One thing certain about the Regulation E overdraft requirementspassed last November is that they go into effect for new accountsJuly 1 and existing accounts Aug. 15. What is uncertain is theimpact the new regulations will have on credit union income.

Callahan & Associates and the Filene Research Institute bothattempted to shine some light on the possible impact theregulations will have on credit unions' bottom line.

Callahan Industry Analyst Lydia Cole estimated the potentialchanges in credit union noninterest income from Reg E. In 2009,Cole said that credit union noninterest income totaled $11.6billion and that NSF and courtesy pay fees accounted for 28.1% oftotal noninterest income, which equals approximately $3.26 billionin income for the credit union industry. Since Reg E does notrequire consumer opt-in for check and recurring ACH payments, Coleestimated fee income from those sources will remain the same, butan estimated $1.82 billion from debit, point-of-sale and ATMoverdraft fees is up in the air. The impact a credit union will seein fee income relates to how many members choose to opt-in, butCole estimates the potential effect on credit union ROA will likelybe around 10 basis points.

Last week, the Filene Research Institute released a report,“Overdraft Regulation: A Silver Lining to the Clouds?” The reportwas created from a 185-respondent credit union survey Fileneconducted over the past few months. Half the credit unionrespondents to the survey were federally chartered and almost allwere federally insured, two-thirds had at least $100 million intotal assets and the median membership of respondents was36,650.

Worst-case scenario, if no members opt-in for overdraftservices, the report said that total fee income would sink by asmuch as 11% and that overall ROA could fall by as much as ninebasis points. At the same time the report said that while theworst-case scenario would result in a tangible drag on earnings, itwould not destroy the credit union business model.

“It will be a knock, but not a significant bleed,” said MarkMeyer, CEO of Filene.

The survey found that the median percentage of respondents' feeincome from overdraft was 39.5%. Eighty percent of respondents haveautomated overdraft programs, as opposed to linked-account programsor line of credit programs. Of those that offer automated programs,18.3% do not inform their members and 14.8% require members toopt-in to the program.

The Filene report also offers a look at how credit unions canget around Reg E to maintain fee income. The current ruling doesnot put restrictions on the order in which items are processed.Since Reg E does not apply to checks and ACH transactions, if acredit union posts point-of-sale and ATM transactions first, itwould be the check and ACH items that cause the overdraft and wouldstill be subject to a fee even if a members chooses not toopt-in.

The survey suggests that the best route for credit unions may beto maintain consumer-friendly features and survive with diminishedROA.

Other data from Callahan suggests that some credit unions arealready moving in this direction and are relying on other sourcesthan overdraft fees for noninterest income. Callahan's year-end2009 noninterest income survey showed that in December 2009respondents reported overdraft fee income made up 27.4% of totalnoninterest income, while in December 2008 the group reported itmade up 29.6%. However, analysts said that the decrease is notlikely in dollar amount but from the growth of noninterest incomecoming from other sources.

The largest source of noninterest income for credit unions isnow interchange income from debit and credit cards.

In a traditional economy, Meyer said that it may be plausiblefor credit unions to simply continue to survive on reducednoninterest income, but the indsutry's fear is that while thedecrease in income from overdrafts may not be a fatal cut initself, it may be one of many cuts the industry will see thisyear.

“I'm not surprised that the fee income model we relied on for adecade is under attack. It means that we need to start payingattention to innovation and thinking about new business models.There are ways to have consumer-friendly fee income businessmodels. It's just not easy. It takes a lot of hard work,” Meyeradded.

State Employees Credit Union in Raleigh, N.C. falls into thecategory of credit unions that offer a line of credit program asopposed to a courtesy pay overdraft program. The line of creditalready requires members to opt-in, but the credit union hascreated two new member-friendly services that addressoverdrafts.

The first, launched this month, is an electronic account called“Cash Points Global.” The account has no overdraft protection, soif there is no money in the account the transaction is denied. Themember has the option to transfer money online between accounts tocover transactions. The account is promoted as a controlledspending account for students.

In May the credit union will roll out a text alert service toprovide members with alerts about balances and transactions. InJuly, the credit union will launch a service called “AnotherChance.” In order to use the service, members have to sign up foroverdraft protection. If the overdraft protection has run out, analert comes through to the member via text or e-mail, and themember has until the end of the day to make a deposit to cover thetransaction or the transaction gets returned.

“We don't have the view that fee income from overdrafts issomething we should look to build,” said CEO Jim Blaine. “Memberswill make the correct choice if you inform them. That's what creditunions ought to do.”

Marc Paine, executive vice president for overdraft programprovider Strunk & Associates, said that the company isinstructing its clients to focus on making sure they are doing thebest job to get information out to members.

“If they have a fully disclosed program they should concentrateon that program. If it was working before, it should continue towork going forward,” Paine said.

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