Credit Union Exam Solutions Presents With Flying Colors

Treichel: Hey, everyone.

This is Mark Treichel with another
episode of With Flying Colors.

I'm here today with Joe Goldberg.

Joe, how are you doing today?

Goldberg: I'm fine, Mark.

How are you?

Treichel: I'm doing great.

I'm doing great.

Joe, I've had you on over the,
ironically, we've started not

ironically, but surprisingly, this is
the fourth year of with flying colors.

I've had you on every year to talk
about different things in your

area of expertise as it relates to
credit unions and the exam process.

But maybe for a listener who's new or
who hasn't heard some of your podcasts,

could you give a little bit of background
of what you did before NCUA and at NCUA

as it relates to credit unions and as
it relates to consumer compliance or

anything else that you're currently doing?

Goldberg: Sure.

Essentially for since about 1980,
I've been a lawyer doing a number of

different things, but for a good part
of my career, I concentrated on consumer

protection and consumer compliance issues.

I went to NCUA in 2014 and after
a couple of years became the

director of the division of consumer
compliance policy and outreach.

So I was To some extent, the agency's
point person on consumer compliance

matters that included fair lending
as well as more of a garden variety

consumer protection laws and regulations,
but I retired at the end of 2021.

I'm doing a little consulting with
you and a couple of other things

here, keep my hand in things.

But I am glad you have me
back for this this session.

I'm going to talk about the NCUA's
recent missive on overdrafts.

Treichel: Yeah, I'm glad.

I'm glad to as soon as the letter came
out I can't remember if you sent a message

to me and said, Hey, did you see this?

And I said, yeah, let's get you on
the podcast or it happened vice versa.

But I'm glad we have an opportunity
to talk about it, because of the

journey you've taken, I think you,
you can provide some insights that

will be helpful for the listeners.

So with that, Joe, I'm going
to turn it over to you.

Goldberg: Sure.

As Mark, the agencies had concerns
about overdrafts for many years,

and then it intensified probably
over the last decade or so.

So the whole time I was there, there
was agency concern about overdrafts.

But what I'm going to do today is discuss
the December 2024 letter to credit unions

on overdrafts and fees, and especially the
part about NCUA's supervisory approach.

To certain overdraft issues
and the fees related to those.

So if listeners credit union
has any sort of overdraft.

Or not sufficient funds program
or policy you really should read

that letter in its entirety.

It's only about six pages long.

It's eight pages if you
include the end notes.

There's two pages of those,
but it's not overly technical.

Now, to properly discuss what's
in this letter, I want to start

with a little bit of history on
the subject, just for context.

A quick search for NCUA
issuances on overdrafts.

Shows that it sent two letters
to federally insured credit

unions on overdrafts in 2005.

One dealt with bounce protection programs
and the other with courtesy pay programs.

And then in 2010, when the Federal
Reserve Board amended Regulation E

to require consumers to opt into an
overdraft program, where the bank or

credit union charges fees to pay an
overdraft, NTUA issued a regulatory alert.

So even though those were the only
formal issuances going back in

that time period, the agency would
occasionally handle overdraft issues

arising during examinations or maybe
submitted as consumer complaints.

And that was especially true as
the Office of Consumer Financial

Protection developed after coming
into existence in the early 2010s.

And as that decade progressed, NCOA
was aware of a number of private

class actions against credit unions
for overdraft related violations.

So because of an uptick in credit union
compliance problems with their overdraft

programs, NCUA added reviews of all
overdraft programs to annual supervisory

priorities Starting around 2017 or so.

And since then, examiners of federal
credit unions have looked at some aspect

of overdrafts during regular safety and
soundness exams in 2019, 2022, 2023,

and 2024, and we'll do so again in 2025.

The main problems we're
going to talk about.

And that the agency has looked at evolve
heightened risk when a credit union

fails to comply with laws governing
overdrafts either directly or indirectly.

or by laws prohibiting the use of unfair,
deceptive, or abusive acts or practices.

Noncompliance could also
potentially result in consumer

harm, which adds to that risk.

And I just do want to point out, this
is not just a credit union matter.

The federal banking regulators,
including CFPB, have dealt with

identical issues with banks.

CFPB has issued a regulatory change.

For its supervised institutions and the
banking regulators have issued notices

similar to the letter I'm talking about
now because he's overdraft problems.

Including fee related issues persist.

NCOA issued this letter.

It's number 24 dash C U dash O three.

And again, as I said earlier,
it was in December of 2024.

The title or the subject of the
letter is consumer harm stemming

from certain overdraft and non
sufficient funds fee practices.

So by the name, you can
see the focus is on.

NSF fees.

The letter delves into some of the history
that I've mentioned and it describes

why and how members either use overdraft
programs or encounter them inadvertently,

not knowing that they were going to
be dealing with something like that.

I want to focus on the letter's
discussion of various types

of overdrafts and NSF fees.

And I'm also going to mention NCUA's take
on risk management, and as I said earlier,

its supervisory approach going forward.

So in this letter, after a brief statement
on background the letter discusses

several types of what are characterized
as unanticipated overdraft fees.

According to the letter, Unanticipated
overdraft fees occur when a credit union

assesses overdraft fees on transactions
that a member would not reasonably

expect would give rise to such fees.

Now you might think,
how could that happen?

When would a member not know?

They're going to be hit
with an overdraft fee.

The letter has some examples that
might answer those questions.

The first one that the letter discusses
is what's referred to as authorized

positive settled negative overdraft fees.

The acronym is APSN, Authorized
Positive Settle Negative.

This refers to when a member's account
has sufficient funds to cover a debit

card transaction when it is made.

That means that the account was in
the black and the transaction was

authorized by the credit union.

But due to one or more intervening
transactions, the account is in the red

at the time the credit union settles
That initial debit card transaction,

so that can result in a fee for that
overdraft on the initial transaction,

and then it could result in additional
fees for each intervening transaction

that exceeds the account balance.

When settled, the problem is a
member cannot reasonably anticipate

a fee on the initial transaction.

Because the account had a positive
balance and the credit union

authorized it when it was made.

The NCUA says in the letter, this is,
quote, likely unfair under both the

Federal Trade Commission Act and the
Consumer Financial Protection Act.

As a reminder, the Consumer Financial
Protection Act is it's Title 10 of

the Dodd Frank Act, and that's where
the Dodd Frank Act added The abuse

of prong to unfair and what was just
unfair and deceptive acts and practices.

Now the NCUA says that credit union
systems that cannot identify APSN

transactions that result in a fee to
the member have a heightened third

party and reputation risk issue.

The second type of transaction with
fees are multiple re presentment fees.

Now members are usually charged
an NSF fee when a check or an ACH

transaction is presented for payment
and the account has Insufficient funds.

That's pretty normal.

But the problem arises when the check
or the ACH item is represented and

the member's account still does not
have sufficient funds to cover it.

And the credit union
assesses another NSF fee.

And it can happen multiple times,
not just one additional time.

The NCUA notes two issues
connected with this.

Issue number one is, Members have
no control over re presentment, and

issue number two occurs where the
account disclosure does not fully or

clearly describe the credit union's
re presentment policy or practice.

So where this disclosure is inadequate,
there are compliance issues that increase

both compliance risk and reputation risk.

And the same third party issues
exist as with the APSN fees.

So even when a disclosure might describe
the re presentment practice, imposing

a fee for each re presentment of a
single check or ACH item again, this

is a quote from the letter, is likely
unfair under the FTC Act and CFPA if

the member is unable to reasonably avoid
fees from re presented transactions.

All right, now the third type
of fees that's problematic.

are returned deposited item fees.

Another acronym, RDI,
Return Deposited Item.

This relates to a member depositing
a third party's check into

the member's checking account.

That's returned due to an issue with the
account of the person who wrote the check.

The member's credit union assesses a fee
against the member for the returned item.

Reasons for imposing that fee include
insufficient funds in the account of the

checkmaker a stop payment order by the
maker the account on which the check is

written is closed or located in a foreign
country, or there's some defect in the

check, such as missing information.

A problem with the signature,
the date, the account number,

or maybe the payee name.

Now, some of those are beyond the
knowledge or control of the member,

who has no reason to anticipate
the check would be returned.

Now, per the NCUA's letter, blanket
policies of charging a fee to the check

depositor for every RDI, irrespective
of the circumstances, are unfair under

both the Federal Trade Commission Act and
the Consumer Financial Protection Act.

And these practices also heighten
consumer compliance and reputation risk.

And the letter addresses
some other practices.

Three of these which can all heighten
risk are if there are high or no daily

limits on the number of fees assessed.

Second is ordering
transactions to maximize fees.

Generally, that means processing
the largest first, which results

in more transactions being
subject to overdraft fees.

Third is insufficient or
inaccurate fee disclosures.

I mentioned these class actions toward
the beginning of my presentation.

And the problem that generated
those class actions was almost

always That the disclosures
were insufficient or inaccurate.

So generally a credit union had an
overdraft policy and matching disclosures,

or it had disclosures that conflicted
with the practices, the actual practice.

The disclosure might be silent about
how the credit union determined when

an account was overdrawn or maybe the
disclosure would state the credit union

looked at the account's actual balance.

To determine if there were sufficient
funds, but in practice, it used the

available balance, which would be lower.

So that resulted in overdraft fees
for some members whose actual balance

would have covered the transaction.

Inaccurate or insufficient disclosures
and policies might not comply with

the requirements of the NCUA's
Truth in Savings Act regulation.

And they also might be misleading
and considered to be deceptive

in violation of both the FTC Act.

I do want to mention that the letter
discusses risk management principles.

The letter contains suggestions
for determining whether

the credit union adequately
oversees its overdraft programs.

I'm not going to review them here, but
I will suggest that if your credit union

has any type of overdraft program and
imposes fees related to it, And the

credit union has not recently reviewed
its policies, procedures, and practices.

Now would probably be
a good time to do that.

All right, I do want to spend a
minute or two talking about the part

of the letter that discusses NCOAs.

Supervisory approach.

The NCOA says it will continue to review
overdraft programs to make sure credit

unions are effectively managing the
heightened risk of certain fee practices.

So it's going to expect credit
unions to mitigate those risks by

ceasing unanticipated fee practices.

The ones that I talked
about a few minutes ago.

Now, where violations are detected,
NCOA will consider appropriate

supervisory or enforcement action,
including restitution to harmed members.

The agency also says that it will
recognize a credit union's proactive

efforts and self identification
and correction of errors.

The letter says that generally, examiners
will not cite and the NCUA will not take

enforcement action under the FTC Act or
the CFPA for violations that a credit

union self identifies and fully corrects
before the start of an examination.

Now, with respect to restitution,
NCUA will consider the

likelihood of consumer harm.

As well as the credit union's
risk management process to self

identify and correct violations.

And finally, in the letter, NCUA
recommends, as I did about a minute ago

that credit unions with overdraft and
NSF programs review them for compliance.

Now I'll add that in addition to that,
if the credit union has not taken a

recent look at its entire compliance
management system, that are considered

reviewing that at the same time.

An effective and a viable CMS can
prevent almost all noncompliance with

consumer protection laws and regulations.

I refer you to NCOA's Federal Consumer
Financial Protection Guide, which has

a section on CMS with a checklist.

You can use that to help evaluate
your program and see if you need

to make any revisions or updates.

Alright, what I just told you was
supposed to be the end of this podcast

when I prepared my presentation.

Except that yesterday NCUA actually
issued something related to this.

It issued what it calls a research
note and it's titled observations

from the NCUA's new data on non
sufficient funds and overdraft fees.

I'm going to talk about that
for a couple of minutes.

In 2024, NCUA began collecting on
quarterly call reports, data on revenue

from overdraft fees and NSF fees.

Credit unions with assets over a billion
dollars are required to submit the data.

And 444 credit unions did so in 2024.

So this research notes, It contains an
analysis of two aspects of the data.

The first is the combined amount
of those fees as it relates to

other fees credit unions collect.

And total revenue.

And the other aspect examines
certain relationships between

those fees and interest rates.

Let me just tell you a
couple of findings here.

One interesting finding is that
on the average, overdrafts and

NSF fees combined to make up from
2 to 5 percent of total revenue.

Of most credit unions.

So that's essentially an average two
to 5 percent of the total revenue.

However, the highest percentage
that was found, it was 18.

2%.

They also found that generally higher
overdraft fees and NSF fees were not

offset by lower fees for other services.

In fact, credit unions with high overdraft
and NSF fees, excuse me, tended to also

have higher fees for those other services.

And with regard to interest rates, the
data indicate high overdraft and NSF fees

were not used to offset interest rates.

Again the higher those fees were,
they're generally associated

with higher net interest margins.

The press release also says that.

Supervisory related inferences
should not be made from the

observations in this research note.

Now, while I'm sure that's true, I
will suggest that the findings should

be considered in the context of the
letter to credit unions I discussed,

as it's likely that if a credit union
is imposing the types of overdraft

and NSF fees, which could be unfair
or deceptive acts or practices.

Having a higher ratio of those
fees to total revenue could

be an enhanced risk effect.

So again, if your credit union
imposes overdraft or NSF fees, I

encourage you to read the research
note, as it might provide you with

some insight about your own programs.

And with that, now my
presentation is over.

Mark.

Treichel: Very good.

There's a lot to unpack there.

Joe, you were excellent.

You have a lot of technical
expertise on that.

Instead of me interjecting comments,
I thought it would be best to just

let you give your take on all this.

That you've got me wanting to go
do some research on NCWA's website.

The quote unquote research note, I don't
ever recall that term being used in the.

I was at N.

C.

U.

A.

And it's interesting that so I've
had clients and I've had credit union

saying, Hey, I'm real interested on your
take on what's going to happen on N.

S.

F.

E.

S.

Because there's the anticipation
that President Trump will make

vice chair, Kyle Houtman, the chair
sooner than later, shortly after

inauguration, whatever shortly means.

But there's a lot of thoughts out
there that there might be a pivot

on either collecting the data or
NCOA emphasizing it during an exam.

Here you point out that they say that
this research note won't be taken in

consideration for the supervisory report.

That it won't be supervisor related,
but you and I know that data is out

there within the, it's out there
globally as far as not being able

to tell which credit union is which,
but you can reverse engineer it.

The regions will have that information.

O.

C.

F.

P.

will have that information.

While.

They're indicating they won't
do anything supervisory related.

I think in most instances,
that's the case.

But Chairman Todd Harper in the past has
said that fee income is a concentration

risk and by him simply making that
statement, it makes it a risk because

it means NCOA might be looking at it.

Over time you walk through a really
good timeline there of, 05 when

rules were put in place, and then in
2010, different things being done.

And then over the last.

Nine years, these being looked
at addressed in priorities and

or looked at as part of the exam.

So I guess one general thought is whether
there's a D or whether there's an R, it

might pivot a little bit in one direction
with the D and then the other direction,

meaning less enforcement with an R, but
it doesn't ever seem to go away, right?

I don't see this being a topic that
NCOA stops looking at, particularly

with what the CFPB has been
doing in the bigger institutions.

And then just another general.

No, and there's been some prognostication
on Twitter or X or whatever you

want to call it, or LinkedIn
where people are presupposing that

maybe Kyle Hauptmann could unring
the bell of collecting the data.

And I think chairman Harper has
ring fenced that pretty well.

And he even doubled down on it
yesterday at the NCUA board meeting.

And so we approved their
annual performance plan.

They made reference to this.

Research note approach where they
are going to continue to publish

research notes relative to this data.

You have to collect the data to publish
the research note and it was a board vote.

The board voted on the annual plan and the
annual plan included this research note.

Now, how can Kyle Helpman
impact that he is now when he

becomes chair, he will be the.

The chairman of the board is by
the federal credit union acts

is the spokesperson for NC UA.

So what he can do is control
future letters to credit unions.

He can revise theoretically that letter to
credit unions that came out in December.

Although I think he'll be very
careful to want to do that just

because of how closely it came
in particular since he voted.

To continue to do analysis on this
makes me think he's not going to do

a substantial huge pivot here, which
some I think had hoped might be coming.

So that, that would be my prediction that
Houtman will nibble around the edges,

but most of this will remain in play.

Any thoughts on any of that
diatribe I just did there, Joe?

Goldberg: Yeah a couple of things.

The letter does say that it's not
the intent of NCOA to restrict fees

or do away with overdraft fees.

It's looking at, in one
sense, the reasonableness

of how the fees are imposed.

The, I think the research note is
interesting because it does show

that the overwhelming majority of
the credit unions that are imposing

fees are doing so in a frame that's
Somewhat reasonable and palatable.

And that's a good reason to continue
to collect data so you can bolster

the practices of credit unions.

But it also indicates that
there may be some outliers.

Who if there's a, an extremely large
percent of the revenue is coming from NSF

for overdraft fees, then there may be an
issue with their lending practices and how

they're interfacing with their membership.

If that's happening, there may be problems
that are being glossed over, hidden

at least, by the use, by these fees,
bolstering the credit union, when in

fact, the members are having difficulties
and the credit union is not acting in

a manner that's probably in the best
interest of those members who are at risk.

Sure.

Sure.

Yeah.

And I think.

Again, the collection of the data itself,
data is, there are data are neutral.

But it does give you some insight into
the performance of the credit unions.

Yeah, I think to me it's helpful.

And I think no matter what side of the,
the fence you're on it's always better to

have more knowledge than less knowledge.

Treichel: As a data lover, I
would have to agree with that.

Yeah, I like having information.

The information can help
you make better decisions.

Ultimately, I do think that, as credit
unions are fighting maybe loan quality

issues with the economy right now,
NCUA's priority letter just came out

and it was focused on asset quality.

Delinquencies are up.

Where's the economy going to be going
with, where are our nation's at right now?

And the further focus on fee income
will make, it's all credit union has

10 percent net worth is different than
one that has eight and it's different

than one have has that has six.

And historically, as you move down
the scale of net worth and have to try

and either put a net worth restoration
plan together or have had loan losses

come at you It's getting harder.

The world's getting harder in a lot
of different ways, but for financial

institutions that are below average
capital wise oftentimes a way to try

and recover from that was to look
at how you can enhance your fees.

You can still enhance your fees.

You can still fee, but doing
so aggressively is harder this

year than it was last year.

And regardless of who's who's in
charge, I think it'll be harder

next year than it is this year.

So it's just gonna, I'll go on another
bit, a little bit of a diatribe as well,

and it's yeah, having the data is good.

Watching it closely is good, but I think
it's going to lead to ultimately some

credit unions, it'll be a tipping point
for some credit unions where they're

going, Hey, we can't push back here.

We can't push back here.

We can't push back here.

It might be time to merge.

It's similar to succession planning, NCUA.

Previously had a succession
planning letter to credit unions.

They opted for a succession
planning regulation.

Succession planning is like apple
pie and baseball, it's a good thing.

But having to do it, forcing it to be
done by regulation at the same time as a

enhanced look at fees, I think will also.

Having that discussion is a good thing,
but when they have it, I think it's

going to lead to some more mergers.

So I just see consolidation
of credit unions increasing in

general because of the economy
because of the regulatory burden.

And this is a burden but
it's something it's a burden.

I think that.

Again, we're at whatever
side of the plate you're on.

You need to treat your
members fairly, right?

And that's all good.

But it's just another thing
for credit unions to make

sure that they're losing it.

Make sure that they're
doing reasonably right.

You don't want to have
a class action lawsuit.

And I can see the way you frame that
up, Joe, as you're going through it.

And I was learning some things.

I thought I could see some some individual
topics that I will release as a, three

or four minute podcast, just where you're
talking about you, each one of those

issues, because I really want to highlight
this collectively and individually.

1 last time, anything I added there that,
that triggered any thoughts for you?

Goldberg: Yeah, just
1, 1 last thing for me.

And that is that I did mention this,
that the letter about the overdraft fees.

Emphasizes that self identification of
problems and correction of problems is

going to go a long way to protect the
credit union, but it's I want to say

that it's probably a good thing not to
just do it with respect to this issue.

But as I mentioned, your entire compliance
management system the earlier you can get

on top of something as opposed to having
an examiner do it for you or the Office of

Consumer Financial Protection or whoever
it may be, the better you're going to be.

You'll have a better understanding
of what's exactly really is happening

within the credit union as it relates
to consumer compliance and you can.

You can correct things and, then you
can, hold up the the new policies and

procedures to the examiner when they
come in for the exam and say, Hey, we've

looked at this and we're up to date.

Treichel: Yep.

No, that's a great way to wrap this.

Joe, I want to thank you for your
time today and your expertise that

you're sharing it here with my
listeners and listeners, I want to

thank you as always for listening.

I hope you'll listen again soon.

This is Mark Treichel signing
off with flying colors.