Posts tagged ‘overdraft fees’

Are Overdrafts Fees An Endangered Species?

Overdraft fees have recently been put under the microscope once again and it does feel like the pieces are falling into place to see new restrictions placed on this product.

First, there is the news that overdraft fees dropped dramatically during the pandemic. The Wall Street Journal reported yesterday that overdraft revenue fell in 2020 for the first time in six years. The paper reports that banks and credit unions brought in $31.3B in overdraft revenue in 2020, a drop of almost 10 percent from the previous year. This is hardly surprising since the huge influx of savings has given many consumers a bigger financial cushion.

An even more intriguing development is highlighted in today’s American Banker which notes the growing numbers of banks that are offering overdraft fee alternatives. On Wednesday, Ally Financial announced that it will permanently stop charging overdraft fees. According to the AB “these firms are reducing or eliminating their reliance on overdraft fees at a time when regulatory scrutiny seems likely to increase, and as competition from lower-cost alternatives is on the rise.”

These changes are taking place in a political environment focused on issues of economic equality like never before. In 2017 the CFPB issued a report concluding that overdraft services are disproportionately used by individuals with lower credit scores who have less access to credit. The report didn’t have much of an impact but in 2021 this is precisely the type of factoid that is galvanizing individuals to push for changes to the banking system.

Finally, there is the ubiquitous class action litigation involving the accuracy of overdraft disclosures. While I think much of this litigation can be preempted with appropriate changes to account agreement language, judges are scrutinizing overdraft practices like never before. 

What does all this mean? It means that your credit union should begin preparing for the day when the revenue it receives from overdraft fees is dramatically reduced. Unfortunately, this is easier said than done. A report released in May by the Brookings Institution highlighted anecdotal evidence that small lenders and credit unions have grown increasingly dependent on overdraft fee income.

On that happy note, enjoy your day.

June 3, 2021 at 9:06 am Leave a comment

CUs Can’t Shy Away From Debate Over Fees

At the risk of sounding like one of those slightly paranoid armchair media critics and U.S. Presidents who see a nefarious motive behind every critical article, it has been my experience in gathering news for this blog that if the Wall Street Journal is reporting news about credit unions, it typically isn’t good news.

So my ears perked up this morning when my alarm went off and I asked my new virtual best friend Alexia to tell me the news. Her briefing included a report from the WSJ’s News Minute podcast  that credit union overdraft fees have doubled since 2000 and are now almost as high as the same fee charged by banks.

The podcast was referring to an updated study released by Moebs Services that concluded “the average overdraft fee at a bank is now $30, up 50% from $20 in 2000. And credit unions, typically applauded for their consumer-friendly practices and prices, aren’t far behind. The average overdraft fee at a credit union almost doubled over that period, reaching $29, up from $15 in 2000.” Moebs said it based its findings on an analysis of more than 3,800 banks, credit unions and other financial institutions.

The report comes on top of anecdotal evidence that larger credit union overdraft practices are becoming increasingly tempting targets for class action lawyers.

For the record, when it comes to overdraft fees I have drunk the Kool-Aid. If credit unions did away with overdraft services, your members who utilize them would demand you bring them back. So long as members understand what they are doing they should be able to decide for themselves whether or not an additional fee is worth the convenience of not having to balance the checkbook or finding out that a student loan payment has bounced.

But let’s be honest: Many banks and credit unions are growing more dependent on fees, and this trend is likely to continue. The problem is that consumers expect more from credit unions than they do from banks. They trust the industry. The more headlines that are generated implying that credit unions are just as bad as banks, the more the industry stands to lose.

My suggestion is to employ the “straight face test.” Don’t shy away from explaining to your members not only what fees you are charging but why you are charging them. Explain that a given fee not only makes it possible to provide desired services, but also helps keep the credit union healthy.

If you can’t say this to them with a straight face, maybe a given fee is a little too high after all.

 

March 28, 2017 at 9:34 am Leave a comment

In What Order Do You Process Your Checks?

There are some issues that are hanging over the industry like a sword of Damocles.  This morning an article in the Wall Street Journal provides further evidence for those who feel that the CFPB should do more to regulate overdraft fees. 

According to a survey conducted by the paper, hundreds of small, regional banks, and credit unions are “clinging to the practice” of processing checks on a high to low basis.  The paper’s survey revealed that smaller depository institutions are continuing this practice even as larger institutions are backing away from it.

What exactly to do about overdraft fees has been debated for more than a decade now.  In 2010, the Federal Reserve promulgated regulations requiring that members opt in to bank payment on debit card overdrafts.  I was silly enough to think that this would put the issue to a close, but it hasn’t.  For example, in a statement accompanying a 2013 report on overdraft processing, CFPB warned that if “policies and practices do not protect consumers in accordance with consumer protection law, it will use it authorities to provide such protection.”  

The more I look at the issue, the more I feel that overdraft fees are the most misunderstood practices engaged in by depository institutions.  Do they represent an important source of income for many banks and credit unions?  Absolutely, but I bet if you asked your average consumer if they are willing to pay more to make sure that their mortgage or car payment doesn’t bounce, they’d agree.  In other words, overdraft fees are a product that some consumers want and need.

Regulatory Update

I’ve been AWOL for a couple of days and based the volume of work that regulators pumped out over the last week it’s obvious that many of our regulatory overlords intend on being AWOL for most of August. Here are a couple of regulatory proposals to review in preparation for Fall.

CFPB’s HMDA Proposal  Empowered by the Dodd-Frank Act , the Bureau that never sleeps is proposing revisions to the Home Mortgage Disclosure Act. It may not sound like a page turner, but for those credit unions that have to comply with it, properly reporting mortgage loan information can be one of the great compliance headaches. If the regulation goes forward as proposed the types of mortgages subject to reporting requirements will be expanded to include “all mortgage loans secured by a dwelling, regardless of the purpose of the loan” including HELOCS and commercial loans secured by a home.  Here is a link.

NYS moves to regulate Bitcoin New York State’s Department of Financial Services is rushing ahead of federal and state regulators by proposing licensing requirements and a comprehensive regulatory framework for institutions that buy, sell, transfer or store virtual currencies. Here’s a link to NYS’s proposal.

July 29, 2014 at 8:20 am Leave a comment

Protecting The Consumer From Himself

The Consumer Finance Protection Bureau’s (CFPB) Director, Richard Cordray, used a speech in Manhattan yesterday to announce that he would be investigating the overdraft practices of the nation’s largest banks.  This is going to be part of a larger effort to push for disclosures that more clearly highlight overdraft charges to the banking consumer.  Remember that this is separate from the debit card regulations finalized in November of 2009 requiring consumers to opt in to whether or not they wish to be allowed to overdraft their account using either ATM or one-time debit transactions.  The CFPB is animated by a belief that with just the right disclosures, the inherently logical American consumer will avoid the imposition of banking fees.  This is a nice sentiment, but it is fatally flawed. 

First, a checkbook is not a new concept.  Businesses have balanced their ledgers for thousands of years and, believe it or not, there are still people who take the time to make sure that their deposits match up with their withdrawals.  In other words, people already have all the tools at their disposal to avoid overdraft fees.

Ah, but the consumer protection advocate would question whether financial institutions are maximizing the number of bounced checks by devising devious policies like pulling the largest check first from a batch, thereby ensuring that all the subsequent checks will incur late fees if there are insufficient funds.  Let’s assume that every bank, and credit union for that matter, was engaged in that procedure.  I, for one, would rather see my mortgage paid, even if it means that fees will accrue on the other checks.  And let’s say we come out with a regulation specifying the order in which checks must be drawn.  Does anyone really think that the consumer inclined to ignore his balance is going to automatically become so savvy as to pay attention to the order in which his checks will be drawn?

Finally, let’s get to the real issue.  Some fees are actually legitimate.  The check negotiation system lies at the core of our financial system.  There should be penalties involved when people give the merchant down the street a bad check and when credit unions have to go through the expense of renegotiating a breached contractual obligation.  I think the CFPB can do a lot of good, but when it begins to see a victim behind every fee, and no problem that can’t be solved with the proper disclosure, it plays right into the hands of its worst critics.

February 22, 2012 at 7:23 am Leave a comment


Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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