NCUA Increases Scrutiny of Overdraft, NSF, and RDI Fees

The National Credit Union Administration has issued guidance to federal credit unions regarding the consumer harm stemming from certain overdraft and non-sufficient funds (NSF) fee practices. The NCUA will continue to review credit union overdraft programs and will pay particular attention to overdraft fees for authorize positive and settle negative transactions and NSF fees for represented items, NCUA Chairman Todd Harper recently warned credit unions. Earlier this year, we highlighted the increased NCUA supervision on overdraft and NSF fees.

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“The NCUA does not expect credit unions to cease offering overdraft programs designed to assist their members in managing their cash flow needs,” Harper wrote, in a letter to all federally insured credit unions. “However, the NCUA will continue to review overdraft programs to ensure credit unions are effectively managing the heightened risk of certain fee practices and will expect credit unions to properly mitigate such risks, including by ceasing unanticipated fee practices.”

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The advisory letter indicated that credit unions that assess fees that members cannot anticipate may be exposing themselves to heightened reputational, consumer compliance, third party, and litigation. Such overdraft policies may also represent an unfair or deceptive act or practice under the FTC Act and the Consumer Financial Protection Act, he added. The advisory letter also warned that that the following overdraft practices will subject credit unions to heightened risk:

• Having a high or no daily limits on the number of overdraft and NSF fees assessed;
• Failing to provide sufficient and accurate fee disclosures; and
• Processing transactions in a manner to maximize fees.

While the NCUA does not expect credit unions to stop offering overdraft programs, the advisory letter provided some risk management principles for credit unions to follow:

• Closely analyze all aspects of your overdraft and NSF fee practices, including but not limited to opt-in disclosures, website advertising, and other materials that inform members about these practices;
• Review recent regulatory developments regarding unanticipated overdraft and NSF fees;
• Consider member impact;
• Track and analyze related member-complaint activity;
• Monitor and take appropriate action to mitigate reputation, consumer compliance, third-party, and legal risk; and
• Consult legal counsel regarding consumer compliance responsibilities and associated risks.

In addition, the advisory letter also addressed the unfair practice of charging returned deposited item (RDI) fees to members. Any credit unions with blanket policies to charge RDI fees should expect heightened consumer compliance risk and reputation risk

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Similar guidance has been issued by other federal regulators as a part of the Biden Administration’s “junk fee” agenda. See prior blog posts here and here.

Ballard Spahr has advised several client on how to mitigate compliance, reputation and litigation risks related to their overdraft and deposit fee practices.

In addition, in December the CFPB issued the final rule to regulate the amount of overdraft fees that very large financial institutions may charge. Those financial institutions may (i) cap their overdraft fee at $5, (ii) set their overdraft fee based on a calculation from the allowed costs and losses associated with operating overdraft service, or (iii) offer “overdraft lending” by complying with Regulation Z requirements. The final rule is being challenged in federal court by America’s Credit Unions, the Mississippi Bankers Association, the American Bankers Association, the Consumer Bankers Association and three banks, which seek a preliminary injunction to prevent the rule from going into effect on October 1, 2025. The incoming Trump Administration, which opposes the strict regulatory regime of current CFPB Director, may rescind the rule or the next Congress could act to nullify the rule under the Congressional Review Act.