By Ray Birch
MADISON, Wis.—Another expert is recommending credit unions in California not overreact to a recent national report that paints a negative picture of certain CUs’ overdraft practices, emphasizing the article does not take into consideration enough facts.
Nonetheless, CUs in the Golden State should be making sure they’re taking some proactive steps with their OD programs, the analyst says.
“I wasn't surprised. It's in line with what we've seen from that author in the past. I think it's misleading and counterproductive—to view this single issue in isolation,” said CUNA Chief Economist Mike Schenk, emphasizing the author should have evaluated credit unions’ overall pricing structures, not just a single product line.
As CUToday.info reported, the piece stated, “There’s a new predator making money off overdraft fees: credit unions.”
The article, published by Politico under the headline, “Credit Unions Are Making Money Off People Living Paycheck to Paycheck,” was authored by Aaron Klein, the Miriam K Carliner chair and senior fellow in economic studies at the Brookings Institution. Klein served as deputy assistant secretary of the Treasury from 2009 to2012 and as chief economist of the Senate Banking, Housing and Urban Affairs Committee from 2004 to 2009.
The report follows the release of the first annual report from California’s financial regulator following a law requiring data be published showing how much institutions are making from overdraft fees and NSFs, as CUToday.info reported here.
‘No Secret’
“It's no secret there are people who will use this topic as a basis to attack credit unions,” said Schenk. “They don't like credit unions and especially don't like the fact that credit unions have a different tax status. They seem to be under the impression that because credit unions are depositories and they offer similar products and services to banks that they ought to have a similar tax status.”
Schenk pointed out that CUs regularly evaluate their pricing structure and work to ensure overdraft programs are used appropriately by members.
“They're a valuable alternative to overdrawing accounts, and they're fully consistent with the credit union philosophy,” said Shenk. “We see them as valuable in resolving short-term financial disruptions. We support the consumer-friendly, transparent plans that aren't marketed or promoted in a misleading or deceptive manner. And, members do opt in to these programs. That's important to remember. We do oppose efforts by CFPB and other state and federal regulators to eliminate the ability of credit unions to decide how to design these things for themselves. As member-owned institutions, they really should have that ability.”
A Look at the Structure
Schenk said that, largely, overdraft programs at credit unions are structured to pay, rather than return nonsufficient fund transactions, in exchange for fees that that are similar to those that would be charged if the items were returned.
“My sense is that many credit unions have been looking at these programs closely and have been making changes to them,” he said.
Schenk reminded that ethical guidelines underlie regulations as part of the effort keep overdrafts consumer friendly.
“They include things like very specific statements that revolve around avoiding deceptive advertisement, avoiding anything that would incent or entice members to overdraw repeatedly, structuring programs so they don't mislead members, informing heavy users of alternatives, and providing financial counseling information,” he said.
A ’Blanket Statement’
But aren’t credit unions becoming over-reliant on fee income, which was suggested in the opinion piece from Klein? The California analysis, for instance, highlighted several CUs at which OD revenue was a significant piece of their overall revenue.
“It's hard to make a blanket statement like that, and I think it’s especially hard in the context of what of what was done in that article—where, essentially, you're looking at one service exclusive of the portfolio of services the CU offers,” Schenk stated. “Looking at something in isolation, it's really hard to draw any meaningful conclusions on a way a credit union operates and interacts with its members.”
Steps to Take
Should California’s state-chartered credit unions take any steps now that their overdraft revenue numbers are available to the public?
Mike Schenk
“Make sure you're paying attention to your fees,” Schenk advised. “Go over them regularly. I would definitely recommend credit unions do that. Look at the overdraft advertisements you have. Make sure they're not deceptive. Ensure that people really understand what they're getting into. You definitely want to avoid anything that would incent or even seem to incent members to overdraw repeatedly. Identify those heavy users and not only offer financial counseling but help them understand what other alternatives they might have to avoid those fees. All of those things are really important.”
Schenk added that he has heard on several occasions that credit unions face challenges from certain core processing systems that sometimes make it difficult to make OD program adjustments as quickly CUs would like—changes such as the ability to order debit transactions and change overdraft pricing.
“That can be a bit of a problem,” he acknowledged.
‘That’s a Big Problem’
In addition to the new California law making overdraft pricing and revenue public, more attention is simply being paid to such offerings from consumer advocacy groups and the CFPB, the latter having strongly signaled its intent to crack down on “junk fees.”
“We worry a lot about regulatory burden, over regulation, the massive volume of regulatory reporting requirements. We think that regulators too often wade into the minutiae of product structure and pricing, and that's a big problem,” said Schenk.