Predatory Financial Inclusion and the NCUA Ostrich

Shame on the National Credit Union Administration (NCUA). The NCUA announced that it would stop publishing data on overdraft and NSF fee income for individual credit unions. It did so in the name of…financial inclusion! 🤯 What really makes my head spin here is that NCUA still has a Democratic majority on its board. wtaf.

The concern apparently animating the NCUA’s decision to cease publishing institution-level data and only put out aggregate figures is that CUs with high overdraft fee income will be tagged as predatory institutions and suffer reputational consequences, discouraging them from offering for-fee overdraft services, which according to the NCUA Chair “can be the best option in a bad situation” … or which can also result in a $40 latte. To claim that “the previous data collection policy incentivized credit unions to avoid serving the needs of low-income and underserved communities” is sheer nonsense. Instead, it is just obfuscating the extent to which some credit unions are taking advantage of their members. What's worse, NCUA's move presages what might be a broader "going dark" move in bank regulation, in which the publicly available call report data will contain less and less granular information, masking the real financial condition of institutions and allowing regulators to sweep problems under the rug.

Several years ago, Aaron Klein at Brookings did a great study looking at how OD/NSF fees were a key revenue component for a small number of small banks. Klein observed that "It is disturbing that regulators tolerate banks that are mostly or entirely dependent on overdraft fees for profitability."The NCUA announcement spurred me to do the same for credit unions. The results are more troubling.

Prior to March 2024, federally insured credit unions (FICUs--that is both federal credit unions and insured state credit unions) did not break out overdraft and NSF fees as part of their call reports. Starting on March 31, 2024, FICUs with over $1 billion in net assets were required to report overdraft and NSF fees on their call reports, bringing credit union call reports in line with what has been required for banks since 2015. That means that just 451 of 4551 federally insured credit unions (FICUs) that were reporting last quarter.

Credit Unions Charged an Enormous Amount of Overdraft Fees

[This paragraph has been updated to reflect income statement on quarterly call reports being on YTD basis.] Based on that call report data, 23 FICUs did not charge overdraft fees, while 41 did not charge NSF fees, while 9 charged neither.  The 442 reporting FICUs that did charge either OD or NSF fees charged a total of $3.9 in OD/NSF fees in 2024, which breaks down into $2.6 billion of overdraft and $1.2 billion in NSF fees. Those numbers are surprisingly high relative to bank OD fees given how much smaller CU market share is relative to banks: the CFPB estimated that marketwide overdraft fees were $9.1 billion in 2022. 

There Are Many Credit Unions That Would Be Unprofitable Without Overdraft Fees

Putting aside the high aggregate figures for FICU OD/NSF fees, the individual institution-level figures are also troubling. Of the 451 FICUs reporting, 32 had negative net income, so let's just put them aside. That means we have 410 revenue-positive FICUs that charge either OD or NSF fees. What's troubling is not that they are charging fees—that's a reasonable enough thing to do. Instead, it is how deeply reliant many of these FICUs are on OD/NSF fees to stay solvent.

A good metric for the importance of overdraft/NSF fee income to a FICU is that fee revenue as a percentage of net income. That's the metric Aaron Klein uses for banks, but we should recognize that credit union revenue might look a bit different from banks, so it would not be surprising to see overdraft fees making up a higher percentage of net income for credit unions than for banks. Klein reports OD/NSF as 9% of revenue on average for regional banks. For FICUs, the average is much higher: 34%. But there's huge variation:  Boeing Employees gets just 4% of its revenue, compared with, say, 42% for Navy FCU and 171% for Five Star Credit Union in Dothan, Alabama.

The graph below shows the distribution of CU reliance on overdraft/NSF fees by this metric of fees as a percentage of net income. It shows that 148 credit unions relied on overdraft and NSF fee income to the extent that it made up over half their net income during Q4 2024, and that 61 CUs that would have been operating in the red but for overdraft/NSF fees. That should be a bright red flag that something is amiss at those CUs. Either they have unusual expenses or a lot of non-performing loans...or they have a fee-dependent business model that is likely to be predatory on their own members.  

If NCUA really wants to encourage financial inclusion, for-fee overdraft is a terrible way to do so. (And remember that NSF has nothing to do with financial inclusion because its a fee for not paying the item.) The only provider of overdraft on an account is the credit union. That’s a market structure that is vulnerable to supracompetitive pricing. That’s why overdraft fees generally bear no relation to the amount or length of the overdraft or likelihood of repayment.

It’s hard to believe that NCUA really thinks for-fee overdraft is the way to accomplish financial inclusion. Instead, it just looks as if NCUA is trying to give some political cover to those credit unions that are unduly reliant on overdraft/NSF. (And ironically, by doing so, the NCUA has probably triggered a Streisand effect—nobody was looking at credit union OD/NSF fees before this announcement.) NCUA should know better than to pretend that predatory financial inclusion is real financial inclusion.

Comments

[Curt Long]

"The 442 reporting FICUs that did charge either OD or NSF fees charged a total of $9.5 billion in OD/NSF fees in 2024"

Income statement data is reported on a ytd basis. You added up each quarter in 2024 which gave you a result that's ~2.5x too high. The actual figure is $3.9 billion.

[Adam Levitin]

Curt-Thank you. That's a very helpful correction. I should have recognized that something was off given the straightline quarterly growth. I have revised the post accordingly. The CU overdraft numbers are still quite high, but not mind-bendingly so.