ARLINGTON, Va. — Programs that seek to protect credit union members from the full impact of checks drawn on insufficient funds are both a significant source of non-interest income for CUs and the subject of continuing scrutiny.
Critics of the programs charge they have become a profit-center for the financial institutions that deploy them and that banks and credit unions use practices that lead more of the depositors to need the programs. They further charge that the programs end up hurting low-income depositors more than helping them because depositors get trapped in a financial pit these programs help them dig.
Defenders of the service point out that the vast majority of the depositors are grateful for these programs, that they benefit from them and that it is entirely proper for a credit union to charge a member a fee for a service that helps the member's financial life. They also maintain that credit unions generally do not engage in the sorts of financial manipulation that the critics charge.
It's unclear how much of an impact on CUs' bottom lines these programs have. According to Strunk & Associates, a leading provider of a program that serves as overdraft protection for credit unions, only 15% of bank and credit union depositors across the country take the time to formally establish an overdraft line for their checking accounts. However, Strunk estimates that 50% of credit unions offer some sort of formal program for their members, which provides the same service.
Strunk does not call its program an "overdraft protection" program because they maintain it is substantially different from the types of programs that provide overdraft protection on individual accounts.
What is clear, however, is that non-interest income has a more powerful impact on credit unions' bottom lines than ever before, according to Kirk Cuevas, a partner in the Dollar Associates consulting firm. Among its other business, Dollar Associates has clients who offer an overdraft protection service and consults for Strunk as well.
"When you look at what has been happening with ROA, the costs of funds, margins and other credit union economic factors for at least the last couple of years, it is pretty clear that if you backed non-interest income out of the equation, very many credit unions would have negative earnings," Cuevas maintained. "Non interest income has become and is continuing to be very important to how credit unions do business."
But it's hard to figure out just how much of a share of non-interest income overdraft protection represents industry wide. First, non-interest income is not generally broken down further and not all credit unions have a program or even the same sort of program.
Critics, the most prominent of which is the Center For Responsible Lending, an affiliate of the $287 million Self-Help Credit Union, headquartered in Raleigh Durham, charge that financial institutions overall make more than $17 billion in fees from making over 15 billion overdraft loans that the critics charge are often abusive.
Practices which critics tag as abusive include posting charges against a checking account quickly while intentionally delaying the posting of deposits, lowering account balances by re-ordering debits to clear higher-dollar items first, and failing to warn a customer during debit card point-of-sale or ATM transactions if they are about to overdraw their account so that they may cancel the transaction if they choose.
To help correct these abuses, Rep. Carolyn Maloney (D-N.Y.) and Barney Frank (D-Mass.), chairman of the House Financial Services Committee, have introduced legislation that would make abusive overdraft loans subject to Truth-in-Lending Act interest rate disclosures, as well as requiring written consent from account holders before banks could enroll them in these systems. It would also prohibit manipulations designed to increase overdrafts, and would require banks and credit unions to warn their customers before authorizing an overdraft, bill supporters maintained.
But Cuevas doubted that many credit unions actually do these things and maintained that disclosures are the remedy to most, if not all of them. For example Marc Payne, director of marketing for Strunk, says his firm urges credit unions to use share or savings accounts as the first source of funds to cover an overdraft and only go to its programs as a final measure.
"The side of the discussion that is not being heard from is the thousands of credit union members who have been spared the embarrassment and additional expenses of having their checks returned for insufficient funds," Cuevas said. "And critics need to remember that by having an NSF check at all, depositors are already going to have to pay a fee."
Sam Davis, president of Strunk, echoed Cuevas' point and lamented that there has not been a more balanced discussion of the issue. He pointed out the CRL's $17 billion figure made better headlines, but only because reporters ignored the $30 billion that he estimated consumers saved by having the checks paid.
He also pointed out that federal guidance on NSF practices already instruct financial institutions not to order their payment of checks to generate more fees and that, while the guidance does not have the power of law, it puts the issue on the radar for examiners and no bank or credit union will want to run into their examiner on the matter.
Currently there is no Senate version of the House bill and Davis said it is unclear whether there will be one. "We don't want to seem cavalier about this, but we don't believe this legislation is likely to go anywhere as currently drafted," he said.
–dmorrison@cutimes.com
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