Another Credit Union in the Hot Seat With Members of Congress

Friday was the deadline for $1.5 billion Frontwave Credit Union in Oceanside, Calif., to answer questions in a scathing letter from members of Congress based on a media report that the credit union has “exploited young service members by charging them millions of dollars in predatory and exorbitant overdraft fees.”

Frontwave said in a prepared statement Friday that it is sending a response letter to Congress, noting it complies with state and federal regulations, and looks forward to working with members of Congress to address their concerns.

The first credit union to land in the congressional hot seat earlier this year was the $178 billion Navy Federal Credit Union in Vienna, Va. Members of the Congressional Black Caucus and the Congressional Hispanic Caucus expressed deep concerns that the world’s largest credit union was allegedly engaging in racially discriminatory lending practices, according to a CNN report published in December. A statistical analysis by the national media outlet found that Black applicants to Navy Federal were more than twice as likely to be denied as white applicants even when more than a dozen different variables – including income, debt-to-income ratio, property value, down payment percentage and neighborhood characteristics – were the same.

Navy Federal has flatly denied these allegations, arguing that CNN’s analysis was incomplete because it did not include applicants’ credit scores or information about their available cash deposits or relationship history with the lender – none of which is publicly available in the federal data. After Navy Federal’s leadership met with Black Caucus congressional leaders in February, lawmakers reportedly were not satisfied with the credit union’s answers and have sought to hold hearings over the matter. What’s more, this controversy led Navy Federal members to file a class action lawsuit that is pending in U.S. District Court in Alexandria, Va. The credit union has asked a federal judge to dismiss the lawsuit.

The letter to Frontwave was signed by Senators Elizabeth Warren (D-Mass.), JD Vance (R-Ohio), Laphonza Butler (D-Calif.), Richard Blumenthal (D-Conn.), Tim Kaine (D-Va.), Cory Booker (D-N.J.), Ben Cardin (D-Md.), Mazie Hirono (D-Hawaii), Bernie Sanders (I-Vt.) and Rep. Sara Jacobs (D-CA).

The letter follows an investigation from KPBS in San Diego that published a report on Frontwave’s overdraft practices. According to the media outlet’s investigation published in March, it “found Frontwave systematically enrolls thousands of new Marine recruits each year and then collects substantial fee revenue from the young service members when they overdraft their checking accounts.”

The federal lawmakers requested that the credit union answer about a dozen questions regarding its overdraft policies and other related matters.

“Today, Frontwave Credit Union is sending a response to United States Senator Elizabeth Warren and the Congress of the United States regarding its letter to Frontwave dated April 25, 2024,” Frontwave said in a prepared statement on Friday. “We addressed each issue presented to us in the letter with specific information on Frontwave’s programs and services to our membership regarding overdraft procedures and educational services. Please note that Frontwave is fully compliant with all federal and state regulations, and we remain proud and honored to work closely to the benefit of our military members since 1952. Please note that we are still in the process of completing our detailed response and look forward to working closely with the United States Congress to satisfy any and all of its concerns.”

For 25 years, Frontwave has had an exclusive agreement with the Marine Corps that funnels recruits and automatically enrolls them in Frontwave checking accounts to receive their paychecks by direct deposit.

“This enrollment occurs during boot camp, when recruits are young, often away from home for the first time, and particularly vulnerable to marketing tactics. In 2022 alone, Frontwave collected almost $8 million in overdraft fees from a customer base that predominantly consists of Marines,” the congressional letter read. “We seek an explanation for your predatory overdraft practices and urge you to change your unconscionable overdraft and other fee policies.”

According to the KPBS report, when a member’s account is overdrawn by more than $20, they are charged a $20 fee every time they make a purchase — up to a negative $500 account balance.

“Every year, around 20,000 Marine recruits, some as young as 17 years old, go through boot camp at Marine Corps Recruit Depot (MCRD), California. Approximately 99% of recruits are automatically enrolled with Frontwave. On average, the base pay for newly enlisted Marines is around $1,800-2,200 per month before taxes. Many recruits are navigating managing a budget and a checking account for the first time,” the congressional letter reads. “The $500 debt to Frontwave, compounded with interest, could take years for a recruit to repay — and could make it impossible for them to open bank accounts elsewhere when their credit score plummets. Frontwave’s credit union members are primarily Marines and their families and, for more than 25 years, the credit union has benefited from an exclusive arrangement with the U.S. Marine Corps.”

The letter also noted Frontwave claims that its overdraft program is “a benefit for members who need a bridge between paychecks.” But members are not notified when they have low or negative account balances. According to Frontwave’s website, members have to manually set up alerts for low or negative account balances.

“Crucially, when a member is late or overdue on a payment for more than 30 days and is therefore considered delinquent, they can end up in ChexSystems, a consumer reporting database, which makes it difficult to open a bank account elsewhere,” the letter stated. “Frontwave owes service members and the American public an explanation for its deeply exploitative overdraft practices that harm service members and their families.”

The letter did not say whether the Congress members plan to hold a hearing concerning this issue.

Read More: The Congressional Letter to Frontwave Credit Union.