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June 19, 2012 – NAFCU is urging the Consumer Financial Protection Bureau to "carefully consider the long-term implications" of any changes to overdraft protection regulations, especially since consumers may end up actually paying more fees due to returned checks.

In a June 18 letter to the CFPB, NAFCU Regulatory Affairs Counsel Dillon Shea pointed out that credit unions vary in the way they communicate with members about overdrawn accounts, a point reinforced by findings in the June edition of NAFCU'sEconomic & CU Issues Monitor. "Virtually all of the credit unions NAFCU surveyed do contact frequent users and try to work with them to find lower-cost alternatives where possible," he wrote. "Some credit unions will remove the overdraft service if they feel the member is not using it responsibly."

Shea noted that some credit unions offer electronic notification via text message or email when an account is being overdrawn. Most credit unions that offer such services also offer the ability for the member to set up a notification email or text when the account reaches a certain balance. The bottom line, Shea said, is that credit unions "tailor their programs as necessary, and there is no one-size-fits-all approach."

In discussing the consequences of any new overdraft protection regulations, Shea pointed out the Federal Reserve's changes in 2009 to Regulation E and Regulation DD proved "costly and time consuming" for credit unions. "For example, some automated payment processing systems were not capable of distinguishing between an ATM withdrawal, a debit card purchase, a check or an ACH payment," he wrote. "The changes to Regulation E, however, required credit unions to alter their systems in order to make such distinctions."

One area where the CFPB could help credit unions with overdraft: linked savings accounts. "Under the Federal Reserve's Regulation D, a consumer may not make more than six transactions per month from his or her savings account," Shea noted. "Consequently, linking the checking account to the savings account to minimize overdrafts is not an ideal solution for minimizing overdraft fees, particularly since the member may also make other withdrawals from his or her savings account that also count against the six-transaction limit.

"If the CFPB concludes that linking to a savings account is a preferable alternative to overdraft protection, it should work with the Federal Reserve to clarify that a transfer from a savings account to cover overdrafts from accounts at the same depository institution are not covered Regulation D transactions that count against the six-transaction limit," Shea wrote.

He also said the final proposed disclosure, coupled with the CFPB's request for comment, seems to indicate a predisposition on the part of the agency against overdraft protection programs. "The majority of members who use overdraft, contrary to what others might think, do understand the program and choose to keep using it because it provides a service they find valuable," he said. "No amount of disclosures or notices will change the fact that many consumers find the service useful. "

In the survey for the June Economic and CU Issues Monitor, 97.9 percent of participants who charge overdraft fees reverse the fees on a case-by-case basis. NCUA call report data also show a substantial portion of respondents' members, 17.4 percent, specifically opted for overdraft protection over any of the alternatives.