NCUA Has Concerns Over Overdraft Concentration Risk

By Ray Birch

ALEXANDRIA, Va.—Not only will credit union overdraft programs be getting scrutiny this year from NCUA, but the agency will also be expanding the number of credit unions it will be watching, according to Todd Harper, who said the issue is about more than just fairness for consumers but also about concentration risk.

In an exclusive interview with CUToday.info, NCUA’s chairman said the agency in 2024 will be looking at overdraft programs of all credit unions above $100 million in assets. In 2023, the threshold was $500 million.

Harper is cautioning that credit unions that rely too heavily on overdraft income will need to change their business model.

As CUToday.info previously reported, Harper recently spoke to the Brookings Institution, where in addition to a broad update on CU- and agency-related issues, he also indicated the agency will be giving greater scrutiny to overdraft programs and that examiners this year will continue an expanded review of credit union overdraft programs, including website advertising, balance calculation methods, and settlement processes.

Changing Marketplace

“The marketplace on overdraft fees is changing,” Harper told CUToday.info. “We're seeing numerous institutions lower their overdraft fees or are dropping them all together. We’re also seeing not only are they dropping price, but some of them are getting rid of NSF fees.”

Harper pointed to a recent CFPB study that shows two out of three banks above $10 billion in assets have eliminated their NFS fees, whereas four out of five credit unions still have them.

“We have to be thinking about this and be competitive,” Harper said. “Credit unions have a statutory obligation and mission to meet the credit and savings needs of members, especially those of modest means. We know that overdrafting often falls on people of modest means and lower income. Again, the marketplace is changing. Credit unions have to be adjusting their business models to meet that change.”

‘Going Deeper’

Harper emphasized the agency will be “expanding what we started last year,” when NCUA began looking at OD programs of CUs above $500 million in assets.

“This year we're looking at credit unions above $100 million—as well as those credit unions above $500 million that we may not have gotten to last year,” he said. “We're taking a look at exactly what are their practices. What are their website advertising practices? What is their business on balance calculation methods, and their settlement processes? Going deeper, we're looking for things like authorizing positive, settling negative, where the consumer believes they have a positive balance and they go forward and make the transaction and then get a fee charged.”

As CUToday.info has reported, numerous credit unions have been hit with lawsuits over the so-called practice of authorize positive, settle negative, with a panel of attorneys at CUNA’s GAC in 2023 warning credit unions to be especially careful.

Todd Harper

Looking for Patterns & Practices

In addition, the chairman said the federal regulator will be watching for incidents where members are paying multiple overdraft fees in quick succession, which can “can drive somebody into a hole.”

“We're also looking for those patterns or practices that could be problematic or unfair to consumers, likely to cause substantial injury,” said Harper, who has made consumer compliance a priority, even as CU trade groups have pushed back. “Those are the main issues that we're looking at.”

What’s Fair?

One much-debated issue is just what is “fair pricing” to cover the costs a credit union incurs from an overdraft. Asked about that issue, Harper said the answer will be market-driven and also being addressed by the CFPB.

As reported here, CFPB Director Rohit Chopra recently called overdraft fees a “junk fee harvesting machine.” In its newest proposal, the Bureau has proposed a range of pricing benchmarks of $3-$14 per overdraft.

“The CFPB has proposed what these fees should be. But what I'm focused on is whether there is concentration risk,” Harper said. “Is the credit union overly reliant on overdraft fees. If so, then that credit union has more than just a consumer compliance problem, it has a safety and soundness problem.”

Harper urged credit unions to closely monitor the overdraft market.

“Credit unions need to be thinking, they need to be 10 steps ahead of where the market is and be adjusting their balance sheets and their business plans accordingly, knowing that these (prices) are going to continue to drop,” he said.

A Business Decision

Asked if the agency is concerned all of the pressure on overdraft programs will lead many credit unions to exit this market, as some analysts have predicted, Harper said that is “a business decision for the credit union to make. There ought to be many different available means for low-cost low dollar loans. For example, the Payday Alternative Loan product. I know of some credit unions that got rid of their overdraft programs and replaced it with a low-dollar revolving line of credit. I want to make sure that credit is available. I want to make sure that it's safe, it's fair and it's affordable.”

Will the CFPB’s proposal, which applies to Fis above $10 billion in assets, trickle down to the smaller credit unions through competitive pressures? Harper said he expects the market may dictate such a scenario.

Harper did not offer an opinion on whether NCUA believes many credit unions have become too reliant on overdraft revenue. Instead, he stated the answer will be “determined on a credit union by credit union basis. A good balance sheet is made up of a wide variety of sources of revenue. I do think that markets are changing. Credit unions need to be adjusting their business models.

From the Have Not’s to the Have’s

“We know that one-third of households earning $65,000 or less are charged these fees, yet it's only one in 10 households above $175,000 that are charged these fees,” concluded Harper. “The credit union system should not be taking from those who don't have and giving to those who have. We need to make sure that there's balance in the credit union system.”