On Dec. 10, 2024, the National Credit Union Administration (NCUA) issued Letter to Credit Unions 24-CU-03 on Consumer Harm Stemming from Certain Overdraft and Non-Sufficient Funds Fee Practices. The letter evidenced NCUA’s commitment to preventing credit unions from overdraft practices it feels might violate the prohibition against unfair or deceptive practices (UDAAP) under Section 5 of the Federal Trade Commission Act (FTC Act) and Sections 1031 and 1036 of the Consumer Financial Protection Act of 2010 (CFPA).

NCUA has previously, on several occasions, issued guidance and information to credit unions about overdraft programs. It has pointed out the need for credit unions to monitor applicable laws and regulations, including laws on UDAAP, to ensure overdraft programs are compliant.

Both this year and last year, NCUA states it identified the presence of certain overdraft and non-sufficient funds (NSF) fee practices that may create heightened risk exposure. NCUA is most concerned about credit unions charging overdraft or NSF fees stemming from circumstances where a member cannot reasonably anticipate the fee and, therefore, prevent the fee from being charged. The agency specifically enumerated four types of fees it feels pose the most risk of a UDAAP violation:

1. Unanticipated Overdraft Fees - Assess overdraft fees on transactions a member would not reasonably expect would give rise to such fees, including uncertainty about when transactions will be posted to their account and whether they will incur overdraft fees.
2. Authorize Positive, Settle Negative Overdraft Fees (APSN) - Assess overdraft fees on debit card transactions that authorize when a member’s account has a sufficient available balance to cover a debit card transaction but, due to one or more intervening transactions, has an insufficient balance to cover the transaction at the time it settles. Credit unions with core processing systems unable to identify APSN transactions that result in a fee, even though such fees may have been disclosed to the member in advance, have heightened third-party and reputation risk.
3. Multiple NSF Representment Fees - Members are charged an NSF fee when a check or ACH transaction item is presented for payment from a member’s deposit account which has insufficient funds to pay the check or ACH transaction. If the same check or ACH transaction is represented to the credit union when the member’s account still has insufficient funds, some credit unions return the transaction unpaid again and assess an additional unanticipated NSF fee. Even when member disclosures outline representment practices, a policy of assessing fees on each representment is likely a UDAAP risk/violation if the member is unable to reasonably avoid fees from represented transactions.
4. Returned Deposited Item (RDI) Fees - Check that a member deposits into their checking account that is returned to the member because it could not be processed against the check originator’s account. Blanket policies of charging a fee to the check depositor for every RDI, irrespective of the circumstances of the transaction or patterns of behavior on the account, are UDAAP violations.

Besides these four types of fees, NCUA also cautions the following three overdraft or NSF practices heighten UDAAP risk:

1. High or no daily limits on the number of fees assessed. Charging overdraft or NSF fees with a high limit, or without limit, for multiple transactions in a single day.
2. Insufficient or inaccurate fee disclosures. Overdraft program website advertising must accurately disclose fees and comply with Truth in Savings advertising requirements.
3. Ordering transactions to maximize fees. Structuring the transaction processing order so the largest debit item that processes first can result in the account being overdrawn quicker, leading to more overdraft fees assessed against the credit union member. 

NCUA stated they are not asking credit unions to discontinue overdraft programs. However, NCUA will be reviewing overdraft programs in light of the aforementioned risks. If they identify violations of laws or regulations due to unanticipated fee practices, they will evaluate appropriate supervisory or enforcement actions, including restitution. Importantly, NCUA said it will generally not cite and not pursue enforcement action for violations self-identified and fully corrected prior to the start of an examination. 

Have more questions regarding overdraft practices? Contact our regulatory compliance specialists today to make sure your credit union remains compliant.