Courtesy overdraft fees hit credit union customers, too

By Kathy Chu, USA TODAY

While President Obama and members of Congress take aim atcontroversial overdraft loans, government credit unions are quietly offeringthis product in their backyard. At the White House Federal Credit Union, a short walk fromthe Oval Office, customers are automatically signed up for a product calledOverdraft Privilege. When customers don't have enough money to covertransactions, the credit union may pay checks and debit card purchases, thencharge a fee of $25 each time. This coverage is a "safety net," says ChristopherClark, business development manager at the credit union, whose members includeWhite House employees and their family. "We look at it as a tool just toassist (customers) as needed." At least 13 other government credit unions, including theTreasury Department Federal Credit Union and the United States Senate FederalCredit Union, also extend this form of high-cost credit even if consumershaven't asked for it. While government credit unions are far from the only onesthat practice courtesy overdraft, as the industry likes to call it, they'reemblematic of a practice that has become widespread, and deeply entrenched, inthe financial industry. It's a practice that raises questions about whethercredit unions — which often bill themselves as the fee-friendlyalternative to banks — have become too aggressively banklike in theirquest for revenue. "It's disappointing if the most influential Washington,D.C., credit unions are using practices designed by consultants to extractmoney out of their members," says Ed Mierzwinski, consumer programdirector for the U.S. Public Interest Research Group. "Government creditunions should serve as a model for what's right rather than a poster child forwhat's wrong." Government credit unions aren't run by the government butare legally owned by their members, including some of the administrationofficials and members of Congress pushing for overdraft reform. Credit unionssay they automatically extend overdraft loans because members want the service.And they point out that as not-for-profit institutions, they want to meet theircustomers' needs. At the United States Senate Federal Credit Union, whichcounts senators and other government employees among its members, courtesyoverdraft is provided because, "If we didn't, (consumers) would gosomewhere else and get it," says CEO Susan Enis.

Not everyone wants to be signed up, however. Sen. ChrisDodd, D-Conn., chairman of the powerful Senate Banking Committee, is a customerof the Senate credit union. He's also been an outspoken critic of overdraftpractices, vowing to crack down if regulators keep letting institutionsautomatically sign consumers up. "All banks and credit unions should be required to getcustomers' OK before they sign them up for overdraft services," Dodd says. Even though financial institutions often charge the same feewhether they pay or deny the bounced transaction, covering it ultimatelygenerates more revenue, says Brad Nickum, who used to work at EarningsPerformance Group and Profit Technologies, which consulted with institutions onoverdraft programs. "When you allow an overdraft, it increases theprobability of subsequent fees" because consumers have less money to coverother transactions, says Nickum, who now advises regional banks.

Those with less end up paying more

Industry consultants say 10% to 20% of households generatethe bulk of overdraft income. The households hit hardest by overdrafts pay anaverage of $1,374 a year in fees, estimates G. Michael Flores, founder ofBretton Woods, a management advisory firm that works with financialinstitutions. Consumers with the least savings, who may not qualify forless-expensive products such as a line of credit, are the ones who tend to usecourtesy overdraft most, says Joseph Ridout, a spokesman for Consumer Action,an advocacy group. These consumers are often getting hit with sky-high interestrates as a result. If consumers overdraw on a $20 debit card transaction, arecharged the median fee of $27 and repay the credit in two weeks, they'reeffectively paying a 3,520% APR, according to the Federal Deposit InsuranceCorp. Robin Rutan, of Glenwood Springs, Colo., says her localcredit union pays debit card transactions that overdraw her account by a fewcents, without her permission, and charges her $27. "The reason people use debit cards is so they won't goover" their account balance, says Rutan, 56. "But they find everyopportunity they can to zap you."

The Federal Reserve expects to release a rule this year onoverdraft practices that would apply to banks and credit unions. But the agencyhas given little indication about whether it's going to require financialinstitutions to get consumers' permission to sign them up, or allow them tocontinue enrolling consumers automatically. Meanwhile, the Obama administration is pushing to create aregulatory body that could require financial institutions to get consumers'explicit consent for these loans, disclose the credit's high interest rates andwarn borrowers at checkout if they're about to overdraw. These efforts, if successful, would cap how much federalcredit unions can charge for overdraft fees. That's because if courtesyoverdraft is defined as a loan, it would be subject to an interest rate cap — currently 18% — on loans made by federal credit unions, saysLauren Bowne, staff attorney at Consumers Union, which publishes ConsumerReports. Restrictions are necessary, says Jean Ann Fox, director offinancial services at the Consumer Federation of America, because financialinstitutions shouldn't be able to give you credit you didn't ask for on yourbank account, just as they're not able to send you a credit card you didn'twant.

'Robin Hood in reverse'

Today, 67% of credit unions and 43% of banks have courtesyoverdraft policies, says Moebs Services, an economic research firm. Creditunions generally haven't been as savvy about controlling expenses as banks,says Mike Moebs, the firm's founder, so more of them have adopted this policyto bring in revenue to offset costs. Overall, though, credit unions tend to charge less forcourtesy overdraft than banks — and are more lenient about refundingfees, says Mike Schenk, a senior economist at the Credit Union NationalAssociation, a trade group. When consumers overdraw, credit unions charge amedian fee of $25, compared with $35 for large banks, Moebs says. Stop-paymentfees, ATM fees and other charges also tend to be lower at credit unions,industry research shows. Also, as a member-owned institution, any revenue earned bycredit unions goes toward lowering fees or raising rates on deposits, says FredR. Becker Jr., president of the National Association of Federal Credit Unions. The problem is, not all customers benefit equally. "It's sort of like Robin Hood in reverse," says Alex Sheshunoff, aconsultant whose firm used to sell overdraft programs to financialinstitutions. "Some people are paying more in fees, so the credit unions canthen use the money to pay higher rates on deposits" to those with funds tosave. Over the years, credit unions have also focused more on feeincome — and strayed further from their mission of helping members,Mierzwinski says. Automated overdraft programs are one example of how they'veboosted fees, he notes. The bottom line, says Evan Clark, CEO of the Department ofCommerce Federal Credit Union, is that some credit unions now rely on lucrativefees from courtesy overdraft to offset high expenses from branches and personnel. "There are a lot of credit unions that, if they didn'thave overdraft income, they'd go under," says Clark. Last year, credit unions earned $6.6 billion in overdraftincome, nearly one-fifth of the $36.7 billion earned in such fees by allfinancial institutions, according to Moebs Services.

Credit unions that automatically cover consumers' overdraftstend to earn significantly more fee income than those that don't. TheWashington Postal Employees Federal Credit Union — which has courtesyoverdraft — earned an average of $140.70 in fee income per member lastyear. That compares with $65.30 per member last year for Navy Federal, whichdoesn't have this policy. Fee income includes overdraft, ATM and credit cardcharges. Meanwhile, Commerce Federal Credit Union offers courtesyoverdraft, says Clark, but has significantly less revenue than otherinstitutions because if customers "abuse courtesy pay, we're on the phonesaying, 'What are you doing?' " Flores believes courtesy overdraft used to benefit consumerswhen financial institutions only paid checks, because doing so often savedconsumers merchant fees. But when the industry began paying small-dollar debit cardtransactions for a fee, that's when this practice "became onerous," he says. Some credit unions say that if regulators require financialinstitutions to sign consumers up before covering debit card transactions, theindustry should have to do so only for new customers. That approach is already being applied by Wright-Patt CreditUnion in Fairborn, Ohio. The credit union, which serves Wright-Patterson Air ForceBase, started asking new customers this year how they want their overdraftshandled. Consumers can check a box to apply for a line of credit, to have moneytransferred from savings or to automatically have the bank pay their checks fora fee. "We want consumers to know exactly how much it wouldcost if they wrote a check they didn't have money for," says Doug Fecher,CEO of the credit union. Wright-Patt doesn't let consumers overdraw with debitcards. Rutan wishes her credit union, Western Rockies Federal,would do the same. She says she's tired of having to fight her credit union onfees for small-dollar-amount debit card transactions they covered rather thandenied. "I thought that this was a better institution to deal with,"says Rutan. "But they're just not any different than a bank." Western Rockies Federal Credit Union's marketing director,Deborah Scenters, says she can't comment on individual consumers. But shepoints out that consumers can opt out of courtesy overdraft.

Making it tougher to overdraw

Credit unions say that their overdraft programs differ fromthose at many large banks because consumers know how much they can overdraw. "If you disclose to your customers, then they candecide" if they want to use it, says Joe Gillen, CEO of Pinnacle FinancialStrategies, which advises community banks and credit unions. Credit unions also don't make it as easy to overdraw as bigbanks. For instance, while the 10 largest retail banks all pay transactionsfrom highest to lowest dollar amount — which depletes bank accountsfaster and could trigger more fees — this posting order is still theexception, rather than the rule, among large credit unions, USA TODAY's researchfound. Langley Federal Credit Union — which serves LangleyAir Force Base and the surrounding community — says it lets customersoverdraw with checks but not debit cards. It also encourages customers to setup a less expensive line of credit to cover overdrafts, says Brett Noll, asenior vice president at Langley. Still, the controversy over courtesy overdraft explains whysome credit unions have never adopted it. "We've made the decision this is not something we wantto do," says Dave Willis, vice president of debit cards at Navy Federal,the nation's largest credit union, with nearly $40 billion in assets. And concern about overdraft practices has spurred others tore-evaluate the way they do business. The Department of Commerce Federal CreditUnion is considering getting consumers' explicit consent to pay theirtransactions for a fee. "When I started this, I thought it would be a goodservice for members," Clark says. "But I'm definitely going torevisit this."