Consumer Advocates Continue To Target ODs

By Ray Birch

ARLINGTON, Va.—NAFCU hopes credit unions in California don’t begin to back away from offering overdraft programs just because some consumer advocates don’t like the service that has been the target of strong criticisms in national media.

As CUToday.info reported here, California’s financial regulator, following a law requiring data be published showing how much state-chartered insitutions in the Golden State are earning from overdraft fees and NSFs, the state’s Department of Financial Protection and Innovation published the first-ever report with details.

The full report can be found here.

That report was soon followed by one opinion piece in national media that claimed, “There’s a new predator making money off overdraft fees: credit unions.” 

The article, published by Politico under the headline, “Credit Unions Are Making Money Off People Living Paycheck to Paycheck,” was authored by Aaron Klein, the Miriam K Carliner chair and senior fellow in economic studies at the Brookings Institution. Klein served as deputy assistant secretary of the Treasury from 2009 to2012 and as chief economist of the Senate Banking, Housing and Urban Affairs Committee from 2004 to 2009.  

“I don’t think credit unions should be afraid of a product because some consumer advocates don't like it,” NAFCU Senior Vice President of Government Affairs Greg Mesack told CUToday.info.

Greg Mesack

Mesack asserted the report and the follow-up opinion piece were assembled by those opposed to overdraft fees and overdraft programs.

“They think that if they can force credit unions to show how much they collect (in OD revenue) it will somehow (paint credit unions in a negative light),” he said.

The California report also applied to state-chartered banks.

Overdraft programs, Mesack pointed out, are relied on by many Americans.

“People really love them,” he said. “There are those who think they're important. They think they're critical. And we also know, with credit unions and all financial institutions, it's an optional program. Someone has to affirmatively choose to opt in because they think it will be valuable. We also know that credit unions, clearly upfront—before anyone even opts in—disclose the cost of the program, so the consumer can make an informed decision.”

Mesack said experts and consumer advocates can continue to speculate about the cost of overdraft programs.

“And doing so just makes them look bad, good, whatever,” he said. “But, the end of the day, it's a consumer tool that a consumer affirmatively chooses to use.”

NAFCU, Mesack said, stands firmly behind the view that overdraft programs are an important consumer option.

“Without it, people can be putting themselves in financially difficult positions,” he said. “Sometimes, they need to buy the food for their kids. And, in their mind they do the calculation of the charge versus not having the money to buy essentials. Consumers are very rational people, they do the math—which is more expensive, and overdraft fee or a missed mortgage payment? An overdraft fee or missing the car payment? And they'll make those decisions. They know when their money's coming in and they manage toward it.”

The California report, contended Mesack, has many “abstract” numbers that he believes has some trying to twist to tell a certain story.

“From my point of view the more important story is what is the utility of this program,” he said. “Is it clearly disclosed to consumers, and does the consumer have a choice. In these (California report) instances they did.”

Mesack further believes those he called “so-called” consumer advocates are behind the criticism being leveled.

“They like to call themselves consumer advocates. But how many of these advocates have ever had to worry about bumps in the (financial) road?” he said. “I think a lot of these people (behind the report) have not had to worry about money like many of the lower-income Americans who rely on this service. They have not worn the shoes of the consumers who use overdrafts. There’s a group of people who have for a long time been very opposed to overdraft programs. They've been working relentlessly to try to shut them down.”

Curt Long

Mesack contended Klein’s opinion piece in Politico clearly reveals the author does not like overdraft programs and thinks they should not exist.

“I ask the question, would a consumer be better off going to a payday lender? Because that's the only other option,” he said.

One ‘Interesting’ Aspect

NAFCU Chief Economist and Vice President of Research Curt Long doesn’t believe the data in the California report has been manipulated.

“However, if you read through that report, you know it was the California State regulator who produced a report as a result of legislation,” Long explained. “I don't know a lot of the details on who was behind the legislation, but it was interesting in the report that the regulator noted they are going to produce the report consistently.

“And they also added some other metrics that were not required by that legislation, just to provide a maybe a les- distorted view,” continued Long. “If you read the notes from the regulator, I think you know when you're comparing the percent of income that comes from overdraft between a not-for-profit institution and a for-profit institution that is naturally going to lead to a distorted picture. I think the regulator recognized that.”

As a result, Long asserts the report needs more context.

“Such as who are the customers of these institutions? Are they high-income people or low- and moderate-income people? If it's the latter, then you would naturally expect more demand for overdraft services,” he said. “I think there's a lot of important context that that is not available from the report.”

What to Think About Now

What should CUs in California be thinking about now?

“I don’t think that from the report credit unions are necessarily painted in a bad light, it just shows what credit unions collect from overdraft fees, and I don’t know if that’s good or bad,” said Mesack. “In some ways it shows that credit union members value the service. I don't think the fact that credit unions collect overdraft fees makes them look bad. It means they have a product that consumers consider important and essential.”

The California report stated a number of credit unions are overly reliant on fee income. Long disagreed.

“If you look at the numbers, fee income as a percent of credit union assets (nationally) has been trending steadily downhill,” he said. “I just don't see any basis for making that claim.”

What to Do Now

Mesack believes it would be wise for CUs in California to gauge the value members see in the overdraft service, make sure overdraft materials are very clear about the OD program’s structure and pricing and, to provide financial education to members—especially those showing signs of trouble.

CUToday.info reached out to the California League but it has declined to comment to date.