NCUA's Harper: Large credit unions will report overdraft data

Al Drago/Bloomberg

WASHINGTON — National Credit Union Administration Chairman Todd Harper said Tuesday in an interview at the Brookings Institute his agency will soon require credit unions with above $1 billion in assets to report data on both overdraft and nonsufficient funds fees separately to the NCUA.

The NCUA director noted that understanding the scope of such fees is an important first step to ensuring equity at credit unions, as such fees tend to fall disproportionately on lower income people.

"This is going to be different from banks," he noted. "We're gonna require separately reporting of overdraft fees and nonsufficient fund fees, so you'll have greater granularity in order to track."

The top federal credit union regulator noted that such a requirement would apply to over 400 credit unions, which hold roughly 90% of the total assets held by credit unions.

While there has been heightened scrutiny about overdraft and nonsufficient funds fees in the banking industry, credit unions have also faced increasing scrutiny over so-called 'junk fees' for some time. The increasingly online bank and credit union ecosystem means customers can more easily change banking relationships, which has in turn created more pressure among banks and credit unions to offer more competitive fee structures. Harper's remarks indicate credit union regulators are also considering a regulatory approach to curbing such fees.

Harper also touched on another major fairness issue at credit unions: whether credit unions should continue to be exempt from the Community Reinvestment Act.

The 1977 CRA exempted credit unions because their membership bases were smaller and far more local when the law was drafted, and credit unions were thought to be inherently oriented toward community development. But credit unions have grown dramatically and fields of membership have become increasingly broad in some cases, with two credit unions now serving national customer bases. 

Banking industry trade groups, such as the American Bankers Association, called for Congress to subject credit unions to similar CRA obligations to banks in comment letters responding to the CRA revamp finalized last fall, although they still remain exempt. Only Congress can take action to modify the statute to include credit unions.

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Aaron Klein, a senior fellow with the Brookings Institution who interviewed Harper at Tuesday's event, reiterated an argument he's made before that such initial logic exempting them is no longer relevant. If credit unions can effectively serve anyone, Klein argued, they should be CRA compliant.  

Harper argued that the unique nature of credit unions complicates his stance on the issue. He argued that if Congress decides to modify the statute, they should include substantial flexibility, keeping in mind that the idiosyncrasies of credit unions may not make CRA metrics a perfect fit in certain cases.

"What do you do with a credit union that is focused — as you pointed out earlier — on an employer? Maybe it's the police department or a teachers' credit union like my dad started or the one that my mom belongs to," he noted. "It's a fairly narrow bandwidth when it comes to salaries, and you have to have some flexibility in your application there."

Harper also emphasized his agency's enduring focus on fair lending. Under his leadership, the NCUA is increasing monitoring and enforcement of fair lending violations and according to him, the number of staff dedicated to fair lending supervision has tripled.

"Until about eight, nine years ago, we had never referred a case to the Justice Department," he said. "We do do that now and in fact, we are regularly referring." 

While he argued fair lending supervision is an important check on credit unions in the absence of the CRA, he also advised the audience to be mindful that numbers alone can be ill-suited to comprehensively evaluate the fair lending impact of such uniquely small-scale business models. 

"It's problematic practice if there is a particular group that is being denied credit and we've got an obligation to go in and look and dig a little deeper to see what are the reasons for it," he said. "Some of the reasons may be that [credit unions have] got a great outreach program and they're doing a lot of lending in a community — to say, an African American community — overall, but they're also having turndowns as a result of that outreach."

Harper also renewed his agency's call that Congress restore the NCUA's authority to supervise third-party vendors, a capability the NCUA lacks compared to its bank regulatory counterparts. 

The NCUA's vendor authority expired in late 2001. Although statutory language to restore the authority was included in a house-passed annual defense bill in 2022, that provision was dropped from the final language of the law. 

The National Association of Federally-Insured Credit Unions, the industry's major trade group, has opposed this authority, citing concerns about increased compliance burdens. While experts have differing opinions on the significance of this authority, Harper has consistently argued that the growing reliance on third parties necessitates Congress reinstate it. 

Harper noted that lack of authority means risks in the credit system can often fester beyond agency purview, calling it an "achilles' heel for the credit union system."

Harper noted that many of the crucial missions for modern credit unions, such as loan servicing and BSA compliance, are increasingly being outsourced to third parties. This spreads out and dilutes the NCUA's ability to rein in such risks. As with banks, credit unions' third parties store sensitive data and provide core systems that mechanize internal credit union functions.

Harper noted that restoring such authority would also allow credit unions to access NCUA examination information when vetting the reliability and soundness of vendors. This would level the playing field between credit unions' and banks' diligence capability as the latter already enjoy such access with their prudential regulators. He also noted the risks associated with the growth of artificial intelligence in finance as further impetus for restoring the NCUA's ability.

"When the NCUA is given this authority by Congress to complete its job, it will implement a risk-based examination program for third-party vendors focusing on services that relate to safety and soundness, cybersecurity, Bank Secrecy Act and anti-money-laundering compliance, consumer financial protection and areas posing significant risk for the Share Insurance Fund," he said. "The time has come to close this growing regulatory blind spot."