Overdraft

Updated July, 2010

As member-owned, not-for-profit cooperative institutions, many federal credit unions offer overdraft protection programs at the request of their members who find these programs to be beneficial.   Overdraft programs are helpful in providing a line of credit to these members, to assist them with their financial needs.

In October, Senator Chris Dodd, chairman of the Senate Banking Committee, introduced the Fairness and Accountability in Receiving Overdraft Coverage Act (S.1799).   At the same time Representative Carolyn Maloney, who had previously introduced legislation related to overdraft fees, introduced the Overdraft Protection Act (H.R. 3904) with support of House Financial Services Committee Chairman Barney Frank.

Both pieces of legislation would bring overdraft protection programs under the Truth in Lending Act (TILA), require customer consent before the initiation of overdraft protection services, and provide additional disclosure requirements for financial institutions when a customer has exceeded his or her balance.

The requirements imposed by S. 1799 and H.R. 3904 are particularly troubling for credit unions.   By bringing overdraft programs under TILA, the proposed bills would count any fee associated with overdraft programs as a finance charge. NAFCU is pleased, however, that both bills ensure that credit union overdraft fees would be exempt from the statutory usury ceiling of 18%.

Still, NAFCU is deeply concerned about the limitation that both bills impose on the number of overdraft coverage fees charged by a depository institution.   The arbitrary restriction of no more than one fee per month or six fees per year, as prescribed in these bills, would significantly limit consumer choice.   Instead, NAFCU has proposed that credit unions notify customers who have overdrafted several times during the course of a month to educate them on available alternatives. Many credit unions already engage in this type of customer service on a voluntary basis.

NAFCU also has serious concerns about provisions in these bills limiting non-sufficient funds fees for debit card and ATM transactions.   These types of transactions are covered by financial institutions when the transaction is made, even if there are insufficient funds in the consumer’s account at the time that the transaction actually clears.   Because the transaction is authorized by the merchant at the time it takes place, the credit union is contractually obligated to post the payment, even though the funds are not available in the customer’s account.

Credit unions have consistently raised concerns about merchants not checking accounts in “real time” to ensure an overdraft is not created, however, most merchants continue to process all transactions at the end of the day when a consumer’s multiple transactions may cause him or her to overdraft several times.   The limitation to one overdraft fee per month is highly problematic for the vast majority of credit unions that receive transactions not cleared by the merchant at the point of sale.

NAFCU is also concerned about the requirement in both pieces of legislation that overdraft protection services require consumer consent.   If overdraft programs become subject to an “opt-in” requirement, credit unions could be forced to bear a significant regulatory burden by having to contact all of their members to obtain consent for the service.   NAFCU prefers an “opt-out” provision in the legislation instead, which would still give consumers the option of declining overdraft protection, while greatly reducing the burden on credit unions.   NAFCU could, however, support a condition that new members or customer accounts include an opt-in requirement, as those joining a credit union for the first time do not presume that they are being provided overdraft services.

In related action, on November 12, the Federal Reserve issued a rule that would require financial institutions to ask consumers permission before subscribing them into overdraft protection programs.   NAFCU has argued that if Congress acts on this issue it could undercut the regulatory process already underway at the Federal Reserve.    

At a time when unemployment is teetering at 10 percent and many Americans are struggling to access lines of credit, NAFCU questions many provisions in S. 1799 and H.R. 3904 that would hamper the ability of credit unions to serve their customers.  While NAFCU believes it is important to prevent abusive overdraft practices, NAFCU believes that these bills go too far in restricting consumer choice and opposes both bills as written.

In recent months both the House Financial Services Committee and Senate Banking Committee have held open hearings to gather information and begin to evaluate the merit of these overdraft proposals. NAFCU has taken an active role in the Congressional hearing process, and will continue to work with Congress to make significant changes to overdraft legislation should it move forward.