NEWS: It’s hardly news that federal regulators, especially the Consumer Financial Protection Bureau (CFPB), take a dim view of overdraft and non-sufficient funds (NSF) fees charged by credit unions and other financial institutions. The CFPB has repeatedly called them “junk fees,” and a new CFPB rule, which is set to take effect this fall, will strictly cap such fees – unless the courts block the rule.
The NCUA recently weighed in, issuing Letter to Credit Unions No. 24-CU-03, “Consumer Harm Stemming from Certain Overdraft and Non-Sufficient Funds Fee Practices.”
The NCUA’s letter acknowledges that overdraft and NSF programs can serve legitimate purposes, “such as sound account management and honoring transactions when members unintentionally overdraw their accounts.” They also wrote that many credit unions offer these programs in a responsible manner “supported by appropriate risk-management practices.”
However, the NCUA added that “some credit unions operate these programs with certain practices or features that may result in consumer harm and heightened risk exposure for the credit union.” The agency said that it was concerned about “an overreliance on any one revenue stream – including overdraft and NSF fees – can result in concentration risk.”
Problematic fee practices
The NCUA’s letter focuses on three problematic fee practices, where a credit union charges “overdraft or NSF fees stemming from circumstances where a member cannot reasonably anticipate the fee and, therefore, prevent the fee from being charged.” Those practices are:
- Authorize-positive, settle-negative (APSN) overdraft fees on debit card transactions. APSN occurs when an overdraft fee is assessed on debit card transactions that authorize when a member’s account has the available balance to cover the transaction but has an insufficient balance to cover the transaction at the time it settles.
- Re-presentment NSF fees. The NCUA warns against charging multiple NSF fees for the re-presentment of the same check or automated clearing house (ACH) transaction. This may happen when, for example, a check or ACH transaction is initially presented for payment from a member’s deposit account that has insufficient funds, and then the same check or ACH transaction is re-presented but the member’s account still has insufficient funds, and NSF fees are charged on each presentment. The NCUA wrote that in these situations, the member typically doesn’t have control over when a returned check or ACH transaction will be presented again, and so the member cannot reasonably avoid fees from re-presentment transactions. Charging re-presentment fees is likely unfair even when the member disclosures outline re-presentment practices, the NCUA wrote.
- Returned deposited item (RDI) fees assessed under a blanket policy. An RDI is a check that a member deposits into their checking account that is returned to the member because the check could not be processed against the check originator’s account. This may happen because the person who wrote the check did not have sufficient funds in their account to pay it; or the person who wrote the check put a stop payment order on it; or the account the check was drawn on is closed or located in a foreign country; or there is questionable, erroneous, or missing information on the check, like the signature, date, account number, or payee name.
The NCUA explains that “while certain entities, such as lenders and landlords, may be able to recoup fees from the check originator for RDI fees, credit union members generally cannot. In many circumstances, the check depositor has no control over whether, and no reason to anticipate that, the deposited check would be returned. Nor can the check depositor verify with the check originator’s financial institution prior to depositing a check whether there are sufficient funds in the issuer’s account for the check to clear.”
NCUA follows CFPB’s lead
The NCUA letter reflects the same position that the CFPB has taken on such fees in recent years.
The League covered CFPB guidance on the issue in 2022. “Overdraft and depositor fees likely violate the Consumer Financial Protection Act (CFPA) prohibition on unfair practices when consumers cannot reasonably avoid them,” we explained. “[The] Consumer Financial Protection Circular on surprise overdraft fees and the CFPB’s compliance bulletin on surprise depositor fees lay out when a financial institution’s back-end penalties likely break the law.”
Like the CFPB, the NCUA now says that the overdraft program practices cited in its letter may violate the prohibition against unfair or deceptive practices under both the Federal Trade Commission Act and the CFPA.
The risks
The NCUA wrote that it may impose supervisory or enforcement actions, including restitution to harmed members, if examiners identify violations of laws or regulations due to the assessment of these fees.
Similarly, when the CFPB published a “Supervisory Highlights Junk Fees Update Special Edition” in October 2023, it explained that many financial institutions have reduced or eliminated overdraft and NSF fees, but that its “examinations have continued to cite [unfair practices] for charging unfair unanticipated overdraft fees, such as ASPNs.”
In addition, class action litigation across the country has focused on overdraft and NSF fees. Credit unions that charge questionable fees may find themselves targets for lawsuits. “If your credit union assesses overdraft or … NSF fees that your members cannot reasonably anticipate or avoid, your credit union may be exposing itself to heightened reputational, consumer compliance, third-party, and litigation risk,” the NCUA warned.
Best practices
The NCUA’s letter recommends that credit unions offering an overdraft program or charging NSF fees should:
- Review and analyze overdraft and NSF fee practices, including opt-in disclosures and website advertising;
- Review recent regulatory developments;
- Consider member impact;
- Track and analyze related member-compliant activity;
- Monitor and take appropriate action to mitigate risk; and
- Consult legal counsel regarding risks and consumer compliance responsibilities.
TruStage, the bond carrier for many Wisconsin credit unions, has suggested these strategies to mitigate the risks:
- If your credit union assesses APSN overdraft fees on debit card transactions and/or re-presentment NSF fees on transactions that were previously returned unpaid, it is imperative to review the NCUA’s recent guidance as well as the CFPB’s prior guidance with legal counsel. Ultimately, credit unions should determine if a change in fee practices is warranted.
- Credit unions with a blanket policy for assessing returned deposited item fees should review their processes to determine if the assessment of this fee can be tailored as the regulators have suggested.
- Credit unions should add an arbitration provision with a class action waiver to their account agreement. Work with your legal counsel to develop this language. Since 2021, The League has offered a version of its Your Account Agreement form that includes an arbitration agreement clause and class action waiver (WCUL #83005), as explained in this Compliance Courier.