Credit unions should expect increased supervision from NCUA on overdraft/NSF fees, vendor risk, and fair lending

On February 6, 2024, National Credit Union Administration (NCUA) Chairman Todd M. Harper spoke at a Brookings Institution event to outline his regulatory agenda and supervisory priorities for 2024. His prepared remarks addressed the 90th Anniversary of the Federal Credit Union Act, credit union performance in third quarter of 2023, risks posed by third party service providers, liquidity management, and consumer financial protection. The interview highlighted the NCUA’s planned supervision approach on practices relating to overdraft and nonsufficient funds fees, vendor risk management, and fair lending.

Overdraft and NSF Fees

In connection with a focus on consumer financial protection, the NCUA will increase its supervisory efforts on overdraft and non-sufficient funds (NSF) fees. The prepared remarks stated: “NCUA examiners this year will continue an expanded review of credit union overdraft programs, including website advertising, balance calculation methods, and settlement processes. Problematic overdraft programs and non-sufficient funds alerts include fees that aren’t reasonable and proportional, rely on systems that authorize positive and settle negative, or impose multiple representment fees, often in one day.” In addition, the NCUA’s 2024 Supervisory Priorities list overdraft programs as an area of focus. More specifically, the NCUA plans to focus on “website advertising, balance calculation methods, and settlement processes” related to overdraft programs, as well as evaluating credit union adjustments to overdraft programs to address consumer compliance risk and potential consumer harm from unexpected overdraft fees.

The American Banker reported that during the interview, Harper said the NCUA will require credit unions with more than $1 billion in assets, which applies to over 400 credit unions, to separately report data on both overdraft and nonsufficient funds fees.

As we previously blogged, the CFPB has proposed rulemaking on overdraft credit and NSF fees and has been closely monitoring overdraft and NSF practices. The CFPB reported last October that among credit unions with over $10 billion in assets, 16 of 20 continue to charge NSF fees, including four of the five largest.

Vendor Risk Management

With respect to credit unions’ increased reliance on third party vendors, the NCUA raised concerns that the lack of visibility into these critical industry participants poses a systemic risk to the financial services system and our national security. The NCUA cited an example where a core processor experiencing intermittent system outages impacted several credit unions across 40 states, and the NCUA’s lack of authority impeded its ability to quickly respond. NCUA is again asking Congress to restore this authority.

As we previously blogged, last summer, the Federal Reserve, FDIC, and OCC issued final interagency guidance for their respective supervised banking organizations on managing risks associated with third-party relationships, including relationships with financial technology-focused entities such as bank/fintech sponsorship arrangements.

Fair Lending

American Banker reported that during the interview Harper addressed the issue of whether credit unions should remain exempt from the Community Reinvestment Act (CRA). Banking industry trade groups have called for Congress to make changes to this exemption, as credit unions have grown into regional and national financial institutions. Harper raised concerns that applying CRA to credit unions may cause difficulties for credit unions that are formed for employees whose salaries may be similar. According to the American Banker, Harper stated that the NCUA also plans to increase its supervision of fair lending activities and continue to refer cases to the Justice Department. This aligns with NCUA’s recently announced intention to increase the frequency of separate fair lending examinations. Fair lending is also a supervisory priority for the NCUA.

As we previously blogged, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation issued a final rule amending their regulations implementing the CRA, which becomes effective April 1, 2024 with a compliance date for the compliance date for the majority of the rule’s provisions in January 1, 2026. Earlier this week, several national and Texas banking and business trade groups filed a lawsuit in Texas federal court challenging final OCC/FDIC/Federal Reserve Community Reinvestment Act rules.

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