WEBVTT NOTE This file was generated by Descript 00:00:00.470 --> 00:00:02.380 Samantha: Hello, this is Samantha Shares. 00:00:02.990 --> 00:00:06.560 This episode covers the National Credit Union Administrations Letter 00:00:06.560 --> 00:00:11.310 to credit unions Number 24 dash C U dash zero 3 titled Consumer Harm 00:00:11.310 --> 00:00:15.270 Stemming from Certain Overdraft and Non-Sufficient Funds Fee Practices 00:00:16.022 --> 00:00:18.422 The following is an audio version of that letter. 00:00:18.982 --> 00:00:22.172 This podcast is educational and is not legal advice. 00:00:22.642 --> 00:00:26.632 We are sponsored by Credit Union Exam Solutions Incorporated, whose 00:00:26.632 --> 00:00:29.692 team has over two hundred and Forty years of National Credit 00:00:29.692 --> 00:00:31.582 Union Administration experience. 00:00:32.132 --> 00:00:35.782 We assist our clients with N C U A so they save time and money. 00:00:36.192 --> 00:00:40.172 If you are worried about a recent, upcoming or in process N C U A 00:00:40.172 --> 00:00:44.602 examination, reach out to learn how they can assist at Mark Treichel DOT COM. 00:00:45.032 --> 00:00:49.382 Also check out our other podcast called With Flying Colors where we provide tips 00:00:49.382 --> 00:00:51.962 on how to achieve success with N C U A. 00:00:52.673 --> 00:00:53.573 And now the letter. 00:00:54.278 --> 00:00:57.028 Consumer Harm Stemming from Certain Overdraft and 00:00:57.028 --> 00:00:59.188 Non-Sufficient Funds Fee Practices 00:00:59.906 --> 00:01:02.996 Dear Boards of Directors and Chief Executive Officers: 00:01:03.652 --> 00:01:08.262 If your credit union assesses overdraft or non-sufficient funds (N S F) fees 00:01:08.262 --> 00:01:12.522 that your members cannot reasonably anticipate or avoid, your credit union 00:01:12.522 --> 00:01:16.492 may be exposing itself to heightened reputational, consumer compliance, 00:01:16.632 --> 00:01:18.572 third-party, and litigation risk. 00:01:19.328 --> 00:01:23.348 Unanticipated fees can cause substantial harm to credit union members. 00:01:23.978 --> 00:01:27.628 While there may be situations with unique facts or circumstances, the 00:01:27.628 --> 00:01:31.898 assessment of unanticipated fees on credit union members generally represents 00:01:31.898 --> 00:01:36.518 an unfair or deceptive act or practice under Section 5 of the Federal Trade 00:01:36.518 --> 00:01:42.448 Commission Act (F T C Act) and Sections 1031 and 1036 of the Consumer Financial 00:01:42.448 --> 00:01:44.878 Protection Act of 2010 (C F PA). 00:01:45.594 --> 00:01:49.564 The N C U A is issuing this letter to highlight the risks associated 00:01:49.564 --> 00:01:53.804 with certain overdraft and N S F fee practices and outline practices 00:01:53.804 --> 00:01:57.414 that may assist credit unions in managing and mitigating these risks. 00:01:57.924 --> 00:02:01.894 Further, the N C U A is describing its supervisory approach to such 00:02:01.894 --> 00:02:05.914 fees and outlining its expectations that credit unions appropriately act 00:02:05.914 --> 00:02:07.764 to mitigate the associated risks. 00:02:08.204 --> 00:02:12.374 This guidance is consistent with the N C U A’s efforts to achieve the credit 00:02:12.374 --> 00:02:16.224 union system’s statutory mission to meet the credit and savings needs of 00:02:16.224 --> 00:02:18.814 members, especially those of modest means. 00:02:19.502 --> 00:02:20.122 Background 00:02:20.851 --> 00:02:25.291 Overdraft and N S F programs can serve legitimate purposes, such as 00:02:25.291 --> 00:02:29.021 inducing sound account management and honoring transactions when members 00:02:29.121 --> 00:02:31.201 unintentionally overdraw their accounts. 00:02:31.761 --> 00:02:35.731 Many credit unions offer these programs responsibly, supported by 00:02:36.514 --> 00:02:38.674 appropriate risk-management practices. 00:02:39.204 --> 00:02:43.274 However, some credit unions operate these programs with certain practices 00:02:43.274 --> 00:02:46.614 or features that may result in consumer harm and heightened risk 00:02:46.614 --> 00:02:48.274 exposure for the credit union. 00:02:48.944 --> 00:02:53.084 In addition to potential heightened consumer financial protection risks, the 00:02:53.134 --> 00:02:57.594 N C U A is concerned that an overreliance on any one revenue stream — including 00:02:57.594 --> 00:03:02.094 overdraft and N S F fees — can result in concentration risk and impact the 00:03:02.094 --> 00:03:06.314 financial health of a credit union, its members, and the system as a whole. 00:03:07.005 --> 00:03:12.055 The N C U A issued interagency guidance about overdraft programs in 2005. 00:03:12.715 --> 00:03:16.875 The interagency guidance described best practices for overdraft programs 00:03:16.875 --> 00:03:21.175 and recommended financial institutions monitor applicable laws and regulations, 00:03:21.405 --> 00:03:26.155 including laws on unfair or deceptive acts or practices, to ensure their 00:03:26.155 --> 00:03:28.405 overdraft programs remain compliant. 00:03:29.107 --> 00:03:33.787 In 2007, the N C U A issued a letter to credit unions that addressed risk 00:03:33.787 --> 00:03:38.027 measurement, monitoring, and control of third-party relationships, such 00:03:38.027 --> 00:03:41.847 as core processing systems that impact many federal credit unions’ 00:03:41.847 --> 00:03:44.347 overdraft and N S F fee practices. 00:03:45.084 --> 00:03:50.424 In 2022, N C U A examiners requested information about federal credit unions’ 00:03:50.424 --> 00:03:54.664 policies and procedures governing overdraft programs, monitoring and 00:03:54.694 --> 00:03:57.124 auditing tools, and member communications. 00:03:57.714 --> 00:04:02.974 In 2023 and 2024, N C U A examiners expanded the review of federal 00:04:02.974 --> 00:04:07.394 credit unions’ overdraft programs and evaluated adjustments credit unions 00:04:07.394 --> 00:04:11.514 made to their overdraft programs to address risk and potential member harm 00:04:11.514 --> 00:04:13.814 from unanticipated overdraft fees. 00:04:14.515 --> 00:04:19.705 Examinations of federal credit unions conducted in 2023 and 2024 identified 00:04:19.705 --> 00:04:23.435 the presence of certain overdraft and N S F fee practices that may 00:04:23.435 --> 00:04:25.185 create heightened risk exposure. 00:04:25.715 --> 00:04:30.705 These practices include charging overdraft or N S F fees stemming from circumstances 00:04:30.705 --> 00:04:34.325 where a member cannot reasonably anticipate the fee and, therefore, 00:04:34.415 --> 00:04:36.165 prevent the fee from being charged. 00:04:36.545 --> 00:04:40.435 Such overdraft program practices may violate the prohibition against 00:04:40.435 --> 00:04:45.685 unfair or deceptive practices under both the FTC Act and the C F P A. 00:04:46.380 --> 00:04:48.290 Unanticipated Overdraft Fees 00:04:49.015 --> 00:04:52.645 Unanticipated overdraft fees occur when a credit union assesses 00:04:52.765 --> 00:04:56.165 overdraft fees on transactions that a member would not reasonably 00:04:56.165 --> 00:04:58.265 expect would give rise to such fees. 00:04:58.825 --> 00:05:02.075 Though credit unions are required to provide disclosures related 00:05:02.075 --> 00:05:05.955 to their transaction processing and overdraft fee policies, these 00:05:05.955 --> 00:05:08.405 processes and policies can be complex. 00:05:09.104 --> 00:05:12.834 Research published by the Consumer Financial Protection Bureau suggests 00:05:12.834 --> 00:05:16.844 that, despite such disclosures, customers and members of depository 00:05:16.844 --> 00:05:21.624 institutions, including credit unions, face uncertainty about when transactions 00:05:21.624 --> 00:05:23.424 will be posted to their account and 00:05:24.202 --> 00:05:26.262 whether they will incur overdraft fees. 00:05:26.937 --> 00:05:30.047 Authorize Positive, Settle Negative Overdraft Fees 00:05:30.808 --> 00:05:34.698 Policies that assess overdraft fees on debit card transactions that 00:05:34.698 --> 00:05:38.418 authorize when a member’s account has a sufficient available balance to 00:05:38.418 --> 00:05:40.568 cover a debit card transaction but, 00:05:41.310 --> 00:05:44.830 due to one or more intervening transactions, has an insufficient 00:05:44.830 --> 00:05:49.050 balance to cover the transaction at the time it settles, are commonly referred 00:05:49.050 --> 00:05:51.190 to as authorize positive, settle 00:05:51.870 --> 00:05:53.890 negative (A P S N) transactions. 00:05:54.380 --> 00:05:58.980 In addition to charging an overdraft fee on the A P S N transaction, members 00:05:58.980 --> 00:06:02.810 may also be assessed an overdraft fee on intervening transactions that 00:06:02.810 --> 00:06:04.890 exceed the member’s available balance. 00:06:05.553 --> 00:06:09.923 Charging A P S N overdraft fees when members would not reasonably anticipate 00:06:09.923 --> 00:06:13.453 them because they had a sufficient balance at the time the credit union 00:06:13.453 --> 00:06:18.813 authorized the payment is likely unfair under both the FTC Act and the C F P A. 00:06:19.538 --> 00:06:24.518 Also, credit unions with core processing systems unable to identify A P S N 00:06:24.518 --> 00:06:28.858 transactions that result in a fee, even though such fees may have been disclosed 00:06:28.858 --> 00:06:32.868 to the member in advance, have heightened third-party and reputation risk. 00:06:33.593 --> 00:06:35.813 Multiple N S F Representment Fees 00:06:36.452 --> 00:06:40.822 Some members are charged an N S F fee when a check or automated clearing house 00:06:40.952 --> 00:06:44.982 (A C H) transaction item is presented for payment from a member’s deposit 00:06:44.982 --> 00:06:49.442 account which has insufficient funds to pay the check or A C H transaction. 00:06:49.952 --> 00:06:54.392 If the same check or A C H transaction is represented to the credit union when the 00:06:54.392 --> 00:06:58.632 member’s account still has insufficient funds, some credit unions return the 00:06:58.632 --> 00:07:03.412 transaction unpaid again and assess an additional unanticipated N S F fee. 00:07:03.972 --> 00:07:08.222 Credit union members typically have no control over when a returned A C H 00:07:08.222 --> 00:07:12.592 transaction or check will be presented again and are unable to control whether 00:07:12.592 --> 00:07:17.102 an intervening deposit will be sufficient to cover the transaction and related fees. 00:07:17.831 --> 00:07:22.451 Credit unions that assess additional fees on representment transactions, including 00:07:22.451 --> 00:07:26.241 where the disclosure does not fully or clearly describe the credit union’s 00:07:26.241 --> 00:07:30.591 representment practice, have heightened consumer compliance and reputation risk. 00:07:31.161 --> 00:07:35.161 Credit unions may also have heightened third-party and reputation risk due to 00:07:35.161 --> 00:07:40.391 core processing system settings related to multiple N S F fees, such as identifying 00:07:40.391 --> 00:07:44.641 and tracking represented items and maintaining data on such transactions. 00:07:45.273 --> 00:07:48.473 Inaccurate disclosures have the potential to mislead reasonable 00:07:48.473 --> 00:07:53.533 customers and are considered deceptive under the FTC Act and the C F P A. 00:07:54.053 --> 00:07:58.203 Even when member disclosures outline representment practices, a policy of 00:07:58.203 --> 00:08:00.573 assessing fees on each representment is 00:08:01.282 --> 00:08:05.562 likely unfair under the FTC Act and the C F P A if the member is 00:08:05.612 --> 00:08:09.192 unable to reasonably avoid fees from represented transactions. 00:08:09.896 --> 00:08:11.766 Returned Deposited Item Fees 00:08:12.502 --> 00:08:16.712 A Returned Deposited Item (R D I) is a check that a member deposits 00:08:16.712 --> 00:08:19.772 into their checking account that is returned to the member because the 00:08:19.772 --> 00:08:22.962 check could not be processed against the check originator’s account. 00:08:23.592 --> 00:08:27.482 Some reasons for R D I fees include, but are not limited to: 00:08:28.217 --> 00:08:31.447 The check originator may not have sufficient funds in their account to 00:08:31.447 --> 00:08:33.137 pay the amount stated on the check; 00:08:33.861 --> 00:08:36.811 The check originator may have directed the issuing financial 00:08:36.811 --> 00:08:38.441 institution to stop payment. 00:08:39.223 --> 00:08:43.343 The account referenced on the check may be closed or located in a foreign country; 00:08:43.723 --> 00:08:47.533 or There may be questionable, erroneous, or missing information on the check, 00:08:48.289 --> 00:08:52.389 including signature, date, account number, or payee name information. 00:08:53.150 --> 00:08:57.600 While certain entities, such as lenders and landlords, may be able to recoup fees 00:08:57.600 --> 00:09:02.260 from the check originator for R D I fees, credit union members generally cannot. 00:09:02.850 --> 00:09:06.720 In many circumstances, the check depositor has no control over whether, 00:09:07.020 --> 00:09:10.780 and no reason to anticipate that, the deposited check would be returned. 00:09:11.370 --> 00:09:15.090 Nor can the check depositor verify with the check originator’s financial 00:09:15.090 --> 00:09:19.210 institution prior to depositing a check whether there are sufficient funds in the 00:09:19.210 --> 00:09:21.160 issuer’s account for the check to clear. 00:09:21.910 --> 00:09:26.170 Blanket policies of charging a fee to the check depositor for every R D 00:09:26.170 --> 00:09:29.980 I, irrespective of the circumstances of the transaction or patterns of 00:09:29.980 --> 00:09:35.260 behavior on the account, are unfair under both the FTC Act and the C F P A. 00:09:35.770 --> 00:09:38.920 These practices also heighten consumer compliance and 00:09:39.628 --> 00:09:40.638 reputation risk. 00:09:41.424 --> 00:09:43.864 Other Overdraft or N S F Practices 00:09:44.537 --> 00:09:47.447 Additional fee practices that may present heightened risk 00:09:47.447 --> 00:09:49.567 include but are not limited to: 00:09:50.334 --> 00:09:53.134 High or no daily limits on the number of fees assessed. 00:09:53.614 --> 00:09:58.074 Charging overdraft or N S F fees with a high limit, or without limit, for 00:09:58.074 --> 00:10:02.134 multiple transactions in a single day result in high costs for members and 00:10:02.134 --> 00:10:04.204 difficulty in bringing accounts positive. 00:10:04.764 --> 00:10:08.504 Such practices increase consumer compliance and reputation risk 00:10:08.794 --> 00:10:12.994 and are likely unfair under both the FTC Act and the C F P A. 00:10:13.650 --> 00:10:16.230 Insufficient or inaccurate fee disclosures. 00:10:16.810 --> 00:10:21.540 Overdraft program website advertising must accurately disclose fees and comply 00:10:21.540 --> 00:10:26.910 with the requirements under Part 707 of the N C U A Rules and Regulations, which 00:10:26.910 --> 00:10:29.160 implements the Truth in Savings Act of 00:10:29.962 --> 00:10:30.952 1991. 00:10:31.502 --> 00:10:34.762 Failure to disclose and comply also increases consumer 00:10:34.762 --> 00:10:36.602 compliance and reputation risk. 00:10:37.302 --> 00:10:40.512 Inaccurate disclosures have the potential to mislead customers 00:10:40.782 --> 00:10:44.982 and are considered deceptive under both the FTC Act and the C F P A. 00:10:45.362 --> 00:10:49.562 Failure to disclose processing cutoff times for the posting of payments credited 00:10:49.562 --> 00:10:53.482 to a member’s account through third-party peer-to-peer payment applications is 00:10:53.482 --> 00:10:57.972 likely an unfair practice because it may mislead consumers to falsely believe they 00:10:57.972 --> 00:11:01.932 have sufficient funds to cover additional transactions posted the same day. 00:11:02.713 --> 00:11:05.143 Ordering transactions to maximize fees. 00:11:05.693 --> 00:11:09.473 Structuring the transaction processing order so the largest debit item 00:11:09.473 --> 00:11:12.943 processes first can result in the account being overdrawn quicker 00:11:12.943 --> 00:11:16.283 leading to more overdraft fees assessed against the credit union 00:11:16.924 --> 00:11:17.414 member. 00:11:17.994 --> 00:11:21.974 Such practices result in higher costs to the member with no countervailing 00:11:21.974 --> 00:11:26.884 benefit and are likely unfair under both the FTC Act and the C F P A. 00:11:27.556 --> 00:11:29.096 Risk Management Principles 00:11:29.858 --> 00:11:33.268 Prudent credit unions maintain awareness of the complex market 00:11:33.328 --> 00:11:37.468 and regulatory requirements that govern overdraft and N S F programs. 00:11:37.858 --> 00:11:41.928 Consumers have brought class action lawsuits against financial institutions, 00:11:42.098 --> 00:11:46.238 including credit unions, involving overdraft practices and disclosures. 00:11:46.588 --> 00:11:49.758 Some of these lawsuits have resulted in substantial settlements, 00:11:49.908 --> 00:11:52.138 including restitution and legal fees. 00:11:52.891 --> 00:11:57.881 If your credit union provides an overdraft program or charges N S F fees, you should: 00:11:58.688 --> 00:12:03.148 Closely analyze all aspects of your overdraft and N S F fee practices, 00:12:03.418 --> 00:12:07.668 including but not limited to opt-in disclosures, website advertising, 00:12:07.778 --> 00:12:10.958 and other materials that inform members about these practices; 00:12:11.714 --> 00:12:15.204 Review recent regulatory developments regarding unanticipated 00:12:15.204 --> 00:12:17.114 overdraft and N S F fees; 00:12:17.849 --> 00:12:19.229 Consider member impact. 00:12:19.927 --> 00:12:22.827 Track and analyze related member-complaint activity. 00:12:23.539 --> 00:12:28.339 Monitor and take appropriate action to mitigate reputation, consumer compliance, 00:12:28.509 --> 00:12:30.949 third-party, and legal risk; and 00:12:31.398 --> 00:12:35.358 Consult legal counsel regarding consumer compliance responsibilities 00:12:35.358 --> 00:12:36.638 and associated risks. 00:12:37.347 --> 00:12:40.857 An effective compliance management system should include policies and 00:12:40.857 --> 00:12:45.527 procedures designed to manage consumer compliance and reputation risk, ensure 00:12:45.527 --> 00:12:49.797 compliance with applicable laws and regulations, and prevent consumer harm. 00:12:50.397 --> 00:12:54.177 Mitigation strategies should include discontinuing policies related to 00:12:54.177 --> 00:12:58.447 charging overdraft, N S F, and other related fees that your members cannot 00:12:58.447 --> 00:13:00.377 reasonably anticipate and avoid. 00:13:00.987 --> 00:13:05.147 Your analysis should self- identify and reimburse members who have been negatively 00:13:05.147 --> 00:13:07.547 impacted by any assessment of these fees. 00:13:08.258 --> 00:13:11.928 In addition, your credit union may consider offering members the following 00:13:11.928 --> 00:13:16.018 features as part of your overdraft program: linked savings accounts; 00:13:16.218 --> 00:13:20.628 affordable lines of credit or short- term, small-dollar loans; and making 00:13:20.628 --> 00:13:24.818 educational resources available to members enrolled in overdraft programs, 00:13:25.138 --> 00:13:30.668 such as those available on the N C U A’s consumer website, MyCreditUnion.gov. 00:13:31.529 --> 00:13:33.719 N C U A’s Supervisory Approach 00:13:34.373 --> 00:13:38.533 The N C U A does not expect credit unions to cease offering overdraft 00:13:38.533 --> 00:13:42.603 programs designed to assist their members in managing their cash flow needs. 00:13:43.003 --> 00:13:47.333 However, the N C U A will continue to review overdraft programs to ensure 00:13:47.333 --> 00:13:49.783 credit unions are effectively managing the 00:13:50.603 --> 00:13:54.593 heightened risk of certain fee practices and will expect credit unions to 00:13:54.593 --> 00:13:59.793 properly mitigate such risks, including by ceasing unanticipated fee practices. 00:14:00.529 --> 00:14:05.219 If examiners identify violations of laws or regulations due to unanticipated 00:14:05.219 --> 00:14:09.759 fee practices, the N C U A will evaluate appropriate supervisory 00:14:09.759 --> 00:14:13.499 or enforcement actions, including restitution to harmed members. 00:14:14.196 --> 00:14:18.386 The N C U A will also recognize your credit union’s proactive efforts to 00:14:18.386 --> 00:14:20.816 self-identify and correct violations. 00:14:21.236 --> 00:14:25.396 Examiners will generally not cite and the N C U A will generally not pursue 00:14:25.396 --> 00:14:30.396 enforcement action under the FTC Act nor the C F P A for violations that have 00:14:30.396 --> 00:14:34.696 been self- identified and fully corrected prior to the start of an examination. 00:14:35.196 --> 00:14:39.756 In addition, in determining the scope of any restitution, the N C U A will 00:14:39.756 --> 00:14:43.766 consider the likelihood of substantial consumer harm as well as a credit 00:14:43.766 --> 00:14:47.946 union’s risk-management processes to identify and correct violations. 00:14:48.676 --> 00:14:53.146 The N C U A encourages credit unions to review their overdraft and N S F 00:14:53.146 --> 00:14:58.316 program practices to ensure compliance with Section 5 of the FTC Act, Sections 00:14:58.316 --> 00:15:04.086 1031 and 1036 of the C F P A, and other applicable laws and regulations. 00:15:04.745 --> 00:15:09.745 If you have any questions, please contact your N C U A examiner or regional office. 00:15:10.376 --> 00:15:11.656 This concludes the letter 00:15:12.340 --> 00:15:16.520 If your Credit union could use assistance with your exam, reach out to Mark Treichel 00:15:16.520 --> 00:15:19.280 on LinkedIn, or at mark Treichel dot com. 00:15:19.820 --> 00:15:22.500 This is Samantha Shares and we Thank you for listening.