CFPB sanctions Navy Federal for improper overdraft fees

Joshua Roberts/Bloomberg

UPDATE: A quote by the National Credit Union Administration in this article was changed to remove the word "deceptive."

Navy Federal, the nation's largest credit union with assets totaling $181 billion, must pay $95 million in refunds and penalties after the Consumer Financial Protection Bureau cited it for charging illegal overdraft fees. 

The Vienna, Virginia-based Navy Federal "harvested tens of millions of dollars in junk fees, including from active duty servicemembers and veterans," CFPB Director Rohit Chopra said Thursday in a press release. The agency, which has waged a determined campaign against overdraft practices, cited two practices in particular: levying fees when a member had sufficient funds at the point of purchase, and when a member relied on a peer-to-peer payment that had not yet been processed.

Ting Shen/Bloomberg

CFPB barred Navy Federal from charging overdrafts in similar situations going forward. The credit union must also refund $80 million to members and pay a $15 million penalty — the largest CFPB has ever assessed on a credit union. The CFPB's enforcement action earned Navy Federal a strong rebuke from National Credit Union Administration Chairman Todd Harper.

"Navy Federal's authorize positive, settle negative practices and the subsequent charging of overdraft fees were not only unfair, but they also caused substantial harm to consumers," NCUA Chairman Todd Harper said Thursday in a press release. "In many cases, consumers were charged an overdraft fee completely unaware of Navy Federal's complex processes related to the posting of transactions and whether they will incur an overdraft fee."

In a statement Thursday, Navy Federal said it had fully cooperated with the CFPB investigation and agreed to the fine. Navy Federal, however, added it believes its overdraft program was compliant with "all applicable laws and federal regulations."

 "This settlement enables us to focus on serving our members and their families," Navy Federal stated.

Navy Federal's fine comes after a number of banks found themselves ensnared in CFPB's overdraft dragnet. Regions Bank, TD Bank and the Richmond, Virginia-based Atlantic Union Bank have faced fines. 

CFPB unveiled a proposal in January that would classify overdraft as an extension of credit and cap fees charged by the largest financial institutions, or those with more than $10 billion of assets, at $14. Banks have pushed back furiously against the plan. In an August op-ed, Consumer Bankers Association President and CEO Lindsey Johnson wrote that CFPB's overdraft hostility would result in a thinner cushion for cash-strapped consumers who rely on overdraft to make ends meet. 

"Many consumers also reported lacking credit alternatives, meaning overdraft services allow them to pay their bills without having to sell their household goods, borrow from friends or family," Johnson wrote. 

Other analysts claim financial institutions, including some credit unions, have reaped a bonanza off overdraft, saddling low income consumers and service members with tens of millions of dollars in fees. Harper has made scrutinizing credit unions' overdraft practices a priority for NCUA. Earlier this year, for the first time, the agency required credit unions with more than $1 billion of assets to disclose overdraft data in call reports.  

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In  its most recent call report, Navy Federal reported collecting $250.5 million in overdraft fee income through the first nine months of 2024. It collected nearly $1 billion in overdraft fees from 2017 to 2021, according to CFPB.

For its part, Navy Federal stated its Optional Overdraft Protection Program offers members an alternative to payday lenders and other more costly debt. It added that it offers programs aimed at helping members better organize their finances and reduce reliance on overdrafts. Other benefits, including dividend payments and reduced interest rates earn or save members more than $450 a year, according to Navy Federal.

The Navy Federal action marks the second recent high-profile enforcement action directed at a credit union by CFPB. Last week, it sanctioned the $14.7 billion-asset Vystar Credit Union in Jacksonville, Florida, for glitches in the 2022 rollout of a new operating system that limited members' access to their accounts for months.