Overdraft programs present big risks for credit unions

Classroom setting

Overdraft fee programs are shaping up to be a top risk for credit unions during 2022.  Any credit union that maintains an overdraft protection (courtesy pay) program should be familiar with the current risk environment. This is especially critical if the credit union relies heavily on overdraft fee income in their profit model.

On December 1, 2021, The Consumer Financial Protection Bureau (CFPB) released a report on financial institutions’ reliance on overdraft fees. According to the agency, revenues reached an estimated $15.47 billion in 2019.  This quote from CFPB director Rohit Chopra is not at all subtle regarding how the CFPB views overdraft fees: “Rather than competing on quality service and attractive interest rates, many banks have become hooked on overdraft fees to feed their profit model,” said CFPB Director Rohit Chopra. “We will be taking action to restore meaningful competition to this market.” Credit unions should expect increased regulatory scrutiny and new regulation in this area.

In addition, several large banks have recently eliminated overdraft fees. Competition may also force credit unions to revise or eliminate their overdraft protection programs.

Finally, the CUNA Mutual Group third-party litigation team reports they have handled on average two new overdraft/NSF Fee class action matters a week during 2021. These lawsuits allege credit union members were improperly assessed overdraft and/or NSF fees. The allegations include:

  • Improperly charged multiple NSF fees on the same transactions (refers to incoming debits to member accounts that are returned multiple times by credit unions)
  • Improperly assessed overdraft fees on debit card transactions posting to member accounts when funds were previously set aside when preauthorization holds were placed
  • Overdraft fees were improperly assessed using the “available” balance rather than the “actual” or ledger balance and that credit union failed to accurately describe this in agreements / disclosures

All credit unions that offer overdraft protection/courtesy pay programs should assess the compliance risk, legal risk, reputation risk and business risk with these products. Overdraft protection programs have really got it all when it comes to risk and their days as a reliable income maker are most likely limited.