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This podcast provides you the ability to listen to new regulatory guidance issued by the National Credit Union Administration, and occasionally the F D I C, the O C C, the F F I E C, or the C F P B. We will focus on new and material agency guidance, and historically important and still active guidance from past years that NCUA cites in examinations or conversations. This podcast is educational only and is not legal advice. We are sponsored by Credit Union Exam Solutions Incorporated. We also have another podcast called With Flying Colors where we provide tips for achieving success with the N C U A examination process and discuss hot topics that impact your credit union.
Samantha: Hello, this is Samantha Shares.
This episode covers the National
Credit Union Administrations Letter
to credit unions Number 24 dash C
U dash zero 3 titled Consumer Harm
Stemming from Certain Overdraft and
Non-Sufficient Funds Fee Practices
The following is an audio
version of that letter.
This podcast is educational
and is not legal advice.
We are sponsored by Credit Union
Exam Solutions Incorporated, whose
team has over two hundred and
Forty years of National Credit
Union Administration experience.
We assist our clients with N C
U A so they save time and money.
If you are worried about a recent,
upcoming or in process N C U A
examination, reach out to learn how they
can assist at Mark Treichel DOT COM.
Also check out our other podcast called
With Flying Colors where we provide tips
on how to achieve success with N C U A.
And now the letter.
Consumer Harm Stemming
from Certain Overdraft and
Non-Sufficient Funds Fee Practices
Dear Boards of Directors and
Chief Executive Officers:
If your credit union assesses overdraft
or non-sufficient funds (N S F) fees
that your members cannot reasonably
anticipate or avoid, your credit union
may be exposing itself to heightened
reputational, consumer compliance,
third-party, and litigation risk.
Unanticipated fees can cause substantial
harm to credit union members.
While there may be situations with
unique facts or circumstances, the
assessment of unanticipated fees on
credit union members generally represents
an unfair or deceptive act or practice
under Section 5 of the Federal Trade
Commission Act (F T C Act) and Sections
1031 and 1036 of the Consumer Financial
Protection Act of 2010 (C F PA).
The N C U A is issuing this letter
to highlight the risks associated
with certain overdraft and N S F
fee practices and outline practices
that may assist credit unions in
managing and mitigating these risks.
Further, the N C U A is describing
its supervisory approach to such
fees and outlining its expectations
that credit unions appropriately act
to mitigate the associated risks.
This guidance is consistent with the N
C U Aâs efforts to achieve the credit
union systemâs statutory mission to
meet the credit and savings needs of
members, especially those of modest means.
Background
Overdraft and N S F programs can
serve legitimate purposes, such as
inducing sound account management and
honoring transactions when members
unintentionally overdraw their accounts.
Many credit unions offer these
programs responsibly, supported by
appropriate risk-management practices.
However, some credit unions operate
these programs with certain practices
or features that may result in
consumer harm and heightened risk
exposure for the credit union.
In addition to potential heightened
consumer financial protection risks, the
N C U A is concerned that an overreliance
on any one revenue stream â including
overdraft and N S F fees â can result
in concentration risk and impact the
financial health of a credit union,
its members, and the system as a whole.
The N C U A issued interagency guidance
about overdraft programs in 2005.
The interagency guidance described
best practices for overdraft programs
and recommended financial institutions
monitor applicable laws and regulations,
including laws on unfair or deceptive
acts or practices, to ensure their
overdraft programs remain compliant.
In 2007, the N C U A issued a letter
to credit unions that addressed risk
measurement, monitoring, and control
of third-party relationships, such
as core processing systems that
impact many federal credit unionsâ
overdraft and N S F fee practices.
In 2022, N C U A examiners requested
information about federal credit unionsâ
policies and procedures governing
overdraft programs, monitoring and
auditing tools, and member communications.
In 2023 and 2024, N C U A examiners
expanded the review of federal
credit unionsâ overdraft programs and
evaluated adjustments credit unions
made to their overdraft programs to
address risk and potential member harm
from unanticipated overdraft fees.
Examinations of federal credit unions
conducted in 2023 and 2024 identified
the presence of certain overdraft
and N S F fee practices that may
create heightened risk exposure.
These practices include charging overdraft
or N S F fees stemming from circumstances
where a member cannot reasonably
anticipate the fee and, therefore,
prevent the fee from being charged.
Such overdraft program practices
may violate the prohibition against
unfair or deceptive practices under
both the FTC Act and the C F P A.
Unanticipated Overdraft Fees
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.
Though credit unions are required
to provide disclosures related
to their transaction processing
and overdraft fee policies, these
processes and policies can be complex.
Research published by the Consumer
Financial Protection Bureau suggests
that, despite such disclosures,
customers and members of depository
institutions, including credit unions,
face uncertainty about when transactions
will be posted to their account and
whether they will incur overdraft fees.
Authorize Positive, Settle
Negative Overdraft Fees
Policies that assess overdraft fees
on debit card transactions that
authorize when a memberâs account
has a sufficient available balance to
cover a debit card transaction but,
due to one or more intervening
transactions, has an insufficient
balance to cover the transaction at the
time it settles, are commonly referred
to as authorize positive, settle
negative (A P S N) transactions.
In addition to charging an overdraft
fee on the A P S N transaction, members
may also be assessed an overdraft
fee on intervening transactions that
exceed the memberâs available balance.
Charging A P S N overdraft fees when
members would not reasonably anticipate
them because they had a sufficient
balance at the time the credit union
authorized the payment is likely unfair
under both the FTC Act and the C F P A.
Also, credit unions with core processing
systems unable to identify A P S N
transactions that result in a fee, even
though such fees may have been disclosed
to the member in advance, have heightened
third-party and reputation risk.
Multiple N S F Representment Fees
Some members are charged an N S F fee
when a check or automated clearing house
(A C H) transaction item is presented
for payment from a memberâs deposit
account which has insufficient funds
to pay the check or A C H transaction.
If the same check or A C H transaction is
represented to the credit union when the
memberâs account still has insufficient
funds, some credit unions return the
transaction unpaid again and assess
an additional unanticipated N S F fee.
Credit union members typically have
no control over when a returned A C H
transaction or check will be presented
again and are unable to control whether
an intervening deposit will be sufficient
to cover the transaction and related fees.
Credit unions that assess additional fees
on representment transactions, including
where the disclosure does not fully
or clearly describe the credit unionâs
representment practice, have heightened
consumer compliance and reputation risk.
Credit unions may also have heightened
third-party and reputation risk due to
core processing system settings related to
multiple N S F fees, such as identifying
and tracking represented items and
maintaining data on such transactions.
Inaccurate disclosures have the
potential to mislead reasonable
customers and are considered deceptive
under the FTC Act and the C F P A.
Even when member disclosures outline
representment practices, a policy of
assessing fees on each representment is
likely unfair under the FTC Act
and the C F P A if the member is
unable to reasonably avoid fees
from represented transactions.
Returned Deposited Item Fees
A Returned Deposited Item (R D I)
is a check that a member deposits
into their checking account that is
returned to the member because the
check could not be processed against
the check originatorâs account.
Some reasons for R D I fees
include, but are not limited to:
The check originator may not have
sufficient funds in their account to
pay the amount stated on the check;
The check originator may have
directed the issuing financial
institution to stop payment.
The account referenced on the check may
be closed or located in a foreign country;
or There may be questionable, erroneous,
or missing information on the check,
including signature, date, account
number, or payee name information.
While certain entities, such as lenders
and landlords, may be able to recoup fees
from the check originator for R D I fees,
credit union members generally cannot.
In many circumstances, the check
depositor has no control over whether,
and no reason to anticipate that, the
deposited check would be returned.
Nor can the check depositor verify
with the check originatorâs financial
institution prior to depositing a check
whether there are sufficient funds in the
issuerâs account for the check to clear.
Blanket policies of charging a fee
to the check depositor for every R D
I, irrespective of the circumstances
of the transaction or patterns of
behavior on the account, are unfair
under both the FTC Act and the C F P A.
These practices also heighten
consumer compliance and
reputation risk.
Other Overdraft or N S F Practices
Additional fee practices that
may present heightened risk
include but are not limited to:
High or no daily limits on
the number of fees assessed.
Charging overdraft or N S F fees with
a high limit, or without limit, for
multiple transactions in a single day
result in high costs for members and
difficulty in bringing accounts positive.
Such practices increase consumer
compliance and reputation risk
and are likely unfair under both
the FTC Act and the C F P A.
Insufficient or inaccurate
fee disclosures.
Overdraft program website advertising
must accurately disclose fees and comply
with the requirements under Part 707 of
the N C U A Rules and Regulations, which
implements the Truth in Savings Act of
1991.
Failure to disclose and
comply also increases consumer
compliance and reputation risk.
Inaccurate disclosures have the
potential to mislead customers
and are considered deceptive under
both the FTC Act and the C F P A.
Failure to disclose processing cutoff
times for the posting of payments credited
to a memberâs account through third-party
peer-to-peer payment applications is
likely an unfair practice because it may
mislead consumers to falsely believe they
have sufficient funds to cover additional
transactions posted the same day.
Ordering transactions to maximize fees.
Structuring the transaction processing
order so the largest debit item
processes first can result in the
account being overdrawn quicker
leading to more overdraft fees
assessed against the credit union
member.
Such practices result in higher costs
to the member with no countervailing
benefit and are likely unfair under
both the FTC Act and the C F P A.
Risk Management Principles
Prudent credit unions maintain
awareness of the complex market
and regulatory requirements that
govern overdraft and N S F programs.
Consumers have brought class action
lawsuits against financial institutions,
including credit unions, involving
overdraft practices and disclosures.
Some of these lawsuits have
resulted in substantial settlements,
including restitution and legal fees.
If your credit union provides an overdraft
program or charges N S F fees, you should:
Closely analyze all aspects of your
overdraft and N S F fee practices,
including but not limited to opt-in
disclosures, website advertising,
and other materials that inform
members about these practices;
Review recent regulatory
developments regarding unanticipated
overdraft and N S F fees;
Consider member impact.
Track and analyze related
member-complaint activity.
Monitor and take appropriate action to
mitigate reputation, consumer compliance,
third-party, and legal risk; and
Consult legal counsel regarding
consumer compliance responsibilities
and associated risks.
An effective compliance management
system should include policies and
procedures designed to manage consumer
compliance and reputation risk, ensure
compliance with applicable laws and
regulations, and prevent consumer harm.
Mitigation strategies should include
discontinuing policies related to
charging overdraft, N S F, and other
related fees that your members cannot
reasonably anticipate and avoid.
Your analysis should self- identify and
reimburse members who have been negatively
impacted by any assessment of these fees.
In addition, your credit union may
consider offering members the following
features as part of your overdraft
program: linked savings accounts;
affordable lines of credit or short-
term, small-dollar loans; and making
educational resources available to
members enrolled in overdraft programs,
such as those available on the N C U
Aâs consumer website, MyCreditUnion.gov.
N C U Aâs Supervisory Approach
The N C U A does not expect credit
unions to cease offering overdraft
programs designed to assist their members
in managing their cash flow needs.
However, the N C U A will continue to
review overdraft programs to ensure
credit unions are effectively managing the
heightened risk of certain fee practices
and will expect credit unions to
properly mitigate such risks, including
by ceasing unanticipated fee practices.
If examiners identify violations of
laws or regulations due to unanticipated
fee practices, the N C U A will
evaluate appropriate supervisory
or enforcement actions, including
restitution to harmed members.
The N C U A will also recognize your
credit unionâs proactive efforts to
self-identify and correct violations.
Examiners will generally not cite and
the N C U A will generally not pursue
enforcement action under the FTC Act
nor the C F P A for violations that have
been self- identified and fully corrected
prior to the start of an examination.
In addition, in determining the scope
of any restitution, the N C U A will
consider the likelihood of substantial
consumer harm as well as a credit
unionâs risk-management processes
to identify and correct violations.
The N C U A encourages credit unions
to review their overdraft and N S F
program practices to ensure compliance
with Section 5 of the FTC Act, Sections
1031 and 1036 of the C F P A, and
other applicable laws and regulations.
If you have any questions, please contact
your N C U A examiner or regional office.
This concludes the letter
If your Credit union could use assistance
with your exam, reach out to Mark Treichel
on LinkedIn, or at mark Treichel dot com.
This is Samantha Shares and
we Thank you for listening.