A change in the makeup of the National Credit Union Administration board has given new life to a proposed rule on overdrafts that is favored by some credit unions but leaves other institutions and consumer activists wanting more.
If finalized, the measure would remove the strict 45-day limit for members to make a deposit or obtain a line of credit to cover a negative balance. Instead, the proposal would require credit unions to adopt written policies to “establish a specific time limit that is reasonable and universally applicable.”
The presumption of many observers is that credit unions would extend the grace period, perhaps to 60 days. Doing so would give consumers more time to avoid overdraft fees and might help credit unions cut down on their charge-offs of accounts that go into the red. However, consumer groups and some in the industry would like to the NCUA take more steps to curb overdraft fees.
The proposal was brought up for consideration in May 2020 but was tabled after then-Chairman Rodney Hood was the only member of the three-person panel
Hood could not get a second on the motion from either of the other two board members — J. Mark McWatters or Todd Harper. (McWatters and Hood were Republican appointees, with Harper the lone Democrat.)
But after McWatters
Harper, who subsequently was appointed chairman by President Joe Biden, has been an ardent supporter of stronger consumer protection requirements for credit unions. He said the overdraft proposal “missed a tremendous opportunity to provide substantive and real relief” — in other words, it should have in his view gone farther to shield members from overdraft fees.
Some credit unions that favor the proposal say that it would provide some additional relief for members affected by the pandemic and that that alone is a good enough reason for the NCUA to give credit unions more flexibility.
But the plan would also better align with the NCUA-adopted interagency guidance on overdraft protection programs that suggests a maximum of 60 days before an overdraft is charged off.
James Pack III, chief member services officer with Coastal Federal Credit Union in Raleigh, North Carolina, said credit unions should be allowed to determine the specific time limit that would be both reasonable and applicable for its members to either deposit funds or obtain a loan to cover overdrafts.
The $3.8 billion-asset institution also said that negative balances should be charged off within 60 days because anything unpaid longer than that could be considered uncollectable.
In a review of accounts charged off during 2020, the proposal would have prevented 244 transactions from being charged off, because the amount owed was paid within the 15 additional days, he said.
"We reach out to our members within two weeks of an account being overdrawn for any reason, including overdraft fees. The proposed change to the 45-day requirement will not be beneficial just during the coronavirus pandemic but when it has finally ended," he said.
The National Association of Federally-Insured Credit Unions said the 45-day time frame ultimately harms members most by limiting federal credit unions' ability to work with them.
"No consumer protection argument in support of a 45-day time frame, as opposed to a 60-day or 90-day time frame, has been raised, and indeed there are no policy reasons for doing so. Further, there is no safety and soundness concern specifically alleviated by the 45-day time frame as opposed to other reasonable lengths of time," the group said in its comment letter.
But some consumer groups and credit unions have opposed the proposal and are calling for it to be reviewed further.
In a joint letter, the Center for Responsible Lending and $1.6 billion-asset Self-Help Federal Credit Union in Durham, North Carolina, said the NCUA’s proposal offers no evidence that it will achieve its stated goal of providing relief to credit union members. They instead would like to see it go farther and bar overdraft fees for an extended period of time.
"During a health and economic crisis, it’s only more important that the agency take a do-no-harm approach. Instead, this proposal undermines and contradicts federal relief efforts. To avoid causing net harm to members, any final rule must prohibit additional overdrafts, overdraft fees and nonsufficient funds fees during the period beyond 45 days," the groups wrote.
Thomas FitzGibbon, Jr., managing director of Artisan Advisors, said any adopted overdraft policy should ensure that practices are not predatory and thus cause additional financial burden to members.
The proposed rule does not specify what the fees would be limited to and leaves it up to the individual credit unions to set the fees per overdraft and overdraft dollar limits, he said.
In the 1990s, some banks offered “overdraft advantage” and “overdraft privilege” programs that solicited and, in some cases, pre-authorized access to the program. That resulted in significant backlash from consumer advocates because the programs resulted in excessive fees and check-processing procedures that enabled the bank to charge more fees.
"The devil is in the details at the credit unions as it was with the banks who adopted the program to cover overdrafts for longer periods and larger dollar amounts," he said.
FitzGibbon said credit unions will need to consider questions including whether their new policies could cause operating losses in excess of predictions and what the reputational risk could be if the program results in problems with their members.
The comment period for the proposal closed Feb. 16, and an NCUA spokesman said the agency is reviewing the comments received.
