WASHINGTON -
The Consumer Overdraft Protection Fair Practices Act, penned by U.S. Reps. Carolyn Maloney (D-NY), Barney Frank (D-MA.) and Bernard Sanders (I-VT), would put overdraft protection programs-also called courtesy pay and overdraft privilege programs-under the Truth In Lending Act. Doing so would require overdraft protection providers to count any fees or service charges toward calculating the APR-a move that would put most of these programs above the NCUA-enforced 18% usury cap, thereby killing such offerings for credit unions.
"If the legislation passes as it's currently written, these programs are done," CUNA VP-Legislative Affairs Ryan Donovan said. "It's a significant revenue item for credit unions," agreed CUNA's Pat Keefe. "People are not going to be happy about that at all."
NAFCU's Brad Thaler said the trade association has been working with Maloney to get the bill amended to resolve the usury cap issue for CUs-which are the only institutions operating with such a prohibition.
Adding to the problem is the fact that it's almost impossible for CUs to calculate the APR on a courtesy payment until it's essentially too late. "Credit unions never know what the APR is going to be for each separate overdraft, because it depends on when the member pays it back," Thaler explained. "So the APR would be one thing if the member pays it back in two weeks and another thing if the member pays it backing two days. The credit union wouldn't even know it was in violation of the usury cap until it had already violated it."
Perhaps the simplest of resolutions to the problem-exempting CUs from the bill via a "carve out"-is the one option that simply isn't on the table. "Maloney recognizes the conflict in the bill and has indicated she recognizes that credit union programs are not among the abusive programs the bill is supposed to target, but we have been told there will be no carve-out," Thaler related.
Another option: putting overdraft protection under Truth In Savings instead of Truth In Lending, which eliminates the APR requirement, which U.S. Rep. Spencer Bachus (R-AL) is suggesting, Thaler noted.
Though the problem with the usury cap is the greatest concern for CUs, there are other issues with the bill, as well, not the least of which is the opt-in requirement. CUs would have to contact every member to get positive affirmation that they wish to continue using overdraft protection.
A second problem: the 90-day implementation date, which would mean all those member contacts would have to be made within those 90 days. "It's a significant operational burden," Donovan commented. "Initial compliance would be almost impossible."
Because no one tracks how many CUs offer overdraft privilege programs or what percentage of non-interest income these programs represent, there is no way to know exactly what kind of a hit credit unions would take if they were forced to stop offering them.
"Non-interest income has gradually become increasingly important for credit unions, and overdraft protection is a part of that, we just don't know how big a part it is," NAFCU Economist Tun Wai said. "I've talked with credit unions about this, and there are some who have told me that if it weren't for overdraft protection, their ROA would be negative."
The issue could put a strain on two very important credit union relationships: with their members and with their lawmakers. "Credit unions have been looking or alternative sources of income as the margin keeps getting squeezed, but they have to be careful about their relationship with their members," Wai cautioned. "If you start feeing them to death and nickel and dime them, that hurts your credibility with them."
Particularly since credit unions have long promoted themselves as having fewer and lower fees than banks and other financial services providers, he added.
But as credit unions oppose Maloney's bill, they must play a delicate balancing act. As one Capitol Hill observer pointed out, Maloney has long been a staunch supporter of credit unions. Alienating her and other lawmakers who are behind the bill, could be costly.
