from overdraft programs. In addition, as an interim final rule, the proposal would inappropriately bypass the notice and comment period warranted for any proposal that could increase harm to members from overdraft practices.”
‘Fundamentally Detrimental’
The letter goes on to state the overdraft fee practices of many federal credit unions are “fundamentally detrimental to members and inconsistent with the very definition of ‘Federal credit union’ in the Federal Credit Union Act: ‘A cooperative association organized . . . for the purposes of promoting thrift among its members and creating a source of credit for provident or productive purposes.’”
The organizations told the NCUA board that rather than promoting sound financial management, so-called “courtesy” overdraft fee programs “undermine it. Rather than provide credit for provident or productive purposes, these overdraft fee programs make it harder for members to regain their financial footing, or kick them off the ladder altogether.”
The letter argues credit unions “earn an outsized portion of their fee income through overdraft fees, draining billions of dollars every year through back-end ‘gotcha’ fees. These fees average about $30 each at credit unions and members are often charged multiple fees in a single day. Across the checking account market, overdrafts are most commonly caused by debit card transactions, which cause overdrafts averaging only $20 each and which the credit union could easily decline at no cost.”
One CU’s Example
The letter states overdraft fees are overwhelmingly paid by a relatively small number of members “least able to shoulder them.” The groups cited an unnamed credit union of approximately 10,000 members where 60 members were charged between 50 and 214 overdraft fees in one year. The fee was $29 each, meaning these 60 members paid between $1,450 and $6,200 each, the letter states.
The letter says African Americans and Latinos are disproportionately harmed by overdraft fees, which they said is “particularly significant given that African Americans and Latinos are four-to-five times more likely to be unbanked than white Americans, meaning that among those who are banked, African Americans and Latinos pay far more than a representative share of the fees. And their ejection from the financial mainstream when accounts are closed due to overdraft fees only feeds the stark racial disparities.”
In the letter the two consumer groups and the credit union say a “hallmark dysfunction of today’s overdraft programs is that the financial institution repays itself the entire negative balance from the depositor’s next incoming deposit. This practice puts the depository first in line for collection before the member has the opportunity to pay for essential expenses or other obligations.
“By extending the time period for negative balance resolution from 45 to 60 days, the tabled proposal would extend the period for which the credit union maintains this effective super-lien position. Instead, credit unions should be offering members an amortizing loan to clear the negative balance -- clearly in the better interest of the member -- sooner rather than letter continues. “At the same time, the proposal neglects to address the risks the change would pose to credit union members. These risks include the possibility that the credit union will seize significant portions of delayed stimulus or unemployment payments, or other incoming deposits, for repayment of negative balances -- a significant portion of which are comprised of fees that were fundamentally unfair from the start. The proposal also could lead to additional overdraft fees charged during the extended time period.”
How to Provide Relief
The letter-writers encouraged the board to require credit unions to provide “meaningful relief” from overdraft fees during the COVID-19 crisis and beyond, saying NCUA could:
- Require credit unions to cease collecting repayment of negative balances through a single balloon payment from the next incoming deposit, even before the 45-day point; stop charging “sustained” or “extended” overdraft fees when accounts are not quickly brought back to positive
- Reduce the size of the overdraft fee so that it is reasonable and proportional to the cost to the credit union
- Adhere to a meaningful limit on the number of fees charged per month and per year.