The Silent New Giants of Overdraft

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.

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.