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Wealth of Nations


CREDIT UNIONS ARE MAKING MONEY OFF PEOPLE LIVING PAYCHECK TO PAYCHECK

There’s a new predator making money off overdraft fees: Credit unions.



California’s largest state-chartered credit union, Golden 1, took $24 million in
overdraft from their members, while spending $6 million a year for naming rights
for an NBA stadium in Sacramento. | Rich Pedroncelli/AP Photo

By Aaron Klein

10/05/2023 05:00 AM EDT

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Aaron Klein is the Miriam K Carliner Chair and senior fellow in economic studies
at the Brookings Institution. He served as deputy assistant secretary of the
treasury from 2009 to2012 and as chief economist of the Senate Banking, Housing
and Urban Affairs Committee from 2004 to 2009. 

Two years ago, I helped draw attention to a small group of banks that were
overdraft giants, relying on these fees for the majority and, in some cases, the
totality of their profits. Since then many of America’s banks, particularly the
largest ones, have made major changes to their overdraft policies, resulting in
over $5 billion a year in savings for people living on the financial edge.

Credit unions escaped the overdraft debate back then for two reasons. The first
is their reputation for being small, nonprofit, member-owned entities; one would
hardly think they would become addicted to charging their most vulnerable
members high fees. The second is a lack of data because credit unions are exempt
from federal reporting requirements on overdraft fees.



But now, we have data from at least one state: California. Thanks to a 2022 law,
California credit unions are now required to report how much income they receive
from overdraft fees. And the first report of that data reveals that many
California credit unions are taking millions from their most vulnerable
customers and spending it on perks and bonuses for executives that resemble
those of big banks more than nonprofits.



Let’s be clear: Overdraft fees can be predatory. Every overdraft by definition
turns money from someone who has run out of it into nearly pure profit for the
bank or credit union that charged it because they get paid back immediately when
the next deposit hits. Eighty percent of overdraft fees come from just 9 percent
of account holders, highlighting that this product is targeted at people living
paycheck to paycheck who run out of money from time to time. The time people are
out of money is usually short; on average, it took just 13 hours for people
charged an overdraft to find the money, when one bank gave them the time to fix
it.



California’s data shows that some credit unions are making a lot of money from
overdraft fees. California’s largest state-chartered credit union, Golden 1,
took $24 million in overdraft from their members, while spending $6 million a
year for naming rights for an NBA stadium in Sacramento. North Island Credit
Union bought naming rights for a famed music venue in Chula Vista and created an
exclusive entrance, ticket discounts and other perks for some of its members
while taking over $10 million last year in overdraft and non-sufficient funds
charges from its members. Do these business practices sound like those of
nonprofits designed to provide basic banking services to people who share what
the law calls a “common bond,” such as a workplace or other connection required
for membership? Or are they what would expect from for-profit banks?

The full picture among California’s 114 state-chartered credit unions is
alarming. Overall, they took in $252 million in overdraft and non-sufficient
funds fees (NSF) in 2022. Thirty credit unions earned half or more of their net
profit from overdraft and NSF fees alone. Any financial institution, bank or
credit union, that relies on overdraft fees for a majority of their earnings is
operating in an unsafe and unsound manner. Federal and state regulators have
been asleep at the switch allowing this to occur at banks and credit unions.




Take Frontwave Credit Union, which earned $7.8 million in overdraft and NSF fees
in 2022, equal to $63.73 per each of its 122,550 members. Without these fees,
Frontwave would have been in the red for the year. Frontwave is one of eight
California credit unions whose entire profit came from overdraft.

Twelve other California credit unions lost money overall, despite overdraft
revenue that was often quite high. Chief among them was the Police Credit Union
of California, which charged their members $1.84 million in overdraft fees while
losing $510,572 for the year. Law enforcement officers, like other public
servants, deserve better.

The data does show some good news. Ten percent of California state-chartered
credit unions report zero overdraft fees, and just under 20 percent report fees
in the single digits of total net earnings. These credit unions show that you
don’t need to rely on overdraft fees.

California’s credit unions are hardly unique. While many avoid overdraft, a
handful heavily rely on it, just like some banks. One suspects similar trends
across the country. Several of Michigan’s largest credit unions have been sued
for abusive overdraft practices and research from the Consumer Financial
Protection Bureau shows credit unions averaging similar overdraft fees as banks.

Finance & Tax

How SBF’s fall keeps rattling Capitol Hill

By Declan Harty, Eleanor Mueller, Sam Sutton and Jasper Goodman | October 03,
2023 05:00 AM

Most of America’s largest banks and many smaller ones recently reduced
overdrafts by more than half, and some eliminated the product entirely. Big
banks made these changes for a variety of reasons, including the result of media
and congressional scrutiny, competition from financial technology apps, and bank
executives wanting to do the right thing. Credit unions have largely escaped
such scrutiny, and without national data we have no reason to believe they are
changing their ways. California’s data is a wake-up call for the nation as a
whole.

Leaders in Washington are saying the right things but doing little. President
Joe Biden targeted overdraft fees as part of his crackdown on junk fees. Bank
regulators have mentioned the risks of unfair and deceptive overdraft practices.
However, regulators have not yet proposed new regulations, and they continue to
give the most predatory overdraft banks passing regulatory grades. This spring
when Silicon Valley Bank and First Republic failed, bank regulators argued that
potential disruptions to workers’ paychecks justified tens of billions in
bailouts to large corporations who used those banks. But when it came time to
provide actual relief to the workers whose paychecks were disrupted, regulators
were deaf to calls from Democratic Sens. Cory Booker and Raphael Warnock to
address the overdrafts caused by the failures. Federal regulators of credit
unions are split on the practice: Todd Harper, chair of the National Credit
Union Administration (NCUA) has spoken out against abusive overdraft practices,
but the NCUA Board has a Trump-appointed, Republican majority that is continuing
to deregulate.

If Washington regulators will not act, then California and other state
regulators can. More sunlight and smarter regulation can help return millions to
the pockets of those living paycheck to paycheck who deserve access to basic
banking at fair prices. States should start by requiring the data just as
California did.

Next, they should eliminate tricks designed to cause overdrafts, such as posting
debits before credits, a practice more common among credit unions than banks.
Finally, no credit union or bank should be allowed to continually rely on
overdraft revenue for the majority of their earnings. State regulators can step
up and institute this policy.

One would think nonprofit credit unions whose mission is to serve the
underserved would avoid relying on overdraft fees. Until recently, we had no
information on what was going on among credit unions and overdraft. While
federal bank regulators require banks over a certain size to report overdraft
income, the credit union regulator does not. I have testified before Congress
that all credit unions should be required to report this data, too, but Congress
has not acted.

California did. Now we know the problem. Let’s solve it and stop making it so
expensive to be poor.


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 * Filed under:
 * Congress,
 * Joe Biden,
 * Joe Biden 2024,
 * California,
 * Overdraft Fees,
 * Wealth Of Nations


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