On December 10, the National Credit Union Administration (NCUA) issued a letter to all federally insured credit unions, highlighting the risks associated with certain overdraft and non-sufficient funds (NSF) fee practices. The letter emphasizes the potential harm to consumers and the heightened risks to credit unions, including reputational, consumer compliance, third-party, and litigation risks, resulting from these fees.
Background
According to the NCUA, overdraft and NSF programs can serve legitimate purposes, such as encouraging sound account management and honoring transactions when members unintentionally overdraw their accounts. However, the federal agency warns that some credit unions operate these programs in ways that may result in consumer harm and increased risk exposure. The NCUA is concerned that an overreliance on revenue from overdraft and NSF fees can lead to concentration risk, affecting the financial health of credit unions and their members.
The NCUA has previously issued guidance on overdraft programs, including interagency guidance in 2005. In 2022, NCUA examiners began requesting information about federal credit unions’ overdraft programs, and in 2023 and 2024, they expanded their review to evaluate adjustments made to address risks and potential member harm from unanticipated fees.
Unanticipated Overdraft Fees
According to the NCUA, “unanticipated overdraft fees” occur when credit unions assess fees on transactions that members would not reasonably expect to incur such fees. Despite required disclosures, the agency warns that the complexity of transaction processing and overdraft fee policies can lead to consumer uncertainty. The NCUA highlights the practice of “authorize positive, settle negative” (APSN) transactions, where overdraft fees are charged on debit card transactions that were authorized with sufficient funds but settled with insufficient funds due to intervening transactions. According to the agency, this practice is likely unfair under Section 5 of the Federal Trade Commission Act (FTC Act) and Sections 1031 and 1036 of the Consumer Financial Protection Act (CFPA). Also, NCUA warns that there is heightened third-party and reputation risk associated with core processing systems that cannot identify APSN transactions resulting in a fee.
Multiple NSF Representment Fees
Credit unions may charge NSF fees when a check or automated clearing house transaction is presented for payment from an account with insufficient funds. If the same transaction is represented and the account still lacks sufficient funds, additional unanticipated NSF fees may be assessed. According to the NCUA, members typically have no control over when a returned transaction will be represented, making it difficult to avoid these fees. Such practices can lead to heightened consumer compliance and reputation risk and may be considered unfair under the FTC Act and the CFPA, even when member disclosures outline the credit union’s representment practices.
Returned Deposited Item Fees
Returned Deposited Item (RDI) fees are charged when a check deposited by a member is returned because it could not be processed against the check originator’s account. This could be because the originator’s account has insufficient funds, has been closed, there is a stop payment order, or the check is missing required information. According to the NCUA, members generally cannot control or anticipate the return of deposited checks. The NCUA states that blanket policies of charging RDI fees, irrespective of transaction circumstances, are likely unfair under the FTC Act and the CFPA.
Other Overdraft or NSF Practices
In its letter, NCUA identifies additional fee practices that may present heightened risk, including:
- High or no daily limits on the number of fees assessed.
- Insufficient or inaccurate fee disclosures.
- Ordering transactions to maximize fees.
Risk Management Principles
NCUA advises that credit unions should closely analyze all aspects of their overdraft and NSF fee practices, considering member impact and recent regulatory developments. Credit unions are encouraged to discontinue policies related to charging fees that members cannot reasonably anticipate and avoid, and to self-identify and reimburse members negatively impacted by such fees.
The agency also states that credit unions may consider offering features such as linked savings accounts, affordable lines of credit, or short-term, small-dollar loans, and providing educational resources to members enrolled in overdraft programs.
Conclusion
The NCUA states that it will continue to review overdraft programs to ensure credit unions effectively manage the risks associated with certain fee practices. If examiners identify violations of laws or regulations due to unanticipated fee practices, the NCUA states it will evaluate appropriate supervisory or enforcement actions, including restitution to harmed members. However, the NCUA emphasized that it will recognize proactive efforts by credit unions to self-identify and correct violations, generally not pursuing enforcement action for self-identified and fully corrected violations prior to an examination.
Credit unions are encouraged to review their overdraft and NSF program practices to ensure compliance with the FTC Act, the CFPA, and other applicable laws and regulations.
Our Take
With the publication of this letter, the NCUA is generally adopting the CFPB’s position, first fully articulated in 2023, that even fulsome disclosures regarding APSN overdraft and NSF representment fee practices cannot mitigate the unfairness of imposing fees in those circumstances. The NCUA is also adopting the CFPB’s view that assessing RDI fees irrespective of the facts of the transaction is likely unfair. Many credit unions have already ceased all of these practices, and the NCUA apparently expects the remaining credit unions to do so.
