Regulators at the National Credit Union Administration are taking a deeper look at overdraft programs for 2022 as part of a mission of combating financial exclusion.
The NCUA’s heightened scrutiny of the fee programs comes as financial institutions including
Credit union trade organizations like the Credit Union National Association and the National Association of Federally-Insured Credit Unions say that the NCUA’s review of overdrafts is logical when considering the
The NCUA’s decision to focus on overdraft practices aligns with the agency’s past decisions, as well as current initiatives from other regulators such as the
“The NCUA sets their supervisory priorities every year, and every year they include some element of consumer protection laws and regulations,” which in the past has included the Home Mortgage Disclosure Act and the Military Lending Act, Monterrubio said. “Given the overall environment around overdraft, [such as] the CFPB looking more closely at overdraft fees and fees in general, I think it is not necessarily surprising that the NCUA would follow suit.”
The regulatory focus on the fee programs will prompt credit unions to conduct reviews of their own practices regarding the level of fees situated against members and how they are disclosed to consumers, Monterrubio said.
Consumer outcry has also been a driving factor behind many institutions’ decision to revise their overdraft programs.
Roughly 52% of consumers said overdraft fees were an unfair penalty that disproportionately impacts those underprivileged consumers, according to a June 2021 survey of 2,200 U.S. adults conducted by the data intelligence firm Morning Consult in Washington.
“Part of the NCUA’s concern here, and the reason why overdraft is included as a supervisory priority for the agency this year, is because they're always taking a look at potential issues of safety and soundness … as they’re looking at consumer complaints, these issues may come up,” said Ann Kossachev, vice president of regulatory affairs for NAFCU.
In addition to addressing consumer complaints and looking for the potential reputational, compliance or litigation risks the practices pose to both the NCUA and the credit union industry as a whole, regulators also need to be aware of the dependency smaller credit unions have on the revenue generated from fees to help subsidize programs like free checking accounts, financial literacy efforts and community investments, Kossachev said.
“The reality is, overdraft is still a significant source of revenue for some smaller credit unions,” Kossachev said.
At CUNA’s Governmental Affairs Conference held in Washington earlier this month, NCUA Chairman Todd Harper discussed the potentially harmful effects of overdraft fees as part of an update on the agency’s supervisory focuses for the coming year.
“Punitive overdraft fees can harm consumers, and households hit by frequent charges often have their checking accounts closed … so, such fees can actually lead to financial exclusion, instead of financial inclusion,” Harper said.
Using the data on overdraft procedures and communication with members aggregated through reviews and audits, the NCUA expects to conduct a more thorough examination of the programs in 2023, Harper said.
“The agency needs to understand how these programs are structured, whether disclosures are provided to consumers, whether there are any features that are unfair to consumers and whether a credit union relies too heavily on overdraft fee income,” leading to potential issues of safety and soundness, Harper said.
For those institutions that still heavily rely on the fees, Harper proposed the institution of additional features such as linking to savings accounts, and offering lower-rate lines of credit and short-term, small-dollar personal loans to provide members with additional windfalls.
