Overdraft or non-sufficient funds (NSF) fees that blindside members may expose credit unions to heightened reputational, consumer compliance, third-party, and litigation risk, their federal regulator warned in a letter issued Tuesday.
In a Letter to Credit Unions (LTCU 24-CU-03), the National Credit Union Administration (NCUA) flatly said unanticipated fees “can cause substantial harm to credit union members” (otherwise known as customers are banks and other financial institutions).
“While there may be situations with unique facts or circumstances, the assessment of unanticipated fees on credit union members generally represents an unfair or deceptive act or practice under Section 5 of the Federal Trade Commission Act (FTC Act) and Sections 1031 and 1036 of the Consumer Financial Protection Act of 2010 (CFPA),” the agency wrote in a letter signed by NCUA Board Chairman Todd Harper.
“The NCUA is issuing this letter to highlight the risks associated with certain overdraft and NSF fee practices and outline practices that may assist credit unions in managing and mitigating these risks,” Harper wrote. “Further, the NCUA is describing its supervisory approach to such fees and outlining its expectations that credit unions appropriately act to mitigate the associated risks. This guidance is consistent with the NCUA’s efforts to achieve the credit union system’s statutory mission to meet the credit and savings needs of members, especially those of modest means.”
The letter asserts that exams of federal credit unions (FCUs) in 2023 and 2024 identified the “presence of certain overdraft and NSF fee practices that may create heightened risk exposure.”
“These practices include charging overdraft or NSF fees stemming from circumstances where a member cannot reasonably anticipate the fee and, therefore, prevent the fee from being charged,” according to the letter. “Such overdraft program practices may violate the prohibition against unfair or deceptive practices under both the FTC Act and the CFPA.”
Regarding those unanticipated fees, the letter zeroes in on “authorize positive, settle negative” (APSN) fees. According to the letter, these are overdraft fees on debit card transactions that authorize when a member’s account has a sufficient available balance to cover a debit card transaction but, due to one or more intervening transactions, has an insufficient balance to cover the transaction at the time it settles.
In addition to the APSN fee, the letter notes that members may also be assessed an overdraft fee on intervening transactions that exceed the member’s available balance.
In bold letters, the letter states: “Charging APSN overdraft fees when members would not reasonably anticipate them because they had a sufficient balance at the time the credit union authorized the payment is likely unfair under both the FTC Act and the CFPA.”
The agency also said that if credit unions’ core processing systems cannot identify ASPN transactions that result in fees, even though the fees may have been disclosed in advance, “have heightened third-party and reputation risk.”
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