Overdraft Fees Under the Microscope: NCUA’s Latest Guidance Decoded

But maybe for a listener who's new or who hasn't heard some of your podcasts, could you give a little bit of background of what you did before NCUA and at NCUA as it relates to credit unions and as it relates to consumer compliance or anything else that you're currently doing?

So I was To some extent, the agency's point person on consumer compliance matters that included fair lending as well as more of a garden variety consumer protection laws and regulations, but I retired at the end of 2021. I'm doing a little consulting with you and a couple of other things here, keep my hand in things. But I am glad you have me back for this this session. I'm going to talk about the NCUA's recent missive on overdrafts.

Or not sufficient funds program or policy you really should read that letter in its entirety. It's only about six pages long. It's eight pages if you include the end notes. There's two pages of those, but it's not overly technical. Now, to properly discuss what's in this letter, I want to start with a little bit of history on the subject, just for context. A quick search for NCUA issuances on overdrafts. Shows that it sent two letters to federally insured credit unions on overdrafts in 2005.

One dealt with bounce protection programs and the other with courtesy pay programs. And then in 2010, when the Federal Reserve Board amended Regulation E to require consumers to opt into an overdraft program, where the bank or credit union charges fees to pay an overdraft, NTUA issued a regulatory alert.

So even though those were the only formal issuances going back in that time period, the agency would occasionally handle overdraft issues arising during examinations or maybe submitted as consumer complaints. And that was especially true as the Office of Consumer Financial Protection developed after coming into existence in the early 2010s. And as that decade progressed, NCOA was aware of a number of private class actions against credit unions for overdraft related violations.

So because of an uptick in credit union compliance problems with their overdraft programs, NCUA added reviews of all overdraft programs to annual supervisory priorities Starting around 2017 or so. And since then, examiners of federal credit unions have looked at some aspect of overdrafts during regular safety and soundness exams in 2019, 2022, 2023, and 2024, and we'll do so again in 2025. The main problems we're going to talk about.

And that the agency has looked at evolve heightened risk when a credit union fails to comply with laws governing overdrafts either directly or indirectly. or by laws prohibiting the use of unfair, deceptive, or abusive acts or practices. Noncompliance could also potentially result in consumer harm, which adds to that risk. And I just do want to point out, this is not just a credit union matter. The federal banking regulators, including CFPB, have dealt with identical issues with banks.

CFPB has issued a regulatory change. For its supervised institutions and the banking regulators have issued notices similar to the letter I'm talking about now because he's overdraft problems. Including fee related issues persist. NCOA issued this letter. It's number 24 dash C U dash O three. And again, as I said earlier, it was in December of 2024. The title or the subject of the letter is consumer harm stemming from certain overdraft and non sufficient funds fee practices.

So by the name, you can see the focus is on. NSF fees. The letter delves into some of the history that I've mentioned and it describes why and how members either use overdraft programs or encounter them inadvertently, not knowing that they were going to be dealing with something like that. I want to focus on the letter's discussion of various types of overdrafts and NSF fees.

And I'm also going to mention NCUA's take on risk management, and as I said earlier, its supervisory approach going forward. So in this letter, after a brief statement on background the letter discusses several types of what are characterized as unanticipated overdraft fees. According to the letter, Unanticipated overdraft fees occur when a credit union assesses overdraft fees on transactions that a member would not reasonably expect would give rise to such fees.

Now you might think, how could that happen? When would a member not know? They're going to be hit with an overdraft fee. The letter has some examples that might answer those questions. The first one that the letter discusses is what's referred to as authorized positive settled negative overdraft fees. The acronym is APSN, Authorized Positive Settle Negative. This refers to when a member's account has sufficient funds to cover a debit card transaction when it is made.

That means that the account was in the black and the transaction was authorized by the credit union. But due to one or more intervening transactions, the account is in the red at the time the credit union settles That initial debit card transaction, so that can result in a fee for that overdraft on the initial transaction, and then it could result in additional fees for each intervening transaction that exceeds the account balance.

When settled, the problem is a member cannot reasonably anticipate a fee on the initial transaction. Because the account had a positive balance and the credit union authorized it when it was made. The NCUA says in the letter, this is, quote, likely unfair under both the Federal Trade Commission Act and the Consumer Financial Protection Act.

As a reminder, the Consumer Financial Protection Act is it's Title 10 of the Dodd Frank Act, and that's where the Dodd Frank Act added The abuse of prong to unfair and what was just unfair and deceptive acts and practices. Now the NCUA says that credit union systems that cannot identify APSN transactions that result in a fee to the member have a heightened third party and reputation risk issue. The second type of transaction with fees are multiple re presentment fees.

Now members are usually charged an NSF fee when a check or an ACH transaction is presented for payment and the account has Insufficient funds. That's pretty normal. But the problem arises when the check or the ACH item is represented and the member's account still does not have sufficient funds to cover it. And the credit union assesses another NSF fee. And it can happen multiple times, not just one additional time. The NCUA notes two issues connected with this.

Issue number one is, Members have no control over re presentment, and issue number two occurs where the account disclosure does not fully or clearly describe the credit union's re presentment policy or practice. So where this disclosure is inadequate, there are compliance issues that increase both compliance risk and reputation risk. And the same third party issues exist as with the APSN fees.

So even when a disclosure might describe the re presentment practice, imposing a fee for each re presentment of a single check or ACH item again, this is a quote from the letter, is likely unfair under the FTC Act and CFPA if the member is unable to reasonably avoid fees from re presented transactions. All right, now the third type of fees that's problematic. are returned deposited item fees.

Another acronym, RDI, Return Deposited Item. This relates to a member depositing a third party's check into the member's checking account. That's returned due to an issue with the account of the person who wrote the check. The member's credit union assesses a fee against the member for the returned item.

Reasons for imposing that fee include insufficient funds in the account of the checkmaker a stop payment order by the maker the account on which the check is written is closed or located in a foreign country, or there's some defect in the check, such as missing information. A problem with the signature, the date, the account number, or maybe the payee name. Now, some of those are beyond the knowledge or control of the member, who has no reason to anticipate the check would be returned.

Now, per the NCUA's letter, blanket policies of charging a fee to the check depositor for every RDI, irrespective of the circumstances, are unfair under both the Federal Trade Commission Act and the Consumer Financial Protection Act. And these practices also heighten consumer compliance and reputation risk. And the letter addresses some other practices. Three of these which can all heighten risk are if there are high or no daily limits on the number of fees assessed.

Second is ordering transactions to maximize fees. Generally, that means processing the largest first, which results in more transactions being subject to overdraft fees. Third is insufficient or inaccurate fee disclosures. I mentioned these class actions toward the beginning of my presentation. And the problem that generated those class actions was almost always That the disclosures were insufficient or inaccurate.

So generally a credit union had an overdraft policy and matching disclosures, or it had disclosures that conflicted with the practices, the actual practice. The disclosure might be silent about how the credit union determined when an account was overdrawn or maybe the disclosure would state the credit union looked at the account's actual balance. To determine if there were sufficient funds, but in practice, it used the available balance, which would be lower.

So that resulted in overdraft fees for some members whose actual balance would have covered the transaction. Inaccurate or insufficient disclosures and policies might not comply with the requirements of the NCUA's Truth in Savings Act regulation. And they also might be misleading and considered to be deceptive in violation of both the FTC Act. I do want to mention that the letter discusses risk management principles.

The letter contains suggestions for determining whether the credit union adequately oversees its overdraft programs. I'm not going to review them here, but I will suggest that if your credit union has any type of overdraft program and imposes fees related to it, And the credit union has not recently reviewed its policies, procedures, and practices. Now would probably be a good time to do that.

All right, I do want to spend a minute or two talking about the part of the letter that discusses NCOAs. Supervisory approach. The NCOA says it will continue to review overdraft programs to make sure credit unions are effectively managing the heightened risk of certain fee practices. So it's going to expect credit unions to mitigate those risks by ceasing unanticipated fee practices. The ones that I talked about a few minutes ago.

Now, where violations are detected, NCOA will consider appropriate supervisory or enforcement action, including restitution to harmed members. The agency also says that it will recognize a credit union's proactive efforts and self identification and correction of errors.

The letter says that generally, examiners will not cite and the NCUA will not take enforcement action under the FTC Act or the CFPA for violations that a credit union self identifies and fully corrects before the start of an examination. Now, with respect to restitution, NCUA will consider the likelihood of consumer harm. As well as the credit union's risk management process to self identify and correct violations.

And finally, in the letter, NCUA recommends, as I did about a minute ago that credit unions with overdraft and NSF programs review them for compliance. Now I'll add that in addition to that, if the credit union has not taken a recent look at its entire compliance management system, that are considered reviewing that at the same time. An effective and a viable CMS can prevent almost all noncompliance with consumer protection laws and regulations.

I refer you to NCOA's Federal Consumer Financial Protection Guide, which has a section on CMS with a checklist. You can use that to help evaluate your program and see if you need to make any revisions or updates. Alright, what I just told you was supposed to be the end of this podcast when I prepared my presentation. Except that yesterday NCUA actually issued something related to this.

It issued what it calls a research note and it's titled observations from the NCUA's new data on non sufficient funds and overdraft fees. I'm going to talk about that for a couple of minutes. In 2024, NCUA began collecting on quarterly call reports, data on revenue from overdraft fees and NSF fees. Credit unions with assets over a billion dollars are required to submit the data. And 444 credit unions did so in 2024. So this research notes, It contains an analysis of two aspects of the data.

The first is the combined amount of those fees as it relates to other fees credit unions collect. And total revenue. And the other aspect examines certain relationships between those fees and interest rates. Let me just tell you a couple of findings here. One interesting finding is that on the average, overdrafts and NSF fees combined to make up from 2 to 5 percent of total revenue. Of most credit unions. So that's essentially an average two to 5 percent of the total revenue.

However, the highest percentage that was found, it was 18. 2%. They also found that generally higher overdraft fees and NSF fees were not offset by lower fees for other services. In fact, credit unions with high overdraft and NSF fees, excuse me, tended to also have higher fees for those other services. And with regard to interest rates, the data indicate high overdraft and NSF fees were not used to offset interest rates.

Again the higher those fees were, they're generally associated with higher net interest margins. The press release also says that. Supervisory related inferences should not be made from the observations in this research note.

Now, while I'm sure that's true, I will suggest that the findings should be considered in the context of the letter to credit unions I discussed, as it's likely that if a credit union is imposing the types of overdraft and NSF fees, which could be unfair or deceptive acts or practices. Having a higher ratio of those fees to total revenue could be an enhanced risk effect.

So again, if your credit union imposes overdraft or NSF fees, I encourage you to read the research note, as it might provide you with some insight about your own programs. And with that, now my presentation is over. Mark.

I was at N. C. U. A. And it's interesting that so I've had clients and I've had credit union saying, Hey, I'm real interested on your take on what's going to happen on N. S. F. E. S. Because there's the anticipation that President Trump will make vice chair, Kyle Houtman, the chair sooner than later, shortly after inauguration, whatever shortly means. But there's a lot of thoughts out there that there might be a pivot on either collecting the data or NCOA emphasizing it during an exam.

Here you point out that they say that this research note won't be taken in consideration for the supervisory report. That it won't be supervisor related, but you and I know that data is out there within the, it's out there globally as far as not being able to tell which credit union is which, but you can reverse engineer it. The regions will have that information. O. C. F. P. will have that information. While. They're indicating they won't do anything supervisory related.

I think in most instances, that's the case. But Chairman Todd Harper in the past has said that fee income is a concentration risk and by him simply making that statement, it makes it a risk because it means NCOA might be looking at it. Over time you walk through a really good timeline there of, 05 when rules were put in place, and then in 2010, different things being done. And then over the last. Nine years, these being looked at addressed in priorities and or looked at as part of the exam.

So I guess one general thought is whether there's a D or whether there's an R, it might pivot a little bit in one direction with the D and then the other direction, meaning less enforcement with an R, but it doesn't ever seem to go away, right? I don't see this being a topic that NCOA stops looking at, particularly with what the CFPB has been doing in the bigger institutions. And then just another general.

No, and there's been some prognostication on Twitter or X or whatever you want to call it, or LinkedIn where people are presupposing that maybe Kyle Hauptmann could unring the bell of collecting the data. And I think chairman Harper has ring fenced that pretty well. And he even doubled down on it yesterday at the NCUA board meeting. And so we approved their annual performance plan. They made reference to this.

Research note approach where they are going to continue to publish research notes relative to this data. You have to collect the data to publish the research note and it was a board vote. The board voted on the annual plan and the annual plan included this research note. Now, how can Kyle Helpman impact that he is now when he becomes chair, he will be the. The chairman of the board is by the federal credit union acts is the spokesperson for NC UA.

So what he can do is control future letters to credit unions. He can revise theoretically that letter to credit unions that came out in December. Although I think he'll be very careful to want to do that just because of how closely it came in particular since he voted. To continue to do analysis on this makes me think he's not going to do a substantial huge pivot here, which some I think had hoped might be coming.

So that, that would be my prediction that Houtman will nibble around the edges, but most of this will remain in play. Any thoughts on any of that diatribe I just did there, Joe?

And that's a good reason to continue to collect data so you can bolster the practices of credit unions. But it also indicates that there may be some outliers. Who if there's a, an extremely large percent of the revenue is coming from NSF for overdraft fees, then there may be an issue with their lending practices and how they're interfacing with their membership.

If that's happening, there may be problems that are being glossed over, hidden at least, by the use, by these fees, bolstering the credit union, when in fact, the members are having difficulties and the credit union is not acting in a manner that's probably in the best interest of those members who are at risk. Sure. Sure. Yeah. And I think. Again, the collection of the data itself, data is, there are data are neutral. But it does give you some insight into the performance of the credit unions.

Yeah, I think to me it's helpful. And I think no matter what side of the, the fence you're on it's always better to have more knowledge than less knowledge.

And the further focus on fee income will make, it's all credit union has 10 percent net worth is different than one that has eight and it's different than one have has that has six. And historically, as you move down the scale of net worth and have to try and either put a net worth restoration plan together or have had loan losses come at you It's getting harder.

The world's getting harder in a lot of different ways, but for financial institutions that are below average capital wise oftentimes a way to try and recover from that was to look at how you can enhance your fees. You can still enhance your fees. You can still fee, but doing so aggressively is harder this year than it was last year. And regardless of who's who's in charge, I think it'll be harder next year than it is this year.

So it's just gonna, I'll go on another bit, a little bit of a diatribe as well, and it's yeah, having the data is good. Watching it closely is good, but I think it's going to lead to ultimately some credit unions, it'll be a tipping point for some credit unions where they're going, Hey, we can't push back here. We can't push back here. We can't push back here. It might be time to merge. It's similar to succession planning, NCUA. Previously had a succession planning letter to credit unions.

They opted for a succession planning regulation. Succession planning is like apple pie and baseball, it's a good thing. But having to do it, forcing it to be done by regulation at the same time as a enhanced look at fees, I think will also. Having that discussion is a good thing, but when they have it, I think it's going to lead to some more mergers. So I just see consolidation of credit unions increasing in general because of the economy because of the regulatory burden.

And this is a burden but it's something it's a burden. I think that. Again, we're at whatever side of the plate you're on. You need to treat your members fairly, right? And that's all good. But it's just another thing for credit unions to make sure that they're losing it. Make sure that they're doing reasonably right. You don't want to have a class action lawsuit. And I can see the way you frame that up, Joe, as you're going through it. And I was learning some things.

I thought I could see some some individual topics that I will release as a, three or four minute podcast, just where you're talking about you, each one of those issues, because I really want to highlight this collectively and individually. 1 last time, anything I added there that, that triggered any thoughts for you?

But as I mentioned, your entire compliance management system the earlier you can get on top of something as opposed to having an examiner do it for you or the Office of Consumer Financial Protection or whoever it may be, the better you're going to be. You'll have a better understanding of what's exactly really is happening within the credit union as it relates to consumer compliance and you can.

You can correct things and, then you can, hold up the the new policies and procedures to the examiner when they come in for the exam and say, Hey, we've looked at this and we're up to date.