By Ray Birch
BIRMINGHAM, Ala.—The CFPB’s new overdraft rule will increase the pace of credit union mergers, predicts Dennis Dollar, who is advising credit unions to examine field of membership options to combat an expected decline in revenue.
The former NCUA chairman and Dollar Associates principal said he also expects NCUA will propose an overdraft rule similar to what the CFPB has outlined. What will be the result? Dollar believes the data indicate nearly 2,000 credit unions will see negative net income.
As CUToday.info reported, the Consumer Financial Protection Bureau has proposed a rule it said is designed to “rein in excessive overdraft fees” charged by the nation’s biggest financial institutions, and is proposing benchmarks of $3-$14 per overdraft. The proposal applies to institutions of $10 billion or more in assets, which would affect approximately 21 credit unions.
While the rule is targeted at financial institutions above $10 billion in assets, which is the size of institutions the CFPB regulates, analysts believe the effects will trickle down to FIs of all sizes due to competitive pressures.
Those pressures, Dollar said, will only increase consolidation among credit unions as the CFPB’s rule moves closer to implementation.
“The possibility of between 1,500 and 2,000 credit union mergers by 2030 is very real,” he said.
‘Quite Onerous’
Dollar called the CFPB’s proposed overdraft rule “quite onerous.”
“Even though surveys show most consumers like the program, as they have opted into overdraft protection and use it to cover a shortfall when the account runs out before the month does, the CFPB seems intent on limiting what can be charged by a financial institution for the risk of covering overdrafts,” he said.
Dollar also contended that while all credit unions will feel pressures on OD revenue from competitors outside the industry, even more pressure on overdraft pricing is likely to be felt from within the industry.
“NCUA seems to be moving toward a copycat rule to apply to credit unions below $10 billion,” said Dollar. “They have broken down overdraft income that must be reported by credit unions from other types of non-interest income on the NCUA Call Report beginning in 2024. Chairman (Todd) Harper speaks about overdraft income and overdraft fees in many of his remarks to Congress and at credit union gatherings. All signs point to NCUA acting in some manner to follow suit to the CFPB.”
Dennis Dollar
Dollar agrees with those experts who argue the CFPB’s proposals will have the opposite of their intended affect and will ultimately harm consumers.
“It is unfortunate that regulatory action to restrict overdraft fees will end up driving thousands of credit union members to payday lenders and check cashing outlets if their credit union will not honor their overdraft on Thursday night, when they are buying groceries or paying rent when payday doesn’t come until the next Tuesday,” he said. “But that is where both CFPB, and likely NCUA, seem to be headed.”
Forcing the Hand of FIs
Dollar asserted the CFPB proposal is designed to force financial institutions to extend a loan to cover overdrafts with applicable interest rate limitations and disclosures.
“What that means is that with the average overdraft being $200 and being paid off in seven days, at the credit union maximum interest rate allowable by law at 18%, a credit union will earn approximately 73 cents for the risk that the overdraft may not be settled because the member loses his job or just decides not to pay the overdraft,” explained Dollar.
Dollar emphasized credit unions cannot trade what has normally been a $20 to $25 dollar overdraft fee for 73 cents and accept the risk of default by the member.
“One $200 default will eat up the earnings for almost 500 overdrafts at 73 cents each,” he said. “The program will be untenable to offer in the loan and APR structure that the CFPB, and seemingly NCUA, prefer.”
Consumer Bears the Cost
Again, the consumer will bear the cost of regulation, by going to payday lenders, reiterated Dollar.
“Thus, driving consumers to high-cost alternative lenders as their new primary financial institution,” said Dollar. “Secondly, the cost will be borne by the financial institutions that will have to forego that income, which is quite significant because consumers see the program as valuable—which is obvious because they voluntarily opt into it and use it when needed.”
Overdraft income is one of the four primary sources of non-interest income for credit unions, along with debit interchange revenue, mortgage fees and returns on CUSO investments, pointed out Dollar.
Lacking in Scale
“To have that income stream removed or even cut down from $25 per overdraft to maybe 70 cents will force many credit unions—particularly smaller ones, unfortunately—to look to merger in order to stay in business for their members,” Dollar forecast. “Larger credit unions will have the scale to replace much of the income, even though it will certainly result in higher fees in other areas that will apply to all members rather than just those who use the overdraft programs. But many smaller- to moderate-sized credit unions lack the scale to replace the revenue. The resulting downturn in income and net worth will drive many to merger.”
Dollar Associates’ research shows approximately 1,500 to 2,000 credit unions could have their net income go negative with the loss of overdraft privilege program revenue.
“Again, some have the scale to build it back, but many do not,” he said, adding it will take “some time” for the impact on earnings to be felt in a major way.
Potential Revenue Replacements
Dollar believes the primary ways CUs will replace the overdraft revenue lost to regulation will be to:
- Attract more checking accounts and charge more for the service
- Initiate more mortgages with increased fees
- Make more commercial loans (although that also includes greater risk management issues)
- Make more CUSO investments to drive income from business sources owned by the credit union but outside its walls.
Expanding FOM
“Another way credit unions are preparing for the lost revenue from overdraft over-regulation is to expand their market footprint through field of membership additions—either expanding community charters, adding underserved areas, utilizing associational groups or a combination of these options,” Dollar said. “It’s all about building scale to handle the loss of revenue that the pending and expected overdraft regulations are destined to cost them over the next two to three years.”