ORLANDO, Fla. — With Congress considering a bill that, as currently written, could cut an important revenue stream by 75%, overdraft protection reform has moved from the CU backburner to the hot seat.
The House has held several hearings on overdraft reform and its reaction may be quite severe-including forcing an opt-in for all existing and future members, limiting overdraft frees to one per month and six per year, compelling financial institutions to provide same-day notification of overdraft and even warn them in advance of a potential overdraft and end negative credit reporting if a overdraft fee is paid.
If the bill is passed, credit unions will almost certainly lose accounts, as they will be forced to cut members off to hold down credit risk, Andrew Vahrenkamp, managing strategic adviser at Raddon Financial Group said in a presentation at the CUES CEO/Executive Team Network meeting last week. "There is a subset of Americans who spends money it doesn't have. This is not going to change," he explained. "We're trying to discourage (them) from not doing math." Credit unions' ability to change member behavior could be greatly curtailed as the draft legislation mandates that overdraft fees be "reasonable and proportional."
A cap on overdraft protection fees would make checking unprofitable, Vahrenkamp argued, pointing out that 84% of courtesy pay income comes from the 9% of consumers who overdraw at least eight times per year. A financial institution with 10,000 checking accounts that charges a $27 NSF fee would see its overdraft fee income drop from $1.15 million to $301,000 if the most recent version of the reform bill is passed. Even if the reform is watered down or fails to make its way out of the legislature, competitive pressure could force CUs to abandon current practices.
JPMorgan Chase, Bank of America and Wells Fargo have all taken steps towards more "consumer friendly" overdraft practices including opt-in/opt-out flexibility, chronological posting, limits on the number of fees that can be racked up per day and providing a negative balance cushion of several dollars before the overdraft is charged. The big banks hope self-policing is enough to stave off congressional action, but it could also put CUs in a tight spot. Several executives said overdraft reform could result in the end of free checking and a rise in maintenance fees.
"I think it's terrible. There's going to be a massive change in the way we handle these sorts of accounts," said Bill Rissel, CEO at Fort Knox FCU, adding that he understands Congress wants to try to help consumers but believes it is "in fact doing the exact opposite by trying to push things through before they lose the majority. The abusers will be rewarded and the non-abusers have to suffer."
Larry McCants, President/CEO of Boca Raton, Fla.-based IBM Southeast Employees's FCU, is also worried that new regulations would damper non-interest income. His credit union, which lies in the heart of condo-overbuilt southeast Florida, has held up decently with a net worth of 9.5%. But with the $826 million CU losing $1.2 million last year, thanks in great part to the $2.4 million assessment it incurred, McCants is looking for all the revenue he can get. He encouraged other CU leaders to pressure the trade associations harder to lobby against the measure, adding, "We have to hit this hard."
