Credit unions present themselves as the "good guys," non-profit member-run organizations incapable of engaging in predatory financial services. While this is true for many, my research has uncovered credit unions, including several of the largest, that have developed an addiction to overdraft products that mirrors the worst predatory banks.
Will these credit unions and the broader credit union movement address these problems or use their considerable lobbying clout to defend the few credit unions with poor practices?
For years predatory credit unions hid their overdraft problems by not having to report data. Banks with over $1 billion of assets began reporting overdraft fee income on their call reports in 2015. I called for credit unions to report this data in
The new data shows that many credit unions are exemplary with low or no reliance on overdraft revenue. However, more than a handful of credit unions have become what I call "overdraft addicts," earning a majority of profits from overdraft. Overdraft-addicted banks include First National Bank Texas, Gate City, Woodforest, and Armed Forces, for which overdraft fees made up 186%, 178%, 83%, and 61% net profit respectively in 2023.
For credit unions, the concept of profit is different, so I consider net income. Frontwave Credit Union made 140% of its net income on overdraft while UNCLE made 186%, clear signs of addiction.
This data shows how overdraft-addicted credit unions and banks are similar in how much overdraft related revenue they generate per customer or member. Compare that to Bank of America and PenFed, two large institutions that do not rely on overdraft.
Frontwave is a concerning example. The credit union is based in Oceanside, California, where Marine Corps Base Camp Pendleton is also located. Enlisted Marines are "
Perversely, larger credit unions that carry a low-income designation generate more overdraft per member on average than non-designated credit unions. Analysis of credit unions with over $10 billion of assets show that those with low-income designation average nearly $40 in overdraft and NSF fees per member compared to $21 for non-designated credit unions. Perhaps low-income credit unions serve more people who overdraft, but it is hard to believe that they would generate almost twice the overdraft revenue without something pushing them toward more overdraft. Regulators need to examine overdraft practices as part of low-income certification determinations.
The first step to solving a problem is acknowledging it. Unfortunately, some credit union advocates continue to
This logic calls into question whether parts of the credit union movement have lost sight that "credit unions are member-owned, democratically-controlled and operate for the purpose of maximizing economic benefits to members by providing financial services at competitive and fair rates," according to the World Council of Credit Unions. Instead of fighting disclosures, more states should follow the lead of California and the NCUA and require greater disclosure.
Second, all financial institutions should post customers' credits before their debits to cut down on overdrafts. Ninety percent of banks do this, while only two-thirds of credit unions do.
Third, credit unions should eliminate NSF fees. In October 2023, the
Credit unions should return to being leaders in serving low- and moderate-income Americans. Credit unions can do what the best large banks have done: including creating grace periods for customers to avoid overdraft fees and eliminating NSF fees. They can also reduce the cost of an overdraft to the actual cost the credit union faces — $8 to $10, according to the CFPB — from the $20 to $35 per commonly charged now. Credit unions could also offer affordable small-dollar loans with charges more akin to what wealthier customers pay for lines of credit.
I deeply believe in the credit union movement. My main transaction account has been with the United States Senate Federal Credit Union since 2001. USSFCU
