Navy Fed Fined $95M for Illegal Overdraft Fees

The CFPB said Thursday that it has fined Navy Federal $95 million for surprise overdraft fees on certain ATM withdrawals and debit card purchases from 2017 to 2022.

Navy Federal issued a response, saying it fully cooperated with the CFPB’s investigation and “will continue to comply with all applicable laws and regulations, just as we always have and as we believe we did here.”

The Vienna, Va.-based credit union is the nation’s largest with $180.8 billion in assets and 14 million members as of Sept. 30.

The CFPB ordered Navy Federal to refund more than $80 million to consumers, stop charging illegal overdraft fees, and pay a $15 million civil penalty to the CFPB’s victims relief fund. It said the $95 million is the largest amount the CFPB has ever obtained from a credit union for illegal activity.

In a separate statement, NCUA Chair Todd Harper said Navy Federal’s “authorize positive, settle negative” (APSN) practices and the subsequent charging of overdraft fees were “not only unfair and deceptive, but they also caused substantial harm to consumers.” NCUA removed the word “deceptive” from the statement a few hours later.

“In many cases, consumers were charged an overdraft fee completely unaware of Navy Federal’s complex processes related to the posting of transactions and whether they will incur an overdraft fee,” Harper said.

“APSN practices and an overreliance on overdraft and non-sufficient fees are counter to the credit union system’s statutory mission of meeting the credit and savings needs of their members — especially those of modest means,” Harper added.

The CFPB has reprimanded and fined a credit union only twice before. The first instance was in 2016 when the CFPB ordered Navy Federal to pay $28.5 million for improper debt collection practices. The second was last week when it fined VyStar Credit Union of Jacksonville, Fla. ($14.7 billion in assets, 997,469 members) $1.5 million in civil penalties that will go to the CFPB’s victims relief fund and refund members’ accounts for any fees they were charged as a result of a weeks-long outage in May 2022.

This time the fine was larger.

“Navy Federal illegally harvested tens of millions of dollars in junk fees, including from active duty service members and veterans,” CFPB Director Rohit Chopra said. “The CFPB’s work to rid the market of illegal junk fees has saved American families billions of dollars.”

Overdraft Fees Totaled Nearly $1B

Through its “Optional Overdraft Protection Service,” known as “OOPS,” Navy Federal charged consumers $20 for most overdraft transactions. The credit union collected nearly $1 billion in overdraft fees from 2017 to 2021, according to the CFPB.

The CFPB said members were illegally charged overdraft fees in two ways. First, when they made purchases with their accounts showing enough money to cover the transaction, the credit union still charged them overdraft fees if the account had a negative balance once the purchase posted to the account, sometimes days later.

Navy Federal collected an average of $44 million a year in these surprise fees, the CFPB said. As early as 2015, federal regulators, including the CFPB and the Federal Reserve, began cautioning financial institutions against charging these surprise overdraft fees.

Second, when customers received money through payment services like Zelle, PayPal, and Cash App, Navy Federal’s systems showed the money as immediately available to spend. However, CFPB said the credit union failed to disclose that payments received after 10 a.m. ET (and later, after 8 p.m. ET) wouldn’t actually post until the next business day. Some customers who tried to use this money were then charged overdraft fees. Through this practice, Navy Federal collected at least $4 million in fees.

NCUA data shows that credit unions whose members have lower-than-average savings and checking balances tend to collect more in overdraft and NSF fees — data NCUA began publishing this year.

Navy Federal collected $131.8 million in overdraft fees and $55.1 million in NSF fees in the nine months ending Sept. 30.

Its overdraft fees were an annualized 0.19% of its average assets, compared with 0.07% for the next nine largest credit unions. Its NSF fees were 0.22% of average assets compared with 0.03% of for the other nine.

In Navy Federal’s response to the CFPB, it said overdraft services enable many members to make necessary purchases without going into long-term debt.

“The credit union’s program provides a lifeline to its members and an alternative to payday lenders,” it said. “At the same time, Navy Federal works to help members avoid overdrawing their accounts in the first place and has long invested in specific programs designed to help members reduce their chances of incurring overdraft fees.

“Navy Federal also works to support members if they do overdraw their accounts. Over the past several years, Navy Federal has continued to comply with evolving expectations – including by automatically refunding certain overdraft fees since January 2023.”

Navy Federal said it continues to refine its processes to help members avoid fees. The credit union announced earlier that it will be eliminating non-sufficient fund fees for personal checking accounts starting in the first quarter of 2025.

“Members needing more flexibility in their banking experience will continue to have the opportunity to benefit from Navy Federal’s overdraft options without having to turn to more costly options elsewhere,” it said.

Navy Federal’s overdraft options include its Optional Overdraft Protection Service (“OOPS”), Overdraft Savings Transfer and Checking Lines of Credit.

The CFPB found that Navy Federal violated the Consumer Financial Protection Act through:

• Charging illegal, surprise overdraft fees on purchases made with sufficient funds: Navy Federal charged fees to consumers whose accounts showed sufficient funds when making purchases, only to charge fees when the transactions were later processed.
• Charging overdraft fees caused by delayed peer-to-peer payments with undisclosed processing times: The credit union showed incoming payments from services like Zelle, PayPal, and Cash App as available to spend, but failed to disclose that payments received after specific cutoff times would not post until the next business day, while still charging overdraft fees to some customers who attempted to use these apparently available funds.

In 2020, Navy Federal settled a class action suit for $16 million, including $5.2 million in legal fees and to reimburse 700,000 members charged multiple NSF fees on single transactions from January 2014 to October 2020.