Extraordinary rendition and credit union "Courtesy Overdraft" programs have two things in common. First, it takes some pretty tortured logic to justify both practices; and, one usually shouldn't place too much confidence in "testimonials" resulting from twisted arms or from twisted consciences.
Credit Union Times editor Paul Gentile mucked around in the "Bounce Protection" quagmire in his October 10, 2007 op-ed piece. It's an article well worth reading if you aren't familiar with the difficult contradictions that "Privilege Pay Overdraft" schemes pose for credit unions. Rarely do purpose and practice so visibly collide. Rarely has the difference between what credit unions preach and what credit unions practice been so clearly held in the balance.
Some points in the complex discussion are easily resolved. For example, "That brings into question whether it is a service for the consumer or a great moneymaker for the financial institution". Don't believe "the great moneymaker" side of that question has ever been in dispute, has it? "Bad Checks Are Good Overdraft" is a cash cow of the first order. 'Course whether this extraordinary fee income corrupts the conscience of credit union boards and management remains an intriguing question. Then there is the: "Advocates say it is a valuable product because it protects a consumer from getting dinged twice." Well, okay, the easy solution is for credit unions to just send those items back without a charge! The consumer won't get dinged twice; our hands (and white hats!) will remain clean; and the consumer can work it out with the local merchant (perhaps no fee at all!!). Also, some still debate whether credit unions should pay presented checks in "lowest to highest" order or "highest to lowest" order. All agree that "highest to lowest" greatly increases overdraft fees. Folks arguing for the "highest to lowest" most often claim that consumers would rather bounce many small checks than their monthly mortgage payment. Sounds sensible at first; but most "Because We Love You Overdraft" programs have maximum limits of $500 or so. Last time I checked mortgage payments with insurance and tax escrows were running a bit more than $500. And, while the "highest to lowest" logic may be sound on those twelve days a year that a mortgage check is presented; on the other 353 days of the year it's the wrong practice. A 96% error ratio (353/365) is a pretty steep price for consumers to pay for "Aren't We Wonderful Overdraft".
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All that aside, the major legislative, debate centers around whether these "I'd Never Deceive You Overdraft" plans should fall under truth-in-savings (TIS) or truth-in-lending (TIL) laws. Critics claim that "This Is Good For You — Really! Overdraft" services are identical in practice to payday loans at payday lenders. Payday loans fall under TIL while "Would I Lie To You Overdraft" offerings fall under TIS. What's the difference to credit unions?
Well, a line-of-credit type loan (under TIL) at a credit union has a couple of requirements. It must be underwritten on a prudent basis; the member must be reasonably able to repay the loan; a loan contract explaining duties of the borrower and lender must be signed; extensive consumer disclosures are mandatory; the borrower must agree ("opt in") to the loan; credit reporting and collection practices are well defined; loan loss reserves are funded; and a maximum interest rate of 18% can be charged. With a "Don't Worry, Be Happy Overdraft" deal, the rules are very different under TIS. The advance is not underwritten; the "pigeon" (sorry can't use "borrower" because it's not a loan!) does not have to demonstrate an ability or willingness to repay; there is no contract, so there are no terms, agreements, or disclosures; no need for loan losses if it isn't a loan; accounting for these "advances" under GAAP is at best quirky (just use "cash over and short"!). And, of course, any thought of usury protection for the consumer is entirely unnecessary.
So, there's a lot at stake in the legislative wrangling over these "Just Trust Us Overdraft" alternatives. Credit unions don't want to be burdened by any additional regulatory requirements. Especially when it's clear from the newspapers that everything's on the up and up in today's financial marketplace. And, our member-owners most definitely don't want credit unions to be regulated any more than they want their judges to be honest, their doctors to be licensed, or their meat to be inspected. Credit unions just aren't really that important in our members' lives. Are we?
As always I thank Mr. Gentile for getting us stirred up and thinking about these issues.
Jim Blaine
CEO
State Employees' CU of N.C.
Raleigh, N.C.
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