The Sticking Points of 'Negative Balance Checking'

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This is about the recently published regulatory guidance on negative balance checking. You know, that's the feature of a checking account that allows the institution to pay checks for members even when the balance is not sufficient. Reflecting society, credit union folks do not agree on the rightness of this feature.

Our regulators and consumer groups do not agree on calling negative-balance checking a "loan." We're working on how to treat it on the books, how to manage the financial risk, and how to deal with the moral implications. On the other hand, consumers say they like it, and increased fee income at our credit unions backs that up.

The aforementioned controversies are not why I have my fingers on the keyboard about this. There are other sticking points for me.

The first sticking point might seem minor to you. The genus of "best practices" is research. By dissecting high-performer's operations, consultants and academics discover the practices they call "best," and tell us about them. Therefore, best practices are real experiences, and desires or untried ideas should not carry the "best practices" label.

As a former regulator, I can understand the lure for an agency to attach the term "best practices" to the ideas it wants to foster, as it adds a note of credibility. We need to read between the lines.

Regulators care about the moral implications of what our business institutions do. A part of their missions is to protect the public. It is appropriate for regulatory agencies to opine on what is or is not in consumers' best interests. An example is NCUA's position that it can be detrimental to repeatedly renew a payday loan. Consumer groups, credit union employees, and credit counselors agree.

Recently on CBS, "60 Minutes" aired a piece on payday lenders (it featured Jim Blaine, CEO of State Employees CU and a Credit Union Journal contributor). The lobbyist for the payday lenders stated the average payday loan customer "rolls over" their payday loan 6.9 times (at first he said 7.9). In the program, we learned of one payday lender that limits rollovers to 15 in a year and requires a two-day "rest." A woman interviewed on the show borrowed a little over $2,000 and paid more than $10,000 in fees over several years and many rollovers. Her experience made the averages and the limits sound hollow.

More than three decades ago I was an examiner in Florida. In addition to credit unions, I examined many small loan companies (Beneficial, General, and Associates, for example). Thousands of people had borrowed $600 or so in small loans. Standard practice at those loan companies was to allow customers to "renew" the loan when the balance fell below $500. Examination procedures did not consider rollovers on either compliance or a moral basis. Maybe we should have. But, I digress.

It is also logical that regulatory agencies would try to influence the institutions they regulate; hence, the guidance document. There is no ready forum for their talking directly to consumers. Where I have a concern is in how NCUA is enforcing that influence.

NCUA joined with other agencies to issue guidance on negative balances. At my credit union, we did not see that we were too far out of its line of thinking. We positioned the negative-balance privilege as share draft feature. We avoided promoting it to generate additional fee income. So far, we've experienced minimal losses, and we are charging off in less time than the guidance suggests.

The guidance includes charging off the balances to the Allowance for Loan Losses, which is where I take issue. Doing so makes a share draft feature, something we've not been calling a loan but which is more like a loan. Is that the right direction to go? It's a loss but not a lost loan.

I recently argued to a colleague that guidance is guidance. It's a recommendation, not a regulation. However, CUNA reported that NCUA's General Counsel said that an examiner could "write up" a credit union not behaving pursuant to the guidance.

That's my other sticking point. A "write up" should have a regulation or statute to cite. In this case, it's only a guidance paper for the examiner to cite. At this time I cannot see what catch-all it could fit into. Is there enough data to cite safety-and-soundness concerns? Could it be a public relations risk? What, then?

Is this rule making without going through the proper administrative process? It seems like it could be. Administrative procedures allow the regulated (credit unions, banks, etc.) to understand the regulator's proposed new rules and give them a chance to comment. It also gives the regulated time to get their operations in order and avoid being written up. It is a good game when all the players know all the rules.

Now I'm not as smart as some, but I'm not stupid, either. If I see a good idea, one that potentially makes our credit union better, and especially better for the members, we're probably going to try it. Some of the ideas in the negative-balance guidance have merit. And, we'll probably be in line with much of it. But, I really hope my board and I don't have to answer a "write up" about something that's not in the regulations or otherwise supported by research or data.

Dan Clark is a consultant on governance and strategic planning, and CEO of Tallhassee-Leon Credit Union, Tallahassee, Florida. His opinions are his own and not necessarily his board or management team. For info: &

Money is always there but the pockets change; it is not in the same pockets after a change, and that is all there is to say about money. - Gertrude Stein

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