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ARLINGTON, Va.-Municipal Employees Credit Union of Baltimore will begin offering an overdraft product for its members in about 60 days, according to CEO Bert Hash, Jr. During a Metropolitan Area Credit Union Management Association dinner Jan. 10, he told Credit Union Times, “It could be perceived as a product to encourage members to bounce checks but I think it will be more of a benefit.” Not so, the outspoken and always passionate Jim Blaine, CEO of State Employees Credit Union in North Carolina, stated in his talk at MACUMA’s first event for 2005. “No matter how you dress up a pig, it still doesn’t make sense,” he said. “It’s built on the idea that you write me a bad check and we’ll start from there,” Blaine stated. He pointed out that this is in direct contradiction to credit unions’ long-standing, solid support for promoting financial education. Blaine explained that overdrafts really are credit without a written agreement; no underwriting, terms or conditions; and no stated Annual Percentage Rate, which is not safe and sound business policy. He added that the Federal Reserve Board’s decision to include overdraft programs under Truth in Savings rather than Truth in Lending keeps depository institutions from having to report an APR and keeps credit unions in the business. Credit unions, capped at an 18% interest rate, could never legally offer overdraft privileges for a $20-plus `fee’ that could amount to a triple- or even quadruple-digit APR. Payday lenders are a better deal, he charged. He also noted the irony of the Fed calling this a savings instrument under TISA at a high negative percentage. Further, until 1999, NCUA regulations made overdraft programs illegal, Blaine said. About half of the attendees in the audience raised their hands when polled on how many offered overdraft programs. In a question and answer period following Blaine’s remarks, some participants defended their programs stating that they were providing a service their members requested and expected from their financial institution. Additionally, the MACUMA members offering the product argued that they were saving their members from a bounced check fee charged by the checks’ recipients on top of a fee from the credit union for the bounced check. There are good points to the program, Blaine agreed, but the statistics do not bear up to scrutiny. Just observe advertisements from John M. Floyd and Associates or Strunk and Associates that state they will increase fee income, he said. Once credit unions begin offering these programs the `incidental’ checks over the balance from members jumps 300% to 400%. Best practices, Blaine pointed out, include screening members to see if they qualify for any other line of credit or can attach the checking account to a savings account when they are over the limit. So, what you are left with is the non-creditworthy using the product, because they do not qualify for anything else, and the credit union is left without recourse other than to report them to companies like TeleCheck, which keeps those most in need of financial services and education out of the mainstream financial institutions. Blaine rhetorically questioned whether a credit union can collect on a default for a loan that was never made? Therefore, it also becomes a safety and soundness issue. He warned that credit unions would come under strict scrutiny soon from consumer groups and others and that the programs, which generate a lot of fee income, could be political suicide for credit unions, making them more similar to banks. It is appropriate for banks to offer this service, Blaine said, because they are in it for the money. “I guess we do it for the money,” he acknowledged. “I can understand that a little bit.” However, phrases from other laws-like “arbitrary and capricious,” “unfair and deceptive,” and “disparate impact”-could soon be applied to these programs. He paralleled the situation to the tobacco industry and its legal liability for the effects of the product. Blaine stated that `piggybanks’ were named after pigs for a reason, namely banks, and shattered a small ceramic one with a hammer, a gag he’s pulled a number of times over the years. Instead of offering overdraft privileges, Blaine suggested offering payday loan-type products with a savings account attached to it so part of the payment goes into savings. Or, credit unions can offer members one free overdraft per month to really help members with incidental instances. Overdraft programs can have a positive side, you just have to find it, he advocated. [email protected]

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