The NCUA’s December 2024 Letter to Credit Unions (24-CU-03) sheds light on the risks and regulatory concerns surrounding overdraft and non-sufficient funds (NSF) fee practices. This guidance is crucial for federally insured credit unions aiming to mitigate compliance, reputation, and litigation risks while maintaining fair and transparent practices for their members. Below, we break down the essential points of the letter, tailored for credit union leaders.
The Problem with Unanticipated Fees
Credit unions may face significant risks if their overdraft or NSF fee policies result in fees that members cannot reasonably anticipate or avoid. These fees can lead to:
- Substantial Member Harm: Unexpected fees strain members financially and undermine trust.
- Regulatory Violations: Such practices may be deemed unfair or deceptive under the FTC Act and the Consumer Financial Protection Act (CFPA).
- Heightened Risks: Credit unions expose themselves to reputational, consumer compliance, third-party, and litigation risks.
Key Risk Areas in Overdraft and NSF Fee Practices
The NCUA identified several problematic practices:
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Authorize Positive, Settle Negative (APSN) Fees:
- Fees charged when a transaction is authorized with sufficient funds but settles with insufficient funds due to intervening transactions.
- Such practices are likely unfair under federal regulations, especially if members cannot anticipate the fees.
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Multiple NSF Representment Fees:
- Charging additional fees when a returned check or ACH item is presented multiple times without sufficient funds.
- Members often cannot control or predict when items will be represented, making these fees unfair and deceptive.
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Returned Deposited Item (RDI) Fees:
- Assessing fees on members for depositing checks that are returned unpaid.
- Members typically have no way to foresee these occurrences, increasing compliance and reputational risks.
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Other High-Risk Practices:
- High or No Limits on Fees: Charging excessive fees in a single day creates undue financial burdens on members.
- Inaccurate Disclosures: Failing to clearly disclose fee practices or transaction cutoff times can mislead members and violate regulations.
- Reordering Transactions: Prioritizing larger transactions to maximize overdraft fees is likely to be considered unfair.
Risk Management Best Practices
To address these risks, the NCUA recommends that credit unions:
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Conduct Comprehensive Reviews:
- Analyze all aspects of overdraft and NSF fee programs, including disclosures, processing systems, and member communications.
- Evaluate member complaints and fee structures for fairness and transparency.
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Mitigate Risks:
- Eliminate fee practices that members cannot reasonably anticipate or avoid.
- Self-identify and reimburse members for fees assessed under unfair practices.
- Consult legal counsel to ensure compliance with applicable laws.
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Enhance Member Support:
- Offer alternatives such as linked savings accounts, affordable lines of credit, or short-term loans.
- Provide educational resources to help members manage their accounts effectively.
NCUA’s Supervisory Approach
The NCUA will continue reviewing overdraft and NSF programs during examinations to ensure compliance and risk mitigation. Credit unions are encouraged to take proactive measures, as the agency will consider self-corrected violations and member reimbursements favorably during examinations. Enforcement actions may include restitution for harmed members and other penalties for non-compliance.
This guidance emphasizes the importance of transparency, fairness, and compliance in managing overdraft and NSF fee practices. By implementing the NCUA’s recommended best practices, credit unions can reduce risk exposure, enhance member trust, and align with regulatory expectations.
How We Can Help
At Young & Associates, we specialize in helping credit unions navigate complex compliance requirements. Contact us for tailored solutions to evaluate and improve your overdraft and NSF fee programs. Sign up for our newsletter to stay informed about the latest regulatory updates and best practices in the credit union industry.
