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“Courtesy” overdraft, a gross misnomer

In the last two days, credit unions have come under close scrutiny in USAToday. On Monday, a front page ist1_5250604-keep-smilingarticle proclaimed: Some credit union loans are not a good deal. On Tuesday, it was Credit unions hit customers with fees, too.

The loan article discusses the hazards of short term or payday loans. And while Federal CUs are prohibited from charging more than 18% on loans, many CUs get around that rule by charging an application fee. For instance, a $70 fee for a 14-day loan of $400 results in the equivalent of a 455% APR.

The second article discusses the dangers of overdraft fees. It seems that many CUs sign members up automatically for courtesy overdraft loans, claiming that customers want them  (67% of credit unions and 43% of banks have courtesy overdraft policies). For many, it’s a way to bring in much needed revenue and stay in the black. “There are a lot of credit unions that, if they didn’t have overdraft income, they’d go under,” according to Evan Clark, CEO of the Department of Commerce FCU. Only about 10 – 20% of households pay the majority of overdraft fees – and they pay an average of $1,374/year. All those fees added together equaled $6.6 billion in overdraft income for credit unions last year. And those CUs that offer the “courtesy overdraft” service automatically (surprise, surprise) earn lots more fee income than those that don’t.

Why all the attention? Why now? USA Today has been publishing articles on credit as part of a series. But it is interesting that CUs were specifically called out in the headline and main body of these articles, and that any defense of the product as well as any comparison to bank practices were buried toward the end. (Maybe we should start a conspiracy theory – Gee, who advertises more in USA Today?)

But it really doesn’t matter if there is a bias. Or that USA Today’s advertising department may have had a chat with editorial on behalf of their client. Even the knowledge that banks charge higher fees and usually post from highest to lowest dollar amount in order to trigger even more fees, doesn’t square these practices within the credit union philosophy, according to some CU CEOs. They have always been opposed to overdraft privilege and consider it deceiving to their members.

Does your credit union push courtesy overdraft? Has anyone stopped to consider whether the profit is worth the damage and anger it causes?

4 Responses to “Courtesy” overdraft, a gross misnomer

  1. The credit union industry got pretty defensive over the USA Today article, but the point(s) it makes are fair (unlike the fees charged).

    Denise Wymore is another person who has big issues with “courtesy pay.”

  2. Meg Sisco says:

    Defensive- perhaps, but once again I think everyone is missing the larger picture…there would be no overdraft fees given if you did not bounce your checks. If you hold your accounts in good standing you will not be charged. If you manage your money correctly, you will never need a payday loan and you’ll be able to have the good credit necessary to get a personal loan or home equity loan to get you out of sticky situations. Banks/credit unions would not need to have fees to cover the lost loans/defaults/foreclosures…etc.

    This world in post-subprime crisis mode is adding to the never-ending issues of “no one told one’, ‘I can’t possible be responsible’, ‘someones else is to blame’ attitudes. When people learn to go back to taking responsiblilty for their own actions, we will truely see reform in banking practices and personal finance.

    My 2 cents-

  3. Jim Kelly says:

    The whole “debate” on courtesy pay is confusing to me. So a financial institution covers a person that overdraws their account. What’s the problem? I don’t consider that a bad thing, especially when I see the sign “$50 fee for returned items” every time I pick up my dry cleaning. That’s an extra fee that they would have been charged.

    OK. Let’s say the industry does away with overdraft privilege tomorrow. Suddenly that income stream does not exist. Where do you think we will make up the difference? I guess it would have to be increasing loan rates and decreasing deposit rates. So, just as it appears to be a common theme in today’s society, the responsible pay for the irresponsible.

    Don’t we offer free internet banking that allows 24/7 monitoring of your account? Can’t afford a computer? Don’t we offer 24/7 phone teller to check balances? Can’t afford a phone? Can’t people stop in to check their balances or stop by one of the free seminars CUs offer for cash management (the ones that no one attends)? Can’t move? Don’t we offer free check registers?

    Sorry to make this into a bigger issue, but the theme is getting tiresome. This may stem from the fact that many Credit Unions define the “underserved” incorrectly. People that are having a hard time getting a loan because they can’t keep a checking account balanced or didn’t pay past loans are not the underserved. They are the overserved.

    My heart goes out to the family that pays $1,374 a year in overdraft fees. But here is an idea: Read your statement. Make adjustments. Fix it.

  4. Kent Dicken says:

    >>Meg: Fully agree that personal responsibility should be emphasized instead of our cultural Victim Mindset. Unfortunately, it is part of the same culture that we have to market to.
    >> Jim: Loved the “overserved” comment, but perhaps CUs need to look at whether they are enabling?
    For another take on the topic, be sure to check out the CU Warrior’s post: http://creditunionwarrior.blogspot.com/2009/08/keith-leggett-watch.html

Tell us what you think.