LAS VEGAS–In remarks to credit unions here, NCUA Chairman Todd Harper touched on a number of familiar themes, but also gave extra time to an issue that has drawn increasing attention and scrutiny: Overdrafts and nonsufficient funds fees. But in a state where CU overdraft fees were recently released as part of a government report, Harper said it may be time for credit unions to “rethink” their policies.
In remarks to the California and Nevada Credit Union Leagues’ REACH Conference, Harper said, “Banks have worked in recent years to restructure their overdraft and NSF fee programs. 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.”
What CFPB Has Found
Harper noted a recent CFPB report showed roughly two out of three banks with more than $10 billion in assets have eliminated NSF fees, saving consumers nearly $2 billion annually. Meanwhile, the same report shows that among credit unions with more than $10 billion in assets, 16 of 20 continue to charge NSF fees, including four of the five largest credit unions in the country, he said.
“So, as it stands, credit unions — especially the largest ones — are behind the curve. And, how can it be that banks, on this metric, are more consumer friendly than credit unions?” Harper asked. “That fact should give everyone in the credit union industry pause.”
What Analysis in California Revealed
Harper cited the recent release of data by California’s regulator that found the 114 state-chartered CUs in the Golden State took in approximately $252 million in overdraft and NSF fees in 2022. CUToday.info has details on that report here.
“Of those credit unions, eight derived their entire positive net earnings from overdraft and NSF fees,” said Harper. “And, 30 institutions earned at least half of their positive net earnings from the same fees. This overreliance on overdraft and NSF fees adversely impacts both parties.
“Now, I recognize that not all credit unions are ready to make the jump to reduce or eliminate overdraft and NSF fees overnight,” Harper continued. “These decisions require adjustments to revenue expectations, especially as overdraft fees comprise a sizable proportion of non-interest income at some credit unions. If your credit union plans to maintain an overdraft program, I encourage you to consider features like linking to savings accounts; offering affordable lines of credit or short-term, small-dollar loans, and helping members build their savings. However, as more financial institutions dramatically decrease overdraft fees or drop them altogether, consumers will begin to expect their institution to follow suit.”
Time to ‘Rethink’
Harper said it is time for credit unions to rethink their overdraft programs “if the industry wants to remain competitive and achieve its statutory mission and purpose. The good news is that credit unions and banks that have already made the switch have not had to cut services to members or pare back operations. Instead, many have created new income streams. You, too, can diversify your revenue streams in creative ways.”
Harper urged CUs to build their member bases and create new loan products, including originating a greater number of safe, fair, and affordable mortgages and other loans using alternative ways to identify the creditworthiness of members.
Other Issues
Other issues touched on by Harper included:
Credit Union Financials
Harper focused on credit unions’ overall performance statistics as of Q2, noting:
- The industry’s aggregate net worth ratio grew to 10.63%, which represents an increase of 21 basis points over last year, and a recovery of 61 basis points from the pandemic’s low.
- A 12.6% year-over-year increase in the number of credit union loans. “While that figure lags slightly behind what we observed during the previous four quarters, it indicates a continuing trend of healthy loan growth,” Harper said.
As he has in other recent remarks, Harper cautioned that there are warning signs in the economy and at other financial institutions, noting that several regional banks have signaled ongoing stress on the financial system’s funding and economic capital.
“During the last few quarters, the NCUA has also seen growing stress within the system because of a rise in interest rate and liquidity risk,” Harper said. “In fact, this financial stress is reflected in the increasing number of composite CAMELS code 3, 4, and 5 credit unions. Assets in composite CAMELS code 3 institutions increased sizably in the last quarter, especially among those complex credit unions with more than $500 million in assets. And, such increases may well continue in future quarters. We have also seen more credit unions fall into the composite CAMELS code 4 and 5 ratings during the second quarter.”
$6 Million Added to Reserves
Harper said the agency has added $6 million in reserves to the Share Insurance Fund, which he said is “tied directly to the number of troubled credit unions.”
As he has also cautioned recently, Harper said the agency is seeing growing signs of credit risk emerging, especially in the commercial real estate market and among families with increasingly stressed household budgets, which have spent down pandemic-related savings and struggle with higher prices for goods and services.
Other Concerns
Additional concerns raised by Harper included:
- The recent rise in home equity lines of credit balances could also indicate financial stress in some households stretching to make ends meet.
- There has been an increase in net charge-off ratios at credit unions and declining annualized returns on average assets.
- High levels of interest rate risk can increase a credit union’s liquidity risks, contribute to asset quality deterioration and capital erosion, and place pressure on earnings.
“In fact, several credit unions, including those with more than $1 billion in assets, are already experiencing an impact on their performance,” Harper said.
Second Quarter Takeaways
What can credit unions take away from all these data points and trends? According to Harper, his biggest takeaway is the market is seeing a tale of two types of credit union members emerging, both of which represent risks that credit unions must manage.
“The first type are the savers who have shifted deposits to share certificates to take advantage of better rates,” Harper said. “The growth in timed share deposits has jumped by 69% over the last four quarters. Unless carefully managed, this dramatic switch away from low-paying savings and share checking accounts can expose credit unions to greater interest rate and liquidity risks.
Second Type of Risk
“The second type of members are those with growing financial stress, many of whom are on the wrong side of the higher delinquency rates in credit cards and automobile loans,” Harper continued. “With this rising household financial strain, credit unions must carefully manage their credit risks going forward and consider early intervention to prevent a delinquency from becoming a charge-off. Credit unions must also remain prudent and proactive in managing interest rate risk and the related risks to capital, asset quality, earnings, and liquidity.”
Artificial Intelligence
“AI — including its use in fintech applications — offers both promise and peril,” said Harper. “As a regulator, insurer, and supervisor, the NCUA’s goal is to maximize and deliver on the former while identifying and mitigating the risks of the latter. Some of the pitfalls in relying on artificial intelligence to make important, even life-changing, decisions have already come to light.”
Harper cited the CFPB guidance issued one month ago that reminded creditors they must provide specific reasons for an adverse action taken against an applicant under the Equal Credit Opportunity Act and the Fair Credit Reporting Act.
Real-Time Payments
Harper pointed to FedNow, the around-the-clock instant payment network recently launched by the Federal Reserve, as well as PayPal, Zelle, and Venmo as representing both the present and future of financial services and products.
“Indeed, they have recalibrated customer expectations for what depository institutions should offer to keep their business,” he said.
Harper said “two important benefits” of instant payments — convenience and cost savings — “chip away at the barriers to financial inclusion. They have the potential to give consumers and businesses more control over their money and reduce the time and cost of receiving payments, which makes them more economically resilient.”
A Potential Worry
But there is a “potential worry,” according to Harper, and that is that faster payment settlement has inherent risks and can pose liquidity and risk management challenges for financial institutions. “And, because instant payments are irrevocable, they present an increased opportunity for fraudsters to steal the hard-earned savings of victims with little to no recourse for recovery,” he added.