House Panel Considers Overdraft Fee Reforms

A credit union CEO told a House panel Thursday how it minimized its overdraft fees over the last 12 years to put them in line with actual costs and to be fairer to low-income members.

Paul Kundert, president/CEO of UW Credit Union, spoke and answered questions remotely for the House Financial Services Subcommittee on Consumer Protection and Financial Institutions hearing: “The End of Overdraft Fees/? Examining the Movement to Eliminate the Fees Costing Consumers Billions.”

In written testimony, CUNA and NAFCU argued against further regulation of overdraft fees, the opinion expressed by Republican members of the subcommittee. NAFCU’s letter reminded members that the fundamental change occurred in 2009 when the Fed required checking account customers to opt-in to overdraft protection plans, forbidding the common practice of requiring them as part of the terms of having a checking account.

Brad Thaler, NAFCU’s vice president of legislative affairs, invoked the words of former House Financial Services Committee Chairman Barney Frank (D-Mass.), writing that Frank in 2009 had recognized the importance of an opt-in regime and how consumer choice should trump legislation.

“We wouldn’t, I believe, be in a situation where we are talking about legislation if you would have had an opt-in regime from the beginning,” Frank said.

CUNA President/CEO Jim Nussle wrote that the federal government shouldn’t constrain credit unions from offering overdraft protection plans that help members resolve short-term financial difficulties.

Subcommittee Chair Ed Perlmutter (D-Colo.) said his intent was to both “weed out shark practices that take advantage of Americans,” and help financial institutions remain “solvent and strong.”

Kundert’s testimony threaded the needle between the parties. He summarized his five-page written testimony, which describes years of changes by the Madison, Wis.-based credit union, which ended 2021 with $4.8 billion in assets, 310,221 members and 244,000 checking accounts.

UW Credit Union began offering overdraft protection in 2001.

“We viewed the program positively for our members as it advanced funds in the form of a negative checking account balance and helped the member avoid downstream costs they would incur from a bounced check or returned ACH debit,” Kundert wrote.

The credit union saw the program’s use growing through the Great Recession of 2008-2009, only later realizing that many overdrafts were intentional to meet short-term financial needs.

After the Fed created the opt-in rule, the credit union re-examined its overdraft program. It responded to critiques from consumer groups that overdraft fees fell most frequently on those least able to pay them.

In 2010, the credit union changed its system so fees weren’t triggered for overdrafts of $10 or less. It also limited its fees to one per day, so that one fee would be charged even if several checks bounced in a single day.

And then, fee income fell. Its average overdraft fees per checking account were $12.50 per year after the 2010 changes, at a time when the industry average was $80.

In 2018, it introduced its Clear Account, which was certified last year to meet the Bank On National Account Standards by the national Cities for Financial Empowerment Fund (CFE Fund). Account holders don’t have paper checks. Instead they pay bills and make purchases through debit cards. The account has no fees for overdrafts, no minimum balance requirements and allows access to surcharge-free ATMs.

The account costs $5 per month, or is free if the member uses direct deposit or mobile deposit.

Last July, the credit union reduced its remaining overdraft and NSF fees from $30 to $5. “We witnessed social unrest that prompted organizations like ours to think more deeply about racial equity and to review business practices from an equity point of view,” Kundert wrote.

Again, its fee income fell. Kundert expects overdraft fees will fall from $12.50 per account per year to $2.50, or about $2 million per year. He said the credit union has been able to compensate by increasing its operating efficiency.

• UW Credit Union fee income for the fourth quarter of 2021 was $3.3 million, down 29.9% from a year earlier. For all credit unions fees rose 8.4% to $2.4 billion.
• UW Credit Union’s fees per member fell 33.8% to $10.68 in the fourth quarter, while they rose 3.6% to $18.42 for all credit unions.
• UW Credit Union’s return on average assets was 0.59% for the fourth quarter, down 62 basis points from a year earlier, while ROA for all credit unions rose 8 bps to 0.91%.

The credit union’s changes have been covered by CU Times and in 2010 by The New York Times. The reaction among members?

“We have received very little feedback one way or another regarding these programs,” Kundert said at the hearing.

The amount consumers are charged for overdraft fees is difficult to determine.

Banks with assets over $1 billion have been required since 2015 to report fee income by the three largest categories for consumer deposit accounts: Overdraft and NSF fees, periodic maintenance fees and ATM fees.

That leaves out small banks and credit unions. NCUA reports showed total fee income for credit unions, but not fees by source.

A CFPB report published in December estimated:

• U.S. consumers were charged $15.5 billion in overdraft and NSF fees in 2019.
• Credit unions collected $2.4 billion in 2019, accounting for 15% of the national total overdraft fees and 26% of total credit union fee income.
• Total overdraft fees fell 26% in 2020.