Credit unions: Key questions for overdrafts and lending programs
By Cristina Deschaine
In January, the National Credit Union Administration (NCUA) released its supervisory priorities letter to highlight areas of focus during their 2023 exams. Included in this list was consumer financial protection, specifically, overdrafts and fair lending. Whether you’re preparing for your upcoming exam or looking to strengthen your compliance with consumer financial protection regulations, here are key questions for you to consider when evaluating your current programs.
Overdrafts
Overdraft programs were created as a service that provides members peace of mind when conducting transactions. Use of these programs avoids the embarrassment of a declined card or provides a safety net during times of financial trouble.
Now these programs are being scrutinized by several agencies as potential sources of concern for unfair, deceptive or abusive acts or practices (UDAAP), depending on how they are managed. Related fees have recently been branded as “junk fees” by the Consumer Financial Protection Bureau (CFPB).
With this heightened focus, how should you manage your credit union’s overdraft program effectively to meet the needs of members, comply with regulatory compliance and expectations, and reduce potential loss to the credit union?
Here are some questions to consider when evaluating your credit union’s overdraft program:
- Does the fee amount seem reasonable? While a $20 overdraft or nonsufficient funds (NSF) fee may seem reasonable, what happens when a member overdraws their account due to a smaller transaction of $5? You may consider lowering your fee, creating a tiered method or establishing a minimum dollar amount that would trigger the fee.
- How is the fee being assessed? Other regulatory agencies have taken the stance that charging an overdraft fee on an electronic transaction that was authorized on a positive balance, but later settled on a negative balance is unfair and a violation of the Consumer Financial Protection Act or UDAAP.
In addition, if you use the available balance to determine if an account is overdrawn, this further exasperates the situation and could expose the institution to further UDAAP risk and potential violations. The issue results from the authorized transaction reducing the available balance, which in some instances leads to overdraft fees on intervening transactions that would not have been assessed had the authorized item not reduced the balance.
NCUA Chairman Todd M. Harper stated at a recent conference that this will be an area of focus for examiners for credit unions with over $500 million in assets. Accurately disclosing to members that fees will be charged on the available balance may not be enough anymore to mitigate these concerns.
If you haven’t already, you should review your overdraft program to determine how such fees are assessed and what makes the most sense for your credit union to reduce your risk exposure.
- Do you charge NSF representment fees? Multiple lawsuits have been filed across the country against banks and credit unions of all sizes for charging more than one nonsufficient funds fee per item. This initially became an issue because disclosures did not clearly state this could occur or inaccurately stated the fee would be charged once per item.
The Federal Deposit Insurance Corporation (FDIC) has issued supervisory guidance requiring accurate disclosures, remediation and prompt notification for FDIC-regulated banks. The Office of the Comptroller of the Currency (OCC) and CFPB have stated that even if adequately disclosed, the representment fees are unfair because consumers cannot control when merchants will resubmit items for payment and therefore, consumers cannot adequately determine how much or when they need to deposit funds.As the NCUA’s Harper stated at a recent conference, “Problematic overdraft programs include those that charge fees that aren’t reasonable and proportional, rely on systems that authorize positive and settle negative, or impose multiple representment or NSF fees.”
You may consider reviewing the information provided by regulatory agencies and determining how best to mitigate your risk.
- Are disclosures clear and concise? Clearly and accurately disclosing your overdraft program to members and their ability to opt out is important. Is there a daily limit on the number of overdraft/NSF fees that will be assessed? If your members have an overdraft account transfer set up, will they be charged multiple fees for one transaction if their secondary account also doesn’t have sufficient funds? Can they be charged NSF fees multiple times for the same transaction?
These are some questions you should ask yourself while reviewing your credit union’s overdraft program to understand if your practices are clearly disclosed. This year, the NCUA will be expanding their review of overdraft programs to include website advertising, balance calculation methods and settlement processes, as well as evaluating any adjustments your credit union has already made to address consumer compliance risk and potential consumer harm from unanticipated overdraft fees.
To mitigate risk associated with overdraft programs, some credit unions have decided to remove their overdraft fees altogether. While this response may not make the most sense for your credit union, it could be worth considering alternative solutions to assist your membership.
In addition, the NCUA has an abundance of resources available for credit unions to promote financial literacy among their membership. Reminding your members of ways to prevent overdrafts is a win-win situation for all parties involved.
Fair lending
Appraisal bias in fair lending has been an area of increased concern. Earlier this year, the NCUA’s Harper wrote about his efforts along with other regulatory agencies on the Property Appraisal and Valuation Equity (PAVE) taskforce to combat discrimination in real estate valuations.
In addition, on June 1, 2023, the NCUA, along with five other federal agencies, published a request for comment on a proposed rule surrounding quality control standards over automated valuation systems (AVMs) used in making credit decisions.
With so much to consider in the current environment, here are some questions you can take back to your lending management team:
- Have staff been sufficiently trained? Staff responsible for performing an appraisal review should receive sufficient training to identify potential discrimination. Ultimately, the credit union will be responsible for the risk associated with appraisal bias, so it’s important you have confidence in your staff to identify disparities.
If you’re not already doing so, consider including a section on your appraisal review to remind staff to search for certain red-flag phrases, such as “desirable neighborhood” or “integrated community”. Encourage them to perform a closer review of AVM results and remain cognizant of potential appraisal bias.
- What is your process should appraisal bias be identified? Your staff identified potential appraisal bias — now what? What happens if a member expresses that they believe they’ve experienced discrimination in their appraisal valuation? Identifying bias is the first step but having a process to act on the identified bias is equally important. Whether you allow members to request a second appraisal or report instances of discrimination, your process should be clearly communicated.
- What is your process for tracking exceptions? While appraisal bias is a hot topic, it’s important to remember that bias can extend beyond appraisals. If staff are able to originate loans outside of your credit union’s lending policy, you should consider implementing a dual control to approve such exceptions.
It's also important to monitor those exceptions for disparities between prohibited basis groups and reporting exceptions to your board or appointed committee. Regular reporting and oversight can assist your credit union in identifying potential bias throughout the lending process.
NCUA examiners will be reviewing policies and practices for steering, loan pricing or underwriting discrimination risk factors, as well as conducting a tailored file review to evaluate for consistency, fairness and accuracy on appraisals that were obtained.
As always, having clear and sufficient documentation as evidence that staff have been acting fairly in their lending decisions will be crucial for your exam. If you haven’t reviewed your training program in a while, now may be a good time to check when staff were last trained and when the training itself was last updated.
How Wipfli can help
Wipfli’s experienced team provides you with the training, tools and knowledge you need to be confident in your credit union’s compliance. Our team can help you review your training materials and identify areas that may put you at risk. Contact us to learn more about the solutions we can offer.
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