Courtesy overdraft fees hit credit union customers, too
By Kathy Chu, USA TODAY
While President Obama and members of Congress take aim at controversial overdraft loans, government credit unions are quietly offering this product in their backyard. At the White House Federal Credit Union, a short walk from the Oval Office, customers are automatically signed up for a product called Overdraft Privilege. When customers don't have enough money to cover transactions, the credit union may pay checks and debit card purchases, then charge a fee of $25 each time. This coverage is a "safety net," says Christopher Clark, business development manager at the credit union, whose members include White House employees and their family. "We look at it as a tool just to assist (customers) as needed." At least 13 other government credit unions, including the Treasury Department Federal Credit Union and the United States Senate Federal Credit Union, also extend this form of high-cost credit even if consumers haven't asked for it. While government credit unions are far from the only ones that practice courtesy overdraft, as the industry likes to call it, they're emblematic of a practice that has become widespread, and deeply entrenched, in the financial industry. It's a practice that raises questions about whether credit unions — which often bill themselves as the fee-friendly alternative to banks — have become too aggressively banklike in their quest for revenue. "It's disappointing if the most influential Washington, D.C., credit unions are using practices designed by consultants to extract money out of their members," says Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group. "Government credit unions should serve as a model for what's right rather than a poster child for what's wrong." Government credit unions aren't run by the government but are legally owned by their members, including some of the administration officials and members of Congress pushing for overdraft reform. Credit unions say they automatically extend overdraft loans because members want the service. And they point out that as not-for-profit institutions, they want to meet their customers' needs. At the United States Senate Federal Credit Union, which counts senators and other government employees among its members, courtesy overdraft is provided because, "If we didn't, (consumers) would go somewhere else and get it," says CEO Susan Enis.
Not everyone wants to be signed up, however. Sen. Chris Dodd, D-Conn., chairman of the powerful Senate Banking Committee, is a customer of the Senate credit union. He's also been an outspoken critic of overdraft practices, vowing to crack down if regulators keep letting institutions automatically sign consumers up. "All banks and credit unions should be required to get customers' OK before they sign them up for overdraft services," Dodd says. Even though financial institutions often charge the same fee whether they pay or deny the bounced transaction, covering it ultimately generates more revenue, says Brad Nickum, who used to work at Earnings Performance Group and Profit Technologies, which consulted with institutions on overdraft programs. "When you allow an overdraft, it increases the probability of subsequent fees" because consumers have less money to cover other transactions, says Nickum, who now advises regional banks.
Those with less end up paying more
Industry consultants say 10% to 20% of households generate the bulk of overdraft income. The households hit hardest by overdrafts pay an average of $1,374 a year in fees, estimates G. Michael Flores, founder of Bretton Woods, a management advisory firm that works with financial institutions. Consumers with the least savings, who may not qualify for less-expensive products such as a line of credit, are the ones who tend to use courtesy overdraft most, says Joseph Ridout, a spokesman for Consumer Action, an advocacy group. These consumers are often getting hit with sky-high interest rates as a result. If consumers overdraw on a $20 debit card transaction, are charged the median fee of $27 and repay the credit in two weeks, they're effectively paying a 3,520% APR, according to the Federal Deposit Insurance Corp. Robin Rutan, of Glenwood Springs, Colo., says her local credit union pays debit card transactions that overdraw her account by a few cents, without her permission, and charges her $27. "The reason people use debit cards is so they won't go over" their account balance, says Rutan, 56. "But they find every opportunity they can to zap you."
The Federal Reserve expects to release a rule this year on overdraft practices that would apply to banks and credit unions. But the agency has given little indication about whether it's going to require financial institutions to get consumers' permission to sign them up, or allow them to continue enrolling consumers automatically. Meanwhile, the Obama administration is pushing to create a regulatory body that could require financial institutions to get consumers' explicit consent for these loans, disclose the credit's high interest rates and warn borrowers at checkout if they're about to overdraw. These efforts, if successful, would cap how much federal credit unions can charge for overdraft fees. That's because if courtesy overdraft is defined as a loan, it would be subject to an interest rate cap — currently 18% — on loans made by federal credit unions, says Lauren Bowne, staff attorney at Consumers Union, which publishes Consumer Reports. Restrictions are necessary, says Jean Ann Fox, director of financial services at the Consumer Federation of America, because financial institutions shouldn't be able to give you credit you didn't ask for on your bank account, just as they're not able to send you a credit card you didn't want.
'Robin Hood in reverse'
Today, 67% of credit unions and 43% of banks have courtesy overdraft policies, says Moebs Services, an economic research firm. Credit unions 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 policy to bring in revenue to offset costs. Overall, though, credit unions tend to charge less for courtesy overdraft than banks — and are more lenient about refunding fees, says Mike Schenk, a senior economist at the Credit Union National Association, a trade group. When consumers overdraw, credit unions charge a median fee of $25, compared with $35 for large banks, Moebs says. Stop-payment fees, 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 by credit unions goes toward lowering fees or raising rates on deposits, says Fred R. 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, a consultant whose firm used to sell overdraft programs to financial institutions. "Some people are paying more in fees, so the credit unions can then use the money to pay higher rates on deposits" to those with funds to save. Over the years, credit unions have also focused more on fee income — and strayed further from their mission of helping members, Mierzwinski says. Automated overdraft programs are one example of how they've boosted fees, he notes. The bottom line, says Evan Clark, CEO of the Department of Commerce Federal Credit Union, is that some credit unions now rely on lucrative fees from courtesy overdraft to offset high expenses from branches and personnel. "There are a lot of credit unions that, if they didn't have overdraft income, they'd go under," says Clark. Last year, credit unions earned $6.6 billion in overdraft income, nearly one-fifth of the $36.7 billion earned in such fees by all financial institutions, according to Moebs Services.
Credit unions that automatically cover consumers' overdrafts tend to earn significantly more fee income than those that don't. The Washington Postal Employees Federal Credit Union — which has courtesy overdraft — earned an average of $140.70 in fee income per member last year. That compares with $65.30 per member last year for Navy Federal, which doesn't have this policy. Fee income includes overdraft, ATM and credit card charges. Meanwhile, Commerce Federal Credit Union offers courtesy overdraft, says Clark, but has significantly less revenue than other institutions because if customers "abuse courtesy pay, we're on the phone saying, 'What are you doing?' " Flores believes courtesy overdraft used to benefit consumers when financial institutions only paid checks, because doing so often saved consumers merchant fees. But when the industry began paying small-dollar debit card transactions for a fee, that's when this practice "became onerous," he says. Some credit unions say that if regulators require financial institutions to sign consumers up before covering debit card transactions, the industry should have to do so only for new customers. That approach is already being applied by Wright-Patt Credit Union in Fairborn, Ohio. The credit union, which serves Wright-Patterson Air Force Base, started asking new customers this year how they want their overdrafts handled. Consumers can check a box to apply for a line of credit, to have money transferred from savings or to automatically have the bank pay their checks for a fee. "We want consumers to know exactly how much it would cost 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 debit cards. Rutan wishes her credit union, Western Rockies Federal, would do the same. She says she's tired of having to fight her credit union on fees for small-dollar-amount debit card transactions they covered rather than denied. "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 she points out that consumers can opt out of courtesy overdraft.
Making it tougher to overdraw
Credit unions say that their overdraft programs differ from those at many large banks because consumers know how much they can overdraw. "If you disclose to your customers, then they can decide" if they want to use it, says Joe Gillen, CEO of Pinnacle Financial Strategies, which advises community banks and credit unions. Credit unions also don't make it as easy to overdraw as big banks. For instance, while the 10 largest retail banks all pay transactions from highest to lowest dollar amount — which depletes bank accounts faster and could trigger more fees — this posting order is still the exception, rather than the rule, among large credit unions, USA TODAY's research found. Langley Federal Credit Union — which serves Langley Air Force Base and the surrounding community — says it lets customers overdraw with checks but not debit cards. It also encourages customers to set up a less expensive line of credit to cover overdrafts, says Brett Noll, a senior vice president at Langley. Still, the controversy over courtesy overdraft explains why some credit unions have never adopted it. "We've made the decision this is not something we want to 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 to re-evaluate the way they do business. The Department of Commerce Federal Credit Union is considering getting consumers' explicit consent to pay their transactions for a fee. "When I started this, I thought it would be a good service for members," Clark says. "But I'm definitely going to revisit this."