The Overdraft Program Under Scrutiny
A credit union offers overdraft protection on checking accounts with a $35 per-item fee, up to six fees per day ($210). In the last quarter, 4.2% of accounts generated 61% of all overdraft fee revenue. The credit union uses a high-to-low posting order and does not offer a small-dollar alternative. A member complaint alleges the credit union authorized a $4 debit, then posted a $900 rent check first, triggering three $35 fees. The credit union's disclosures state fees are charged 'per item' but do not explain posting order. Management wants to keep the program unchanged because fee income is 18% of non-interest income. The regulator has requested overdraft data.
1. Identify the compliance and consumer-protection risks in this program.
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Several red flags: (1) Concentration - 4.2% of accounts paying 61% of fees suggests the program is harming a vulnerable subset, which regulators scrutinize as a fairness and UDAAP risk. (2) Posting order - high-to-low posting maximizes fees; if not clearly disclosed, it can be an unfair or deceptive practice. (3) Disclosure gaps - 'per item' without explaining posting order and the daily cap may mislead members about when fees hit. (4) No small-dollar alternative - regulators expect a reasonable alternative (e.g., a small overdraft line or grace amount) so members are not trapped in fee cycles. (5) Authorization - if the $4 debit was authorized and the rent check posted first, the sequencing caused multiple fees on a small transaction; this is the kind of fact pattern that draws UDAAP attention. The credit union should self-assess against the interagency overdraft guidance and prepare a remediation plan, not defend the status quo.
2. What changes should management consider, and how should it respond to the regulator?
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Program changes: (1) disclose posting order clearly and consider low-to-high or actual-order posting; (2) reduce or cap fees (e.g., one fee per day, lower amount); (3) add a small-dollar overdraft line or grace buffer; (4) provide real-time low-balance alerts and a clear opt-in/opt-out; (5) analyze the 4.2% cohort and offer hardship outreach. Regulator response: provide the requested overdraft data promptly and accurately, including fee revenue, posting order, concentration, and complaint trends. Do not misrepresent. Present a remediation plan with timelines. Financial management: model the revenue impact - losing 18% of non-interest income is significant, so replace it with sustainable fee or interest income, not by defending harmful practices. The board should approve the plan and document the rationale.