FARMERS BRANCH, Texas (1/10/14)--Recent regulatory changes have created the need for most credit unions to re-evaluate their overdraft programs, John M. Floyd, chairman and CEO of John M. Floyd & Associates (JMFA), recently told the Cornerstone Credit Union League.
John M. Floyd & Associates is a CUNA Strategic Services provider.
As regulators and consumer groups continue to focus on the expectations of transparency and full disclosure of consumer products, an overdraft program that is not up-to-date can negatively impact a credit union's compliance and revenue, Floyd said (Leaguer
"Now is the time to re-evaluate the overall effectiveness of your overdraft program--from a compliance standpoint--as well as how it affects member service and performance," Floyd said.
In the past several years, nearly all of the criticisms on overdraft programs--as well as reported fines and legal action--have focused on institutions that offer programs with dynamic overdraft limits or those that manipulate transaction processing order to increase overdraft fee income.
"Because dynamic overdraft limits are set using a complicated, ever-changing criteria-based matrix, it is impossible for a member to know his or her limit from day to day," Floyd said. "Or, for that matter whether or not an overdraft will be paid. Posting checks, ATM and debit card transactions in non-neutral order can cause financial hardship for members who may already be facing a difficult economic situation."
From a regulatory standpoint, these undisclosed procedures are discriminatory and will most likely result in increased scrutiny during a compliance exam or, in a worst-case scenario, in fines and legal action.
Transparent financial products and services are expected in today's financial services regulatory environment. To eliminate the risk of non-compliance, credit unions should make sure their overdraft program follows consumer-focused regulations, industry standards and best practices. Those standards and practices include:
Complete transparency regarding fees and program procedures;
Reasonable, communicated overdraft fees;
Clearly established overdraft limits;
Transaction clearing policies that avoid maximizing overdrafts and related fees created by the clearing order;
The ability to easily monitor excessive usage; and
Communications materials that outline alternative financial products that more appropriately fit the needs of excessive overdraft users.
For credit unions, the Credit Union National Association points out, overdraft protection and courtesy pay are designed to be a service to their consumer members, who have asked that they have continued access to such programs.
National studies--one as recent as November 2013--show credit unions offer higher checking account interest rates and lower overdraft fees on average than banks. That study, by GoBankingRates.com, showed credit unions continue to demonstrate their ability to offer depositors higher average checking account returns, with rates at 0.32% APY compared with a 0.26% APY for banks.
And according to Moebs Services, median bank overdraft fees are also $30, while credit unions charge $28 for an overdraft.