NCUA Chairman Todd Harper Urges CUs to Consider Changes in Overdraft Landscape

NCUA Overdraft Webinar

Last week the NCUA hosted a webinar on Overdraft Protection and its future. NCUA Chairman Todd Harper noted Overdraft Protection Programs and their related fees are reaching an inflection point. Due to the changing landscape and consumer expectations, credit unions need to begin adjusting their revenue expectations associated with this service.

He stated that not only do credit unions face a relevance problem if they refuse to consider changes to their ODP Programs, but they must also think about if their ODP programs align with the credit union mission and business structure as well as the needs and expectations of members. Currently, for some members, overdraft fees can be detrimental and inconsistent with the mission especially regarding people of color, those of modest means, and individuals already marginalized by most financial service providers.

Chairman Harper noted in 2019, US credit unions received over $2.4 million in revenue from OPD fees, a quarter of all fee income. He views this as a safety and soundness concern as some credit unions have become overly reliant on ODP and other fee income. Because of this, the NCUA has implemented an ODP review as part of its 2022 examination priorities and he plans to use the information gathered for more a more detailed review in 2023.

The webinar went on to explain that due to interest and loan revenue dropping over the last few decades, credit unions and banks began to rely more on fees to cover the difference. While interest and loan revenue may increase with the FED raising interest rates, credit unions also need to look at their costs and services with the potential loss of fee income if unable to increase their Loan to Share in order to remain profitable.

While ODP fees and their corresponding income to credit unions make up a quarter of all fee income, it is a very small number of members who carry the cost. From its review of ODP Programs, it was found while a majority of credit union members sign up for ODP; 82% never use it; 16% use it only in rare emergencies, roughly 1-2 times per year; while less than 2% of members are frequent users with an average of over 13 overdrafts a year.

From the research it is clear ODP programs fill a need for some credit union members, but credit unions must look at new alternative approaches in filling this need, ones that aligns with the credit union mission and provides equity and inclusion for their members.

Some examples of steps credit unions are making to adjust their ODP Programs are:

• Reducing their reliance on fee income
• Keeping ODP but reducing its associated fees or eliminate fees
• Ensuring accounts with ODP have a connected savings accounts to cover purchases
• Moving from ODP to small, short term loans; credit cards; or Lines of Credit to cover overdraft purchases. Making interest income instead of fee income
• Implement a fairer tiered fee structure for ODP, ensuring the system is easy to understand for both members and staff
• Learning their members and why they overdraft and providing Financial Literacy classes for habitual users