ALEXANDRIA, Va.–The NCUA board has voted 2-1 in favor of a rule that makes changes to what’s required of overdraft policies at federal credit unions.
NCUA Board Member Todd Harper cast the dissenting vote, saying the new rules “benefit credit unions over their members.”
The new rule allows credit unions to charge off the overdraft after about 60 days, and still have the right to offset.
Prior to the vote, staff from the agency’s Office of General Counsel noted CUs have been permitted to offer overdrafts without a member having a credit application on file in 2000, and that the agency’s long-standing position has been overdrafts are a financial accommodation to a member and constitute a loan or line of credit to a member.
The current rule requires federal credit unions to have a policy in place, with a time limit of 45 days for the member to cover the overdraft or receive an approved loan to cover the overdraft.
The new rule removes the 45-day maximum and replaces it with a requirement a FCU have a written policy that is “reasonable and applicable” for all members to pay the overdraft or receive an approved loan.
An ‘Outdated’ Rule
NCUA Chairman Rodney Hood said the revisions are part of the agency’s effort to rethink an outdated and burdensome rule.
“A case in point is this rule change that would adjust overdraft accounting policies,” said Hood. “In some cases overdraft protection can serve as short-term credit and provide peace of mind. In these times in particular, access to short-term credit can be especially helpful.”
Hood said access to short-term credit keeps members from seeking relief from pernicious payday lenders or high-rate credit cards.
“The proposal gives credit unions more time and flexibility to explore solutions to members' needs,” said Hood, adding the change brings NCUA’s rules into alignment with those of other regulators. “The changes will not undermine important consumer protections and are consistent with the long tradition of credit unions providing members with affordable, quality financial services.”
The cap on how a CU prices overdrafts, said Hood, can hurt a credit union or preclude it from offering overdrafts at all. As long as fees are properly disclosed, members can make informed decisions and “ensures CUs can make these necessary products available,” said Hood.
‘Missed Opportunity’
In voting against the proposal, Harper said NCUA is “missing a real opportunity to provide credit union members who are suffering because of this financial crisis with some substantive relief.”
“In considering this matter, we ought to listen to consumer advocates like the Center for Responsible Lending, Self-Help Federal Credit Union, Self-Help Credit Union and the National Consumer Law Center,” said Harper. “In their June 10, 2020, letter to us, they lay out the simple truth about this policy change: ‘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.’”
Harper cited the letter’s allegation that overdraft fee practices at many FCUs 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 purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes.’ Rather than promote 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.”
Saying he very much agreed with that analysis, Harper said Black and Hispanic consumers are being “disproportionately harmed” by overdraft fees,” and the result is the “programs are products of financial exclusion, not financial inclusion.”
Four Steps That Should Have Been Taken
Harper said he preferred NCUA had taken steps to put members on a stronger financial position by:
- Protecting credit union members from the repayment of negative balances through a single balloon payment from their next deposit
- Prohibiting “sustained” or “extended” overdraft fees
- Requiring overdraft fees to be reasonable and proportional to the cost to the credit union
- Limiting to the number of fees charged per year or per month
“The NCUA Board should have taken any of these steps to shield households from the escalating economic fallout of the pandemic and provide relief from overdraft programs,” Harper said. “Instead, we are taking actions to benefit credit unions over their members.”
Harper said he believes credit unions should be offering members an amortizing loan to clear the negative balance, “undoubtedly in the better interest of the member, sooner rather than later.”
“But, by extending the timeframe for negative balance resolution beyond 45 days, the proposed rule before the board today would lengthen the period for which a credit union can maintain its effective super-lien position over its members,” he said.
Harper also raised concern that a CU can charge-off the debt after 60 days, but maintain the right to offset and can garnish a member’s income to pay off the overdraft.