Overdraft Fee Scrutiny Hits Credit Unions as Banks Prepare to Pounce
Also, MFA's Corbett on beating back the SEC private funds rule; Comer looks to White House in SVB probe
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An Overdraft Problem? Credit unions have long enjoyed a special standing in Washington. Much of their policy success, including maintaining their tax-exempt status, has been built by emphasizing their differences with banks: Credit unions are member-owned cooperatives, rather than for-profit businesses. They put their customers first.
But data released last week on credit unions’ income from overdrafts – or “junk fees,” as Democrats tend to call them – is suddenly giving critics new ammunition to undercut that narrative. The banking industry is eagerly looking to capitalize on the opportunity as it steps up a long-running campaign to curb credit unions’ growth and subject them to more stringent oversight.
Alarms are already blaring in the credit union world. The trade association America’s Credit Unions recently suggested its members might want to consider restructuring the fees in light of “reputation risk.”
The figures come from reports that are filed quarterly with the National Credit Union Administration. For the first time this year, NCUA required firms with more than $1 billion in assets to list their income from overdraft. (The tally also includes non-sufficient funds or NSF fees, a cousin of overdraft. Both are assessed when customer accounts dip below zero.)
The numbers show that some credit unions rake in substantial revenue from the charges. In aggregate, the NCUA reported, 443 large credit unions collected around $916 million from the fees during the first quarter. Navy Federal Credit Union, the nation’s largest with about 13 million members, reported almost $170 million in overdraft and NSF payments in the first quarter – substantially more on a per-customer basis than the largest banks, according to one analysis (more on that below).
Credit unions’ reliance on the fees had already been reverberating among progressives like Sen. Elizabeth Warren and CFPB Director Rohit Chopra, who say that overdrafts are often assessed on customers who can afford them the least. They haven’t been shy about naming-and-shaming lenders who rely on fee income to stoke profits.
Last year, when California’s banking regulator began to disclose the overdraft revenue collected by the state’s largest credit unions, it generated a rash of bad press. Frontwave Credit Union, a community lender near San Diego, even got some unwanted attention from Warren, several of her Democratic colleagues and Republican Sen. J.D. Vance. The lawmakers accused the lender of “predatory overdraft practices.”
(Navy Federal has also gotten attention on Capitol Hill after reports that it disproportionately rejected black mortgage applicants. The firm has said it is reviewing the allegations and is deeply committed to fair lending. )
The CFPB, for its part, included credit unions in its proposal seeking to limit overdraft fees charged by large lenders. The bulk of the industry, however, wouldn’t be covered by the rule. Still, Jim Nussle, ACU’s president, called the consumer agency’s plan a “devastating blow to working class Americans.”
NCUA Chairman Todd Harper has also called on credit unions to reduce or eliminate the charges. “How can it be that banks, on this metric, are more consumer friendly than credit unions?” he asked in a speech last fall. “That fact should give everyone in the credit union industry pause.”
ACU lobbied the agency to not publish the data, arguing in a March letter to Harper that it’s a “trade secret” and should be exempt from public view. The disclosure could create “significant reputational risks” and “can and will be spun in a misleading and potentially inaccurate way to meet the agenda of the media,” Carrie Hunt, ACU’s chief advocacy officer, wrote. “What the media fails to recognize, time and time again, is that credit unions are so very different from banks.”
More broadly, the group argues, as banks do, that overdraft programs provide a valuable service by ensuring customers’ transactions still go through when their funds are low. Critics are “trying to name and shame, but there's no shame in overdraft programs,” Greg Mesack, senior vice president at ACU, says. “There's no shame in making sure your members are able to pay their bills from month to month.”
Navy Federal, whose field of membership includes military personnel, veterans and their families, said in a statement that it “provides voluntary overdraft protection services to assist members with short-term needs.” It added that overdraft and non-sufficient funds fees made up 4.9 percent of its gross income in the first quarter of 2024.
Banks, which have had to report overdraft fees for years, are seizing on the new credit union numbers as they renew their effort for Congress to revoke credit unions’ tax-exempt status – or at least take more incremental steps. The American Bankers Association and Independent Community Bankers of America are asking for congressional oversight hearings, and their advocates say credit unions’ reliance on overdraft feeds right into their argument.
“This is even more evidence that Congress needs to have hearings,” says Michael Emancipator, senior regulatory counsel at ICBA. “You’re seeing that credit unions aren’t so different than banks that are not subsidized by the government.”
Overdraft also gives ICBA an opportunity to shine a light on one of its biggest bugbears: the trend of credit unions’ buying community banks. Emancipator cited Michigan-based Elga Credit Union’s recent acquisition of Marine Bank & Trust in Florida, noting that 39 percent of Elga’s revenue comes from overdraft. “Rather than returning the money to their members, they are using their retained earnings to buy banks,” he says.
To be sure, it’s a bit awkward for banks to point the finger. They are fighting the CFPB overdraft plan too, after all. And while the very largest have pared back overdraft charges after years of public pressure, many smaller lenders still rely heavily on them.
Fuel for Critics: Aaron Klein, a fellow at the Brookings Institution who has criticized overdraft fees by both banks and credit unions, points out that the per-customer charges for some large credit unions are much higher than at the largest banks.
“No big bank is anywhere near these levels,” he wrote in a post on X naming some of the heaviest credit union overdraft collectors. Klein’s analysis, which looked at overdraft income per account or member, concluded that large credit unions such as Navy Federal collect more than the biggest U.S. banks, though less than some smaller banks.
Klein has long pushed for the NCUA to release data on the fees, so it was a bit of a coup when Harper announced the change during a fireside chat with Klein at Brookings in February.
Now that the numbers are public, Klein is making clear he’ll use them to browbeat the industry. “The credit unions that have been pigs at the trough gorging on overdraft are going to wake up and see their name in the mud,” he tells Capitol Account.
Perhaps anticipating such attacks, ACU had this caution for members back in February: “Credit unions may want to consider how reporting of this information could affect reputation risk and whether that might necessitate any changes to their fee-related practices.”
Zooming out: The NCUA’s scrutiny of overdraft comes after its 3-member board flipped back to Democratic control for the first time in several years when Tanya Otsuka was sworn in this January. One question going forward is how the agency’s supervisors will respond now that the fee data is garnering public attention.
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What’s Next on Private Funds: We touched base on Friday with Bryan Corbett, president of the Managed Funds Association, in the wake of last week’s ruling that struck down the SEC’s private funds disclosure rule. MFA was one of a half dozen trade groups that filed the lawsuit in September in the U.S. Court of Appeals for the Fifth Circuit. What follows is a recap of our interview (lightly edited for clarity).
This was a very big win for hedge funds, what was the reaction from your members?
“They are happy. No industry group or association wants to find themselves in a situation where they're having to sue their regulator. We've worked really hard to build a constructive relationship with the SEC…It's unfortunate that we did have to litigate on this rule. We felt like the SEC exceeded their authority – and the court agreed. The industry feels relieved, feels vindicated. But we will continue to work very closely with the SEC.”
MFA is suing over several other SEC regulations. Do you expect more wins?
“We've got two other lawsuits outstanding, on the dealer rule and on the securities lending and short sale rules. We feel strongly that not only was the statutory authority exceeded with those rules, but also that it was bad process. The SEC didn't create an adequate record; they didn't do sufficient cost-benefit analysis; two of the rules are totally contradictory to each other. The larger problem is that there have been so many rules so quickly that it doesn't seem like the agency looked at everything in aggregate and figured out what the totality of the impact will be on the markets. That problem is becoming more evident as more and more of these rules go final.”
In the private funds decision, the court didn’t address some of those process questions because it found the agency didn't have authority to write the rule.
“The court was clear, in terms of hewing to what you have authority to do. Just because a regulator would like to do something, doesn't mean they have the authority to do it…The broader procedural process arguments around the 50, 60-plus rules that the SEC has put out – some of those process arguments remain before the courts. We will see subsequent decisions address statutory authority, but also the procedural points that are really important to rulemakings.”
The SEC argued the rule was especially needed because of the enormous growth in private funds. That includes, the agency emphasized, the retirement savings on plenty of retail investors.
“We've been very focused on maintaining the line between mutual funds and private funds. Congress was clear in delineating that line. Through the private funds proposal, as well as some of these other rules, our view is that the SEC is looking to blur this line – and bring retail-like regulation to private funds. The decision reaffirmed that line in a very, very clear way. The growth of the industry is, we think, important for capital markets and plays an important role in providing capital and financing to businesses. But the growth should not be used as a pretext to treat the industry like a mutual fund product. That is what the SEC was doing here.”
The rule was also billed as setting minimal disclosures for investors in hedge, private equity and venture capital funds. If that’s the case, why sue?
“There's a lot of regulation of our industry. There's lots of disclosure and transparency. We've seen different reports saying this rule does away with disclosures by private funds. That's just not true. There's plenty of disclosures to the regulators, there's lots of disclosures that are made to investors when they invest in the funds. This court decision wasn't about disclosure, it was about the SEC overstepping its authority and trying to intermediate the relationship between sophisticated investors and sophisticated funds.”
Is MFA hosting the victory party?
“No, no. Look, we are moving ahead with our agenda – business as usual. This is a long-term process, as you know. We had a good week here, a good outcome. But there's still a lot of work to do.”
SVB Probe Angles at Biden: A House panel probing regulatory lapses in the run-up to and aftermath of Silicon Valley Bank’s failure is homing in on the FDIC – and seeking to draw a connection to the White House.
House Oversight Chairman James Comer and Rep. Lisa McClain, who heads the panel’s health care and financial services subcommittee, fired off a letter today to Chairman Martin Gruenberg asking him to turn over reams of internal communications connected to the FDIC’s handling of the collapsed lender.
In particular, the lawmakers are examining the agency’s inability to find a buyer for SVB before it failed in March 2023 – and questioning whether the Biden administration’s skepticism of mergers may have played a role. (In 2021, President Joe Biden issued an executive order calling on all federal agencies to toughen scrutiny of deals.)
“Press reports and documents reviewed by [the] committee raise questions as to the credibility of statements that there were no buyers contemplating an acquisition,” the lawmakers wrote. “The committee’s investigation will help determine the truthfulness of these statements as well as determine if the Biden [executive order] pressured the FDIC to abandon one of the most efficient and effective methods to resolve failing institutions.”
Among the records requested: All SVB-related documents and communications between the FDIC chief and Chopra during March 2023 as well as Gruenberg’s call logs for that period.