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.