NCUA's Harper Urges Credit Unions To Allow Ample Time For Revising Overdraft Programs

 

By Ray Birch

ALEXANDRIA, Va.—New NCUA data show a dependence among some credit unions on overdraft fees, and NCUA Board Member Todd Harper is advising that if a credit union needs to change its OD course, it should begin its planning now.

In an exclusive interview with CUToday.info, Harper delved more deeply into the data from NCUA’s recent Research Note that provides an analysis of statistics for overdraft and non-sufficient funds fees.

The analysis of 444 credit unions that supplied OD and NSF fee data to NCUA in Q3 2024 reveals overdraft and NSF fees make up about 2% to 5% of total revenues, and that CUs are not using those funds to offer members better deals on other products and services.

As CUToday.info reported, Harper stated it’s time for credit unions to “rethink” their overdraft and non-sufficient funds programs.

“I want to make it really clear, because some people get confused on this point, I'm not saying get rid of overdraft programs,” Harper told CUToday.info. “Overdraft programs serve a legitimate purpose. However, the research note said there are some features of overdraft programs that can be problematic.

“For example, if it's not a reasonable and proportional fee, that could be problematic,” continued Harper. “It can also be problematic if there are multiple presentments charging the consumer. And, of course, it can be problematic if you authorize positive so the consumer thinks they have the money and then when the settlement comes, they settle negative—and they get charged the fee that they didn't expect. That's a surprise.”

Credit unions need to properly craft their overdraft programs to comply with consumer financial protection laws, Harper reminded.

“They also need to understand the marketplace is changing and that we've been seeing banks drop their overdraft fees,” Harper said. “If there is too much concentration on overdraft and NSF fees (at a credit union) that could be problematic for a credit union’s future. It could affect its safety and soundness.”

Harper acknowledged it takes time for a credit union to “evolve” its overdraft plan.

“For example, I spoke to a credit union that's above a billion dollars in assets that does not charge any overdraft or NSF fees, and it has done that for a number of years,” Harper explained. “It took them 18 months to make that decision and then to develop the strategic plan for where they were going to make up that lost revenue.”

More Mortgage Servicing

The credit union, Harper pointed out, determined it would make up the money it lost not charging for overdrafts by doing more mortgage servicing.

“Credit unions need to have that time. This is not something that changes quickly,” Harper cautioned. “But if the market is changing and consumers’ expectations are for lower fees overall, you've got to expect at a certain point in time consumers will start to look at the credit union and say these overdraft fees are too high, and they might switch their primary financial provider.”

Todd Harper

Harper pointed to “interesting” findings from the research note.

“First of all, the higher fees don't lead necessarily to lower fees in other areas,” he said. “To me, that says a credit union’s business model may be too dependent on fees. Maybe it needs to reconsider and go into where the real growth is, and that is by making loans and doing those at competitive rates. That's actually where you are more successful in the long term.”

Another research note data point drew Harper’s attention—higher fees don't necessarily lower credit union interest rates.

“There's not a correlation there. That's an interesting finding. It's something I think we're going to have to continue to watch and see how that evolves,” he said.

Overall, did the research note show an alarming overdependence on overdrafts among the credit unions supplying the data?

“The short answer is no. But what the data did say to me is there are some credit unions that are over dependent,” Harper said, calling those organizations outliers. “There's some whose overdraft and NSF fees make up as high as 18% of their overall revenue. That's an over concentration. But many fell into that 3% to 4% range. That's probably a good place to be.”

While large credit unions may have the product offerings and scale to absorb a cut in OD and NSF fee income, Harper believes small credit unions are not at a disadvantage here.

Small CUs

“Small credit unions oftentimes have easier ways in which to start and develop a new program,” Harper said. “I know of a credit union that looks at each member’s credit scores and then sends them a live check each year around Thanksgiving, telling them how big of a loan they qualify for as part of the credit union’s holiday loan program. They're looking at the individual. It's a line of credit they're offering, and they've been highly successful in terms of bringing in new members.

“Now it’s gotten to the point where consumers are looking forward to getting their check each year because it helps them plan for their holidays,” continued Harper. “That was a small credit union with less than $100 million in assets—they came up with this idea and it made a big difference in how they went about doing their business.”

Harper concluded by explaining what he means in stating credit unions need to rethink their overdraft programs.

“In rethinking their programs, they need to be looking at the market and benchmarking. Are they out of line from where other institutions in their local area are in their overdraft and NSF fees? Is it a standard deviation? Is it more? And do they need to be rethinking their rates?” Harper said. “They also need to make sure their programs don't have problematic features that I talked about earlier—things like authorizing positive and settling negative, as well as fees that are not reasonable and proportional. And finally, they need to be thinking about where they are going to make up that revenue.”

Harper pointed out overdraft and NSF fees disproportionately fall on certain communities—such as lower-income consumers.

“We want to make sure that if you're a credit union you've got a mission to meet the needs of members, especially those of modest means,” Harper said. “Make sure you are not pushing somebody down with the fees, but actually lifting them up. That's what I mean when I say rethink their programs.”