Community-Focused Credit Unions Should Have Dumped ‘Junk Fees’ Long Ago

On Oct. 11, the Biden Administration unveiled a crucial set of proposals aimed at curbing excessive consumer fees, such as overdraft and nonsufficient fund (NSF) fees, often called “junk fees.” This move represents a significant step toward rectifying an issue that has long burdened consumers, particularly low-income consumers and consumers of color.

By now, the general public may have experienced or at least may be aware of the substantial consumer fees banks collect, as well as the exorbitant “service” and “convenience” fees charged by the retail and hospitality industries. Together, these sectors generate millions in junk fees – all at the expense of consumers, many of whom live paycheck to paycheck. One of the more surprising culprits of these fees is credit unions.

Credit unions have historically set themselves apart from conventional banks by emphasizing a community-oriented approach rooted in relationship banking and a commitment to prioritizing people over profits. The NCUA even goes as far as stating its vision is to, “Strengthen communities and protect consumers by ensuring equitable financial inclusion through a robust, safe, sound and evolving credit union system.” However, an analysis of recent Department of Financial Protection and Innovation (DFPI) data by our organization, Rise Economy, shows a stark conflict between that vision and reality.

Despite the NCUA’s vision, DFPI’s data makes the case that credit unions are not as good for consumers as the industry claims. For instance, credit unions make up 15 of the top 20 highest fee-charging institutions, having racked up nearly $171 million in total junk fee income in 2022 alone, our analysis shows. Golden 1 Credit Union ($20.4 billion in assets, Sacramento), California’s largest credit union, amassed more than $28 million in NSF and overdraft fees in 2022. The Top 20 state-chartered credit unions hold $78.8 billion in assets and $98.8 billion in deposits. Some with low-income designation, like Golden 1 and Redwood Credit Union ($8.4 billion in assets, Santa Rosa, Calif.), have collected $44.5 million in junk fees from low-income members. It’s also worth noting that credit unions occupy each of the top 20 spots in terms of the percentage of their total income that comes from NSF and overdraft fee revenue. The DFPI references this as a reliable indicator of how much a financial institution depends on such unnecessary fees to sustain its operations.

Our analysis of this data raises serious concerns about credit unions’ purported mission of advancing equitable financial inclusion. This is even more concerning when considering Black and Latinx households overdraft more often than white households, and those with incomes under $30,000 report overdrafts twice as often as those with incomes over $100,000, according to findings from the Financial Health Network. Credit unions cannot profess to protect consumers while simultaneously maximizing their revenue through overdraft fees. But elected officials have the power to change this.

Options like CalAccount (SB 1177), the proposed public banking option, could potentially save consumers $3.3 billion in fees while also injecting $4.2 billion back into California’s economy. Additionally, state-chartered credit unions largely operate without guidance, regulation or federal Community Reinvestment Act (CRA) obligations. A state-level CRA would allow DFPI to oversee financial institution’s consumer services, including junk fee charges, branch locations and services for non-English speakers or English as a second language customers.

Credit unions’ significant revenue from junk fees calls into question their community-oriented portrayal. Furthermore, it points to a clear need for rigorous evaluation of their services to low-income communities and communities of color. We argue that this regulation must go beyond the federal CRA to ensure they meet the financial needs of these communities, rather than exploit them.

Protecting consumers, especially those who are low-income or people of color, requires immediate and firm action. It is unacceptable for credit unions to make profits at the expense of these consumers. We need to adopt new and innovative alternatives, such as CalAccount, and establish a state-level CRA that can conduct comprehensive evaluations to ensure that unjust penalties are prevented.

Proactive measures, meticulous data collection, like that from DFPI, and rigorous evaluations under a state-level CRA will undoubtedly uplift consumers who have been preyed upon and ultimately ensure that financial entities like credit unions are not exploiting or penalizing individuals in vulnerable economic circumstances. We call on lawmakers to support consumer-friendly alternatives like CalAccount and to champion a state-level CRA. The success of our economy and the financial health of our communities depend on it.

Paulina Gonzalez-Brito is the CEO of Rise Economy, formerly the California Reinvestment Coalition, a member-led alliance focused on creating a more equitable society for Black, Indigenous and People of Color.