By Ray Birch
ARLINGTON, Va.—A new overdraft rule in California could bring more compliance burden to credit unions in this state, and may also mark the beginning of a greater focus on overall fee revenue at financial institutions, NAFCU is suggesting.
As CUToday.info has reported, SB 1415 requires CUs and banks subject to the authority of the California Department of Financial Protection and Innovation (DPFI) to disclose the revenue they earn from overdraft and nonsufficient funds fees.
As NAFCU interprets the rule, SB 1415 requires CUs and banks subject to the authority of the California Department of Financial Protection and Innovation to disclose the revenue they earn from overdraft and nonsufficient funds fees. Federally chartered CUs headquartered in California or outside California are not subject to this California law. State-chartered credit unions and banks headquartered outside of California but with a license to operate a branch in California are subject to this law.
A Different Interpretation
Nick St. John
NAFCU’s interpretation differs from that of Moebs $ervices, as CUToday.info reported.
“FAQs from the California DFPI site show that while state-chartered CUs headquartered outside California might technically be subject to this law, the DFPI has said they won’t have to comply with it in practice,” explained Nick St. John, NAFCU director of regulatory compliance.
California state-chartered credit unions and banks subject to the law have until March 1 to file the information, after which the DPFI is required to publish a report by March 31 for the 2022 calendar year.
“The department would be able to publish this information on their on their website,” said St. John, who noted the immediate impact on affected credit unions is simply more work. “This is, of course, is just additional compliance burden—an additional reporting requirement.”
Defining NSFs
SB 1415, passed out of the Assembly Committee on Banking and Finance, defines “nonsufficient funds fees” as those resulting from the initiation of a transaction that exceeds the customer’s/member’s account balance if the customer’s/member’s bank or credit union declines to make the payment.
The law defines overdraft fees as those resulting from the processing of a debit transaction that exceeds a customer’s/member’s account balance.
Language in the bill at the time it was proposed said “overdraft fees are disproportionately borne by consumers who are least able to afford these oppressive charges: workers with volatile incomes, parents of young children, and Millennials and Gen Z adults. These fees are also highly concentrated, with less than 9% of consumer accounts paying 10 or more overdrafts per year, accounting for nearly 80% of all overdraft revenue generated by financial institutions.
Greg Mesack
‘It’s Pretty Clear’
St. John said NAFCU has yet to hear from its member credit unions about the new law.
“Usually, we do hear from credit unions, things such as they heard the law is coming and they want to know what it means for them,” explained St. John. “But so far our compliance team really hasn’t heard a lot. Maybe it’s because the law is pretty simply written, so it’s pretty clear to credit unions. It’s pretty clear that you have to report your overdraft revenue by a specific date.”
NAFCU SVP of Government Affairs Greg Mesack told CUToday.info the silence has the trade association uncertain about how aware Golden State CUs are of the law.
“We are not sure how well this has been publicized,” explained Mesack. “NAFCU just wants to make sure our members are informed and know this is coming, especially the smaller credit unions. They don't have as many staff and sometimes they get pretty busy.”
‘Should Not be a Concern’
Publishing the information should not be a concern for most credit unions, suggested Mesack.
“We really don’t want to speculate too much on how this might affect credit union overdraft pricing,” said Mesack. “We don't want to speculate on market forces. But credit unions are pretty proud of their overdraft rates, which are very competitive. Credit unions, too, have taken the lead when it comes to affordable rates and providing affordable overdraft services. I don't think credit unions are afraid to disclose their fees and revenue. I think with all of this attention on overdrafts, credit unions have come out looking pretty good.”
But Mesack acknowledged this rule could change behaviors, such as pricing decisions.
“Yes, it could lead to some credit unions lowering price or even not offering overdrafts” said Mesack, who noted that whenever fees and revenue numbers are published it could make organizations easier targets for consumer groups that could “distort” the data. “But if that happened, we will point out that credit unions are not making a lot of money on this and most of their revenue here goes to cover costs. This revenue is not going to some executive’s bonus, and we don't pay our boards. It’s not going into anyone's pockets, it's going back to the members in services, such as free checking.”
Federal Attention
Meanwhile, attention to overdrafts isn’t just limited to Sacramento, with Mesack acknowledging there is also scrutiny on the federal level on Capitol Hill.
“When you look at what (CFPB Director) Mr. (Rohit) Chopra has been saying about overdrafts, and look at what a lot of the consumer groups are saying, they've been beating the drum on this, including senators like Elizabeth Warren,” he said. “There's a group who believe that overdraft fees are abusive, and we disagree. We have data showing the value that overdrafts provide members.”
Mesack also acknowledged that depending on the results of the OD revenue being posted by the DFPI, similar laws could arise in other states. Mesack also thinks California may not stop at overdraft revenue.
“Depending on how this plays out, I will not be surprised to see this same playbook used on other fees in California,” said Mesack. “It goes back to my point that some consumer advocacy groups have decided they don't like this product. If they have found a way to be successful here, why wouldn't they try it again? If you have a sympathetic legislator willing to pass bills for them, why not go back that well again.”
CUToday.info reached out to the California league for its input on the issue but the league declined to comment.