Understanding NCUA’s Guidance on Overdraft and NSF Fees

By Cheryl Lawson, EVP of Compliance Review, ADVANTAGE
February 6, 2025

The National Credit Union Administration (NCUA) recently issued a letter urging credit unions to address overdraft and non-sufficient funds (NSF) fee practices that may harm members or expose institutions to compliance risks. This guidance does not call for an end to overdraft programs. Instead, it highlights the need to eliminate harmful practices and reduce consumer costs while maintaining programs that provide valuable financial support to members.

We’ve long worked with credit unions to offer overdraft programs that balance compliance, member needs, and institutional growth. The NCUA’s letter highlights key areas for improvement, emphasizing the need for credit unions to refine their programs and align with evolving regulatory expectations.

Fee Practices Require Immediate Attention

The NCUA identified several fee practices that pose risks to credit unions and their members. Addressing these areas can help build trust and reduce regulatory scrutiny:

1. Unanticipated Overdraft Fees: Fees from practices such as “authorize positive, settle negative” (APSN) transactions are flagged as potentially unfair because members often cannot predict or avoid them.
2. Multiple NSF Representment Fees: Charging fees for each re-presented check or ACH transaction can result in members incurring unexpected charges without control over re-presentment timing.
3. Returned Deposited Item (RDI) Fees: Blanket policies that charge RDI fees regardless of circumstances risk harming members and eroding their trust in the institution.
4. High or Unlimited Daily Fee Caps: Excessive or uncapped daily fees can lead to significant financial strain on members and increased regulatory attention.
5. Inadequate Disclosures and Transaction Ordering: Misleading or incomplete fee disclosures, coupled with transaction ordering practices designed to maximize fees, may violate consumer protection laws and undermine member relationships.
6. Refining Overdraft Programs to Better Serve Members

Regulators, including the NCUA, recognize the value of overdraft programs but are focused on ensuring they serve members fairly. Credit unions are expected to take the following steps to enhance their programs:

• Evaluate Fee Practices: Review fees, policies, and disclosures to identify risk areas.
• Educate Members: Provide clear, accessible information to help members understand fee structures and ways to avoid charges.
• Implement Member-Friendly Alternatives: Explore options like alerts and notifications, plus other options, including linked savings accounts, affordable credit lines, or small-dollar loans.
• Strengthen Risk Management: Enhance compliance systems, monitor usage, and adapt proactively.

By making these adjustments, credit unions can maintain programs that are both compliant and valuable to their members.

Creating a Better Overdraft Experience

The NCUA’s letter is not a call to end overdraft programs – it’s a call to improve them. By addressing harmful practices and focusing on transparency, credit unions can continue offering valuable financial tools while protecting their reputation and reducing compliance risks.

Aligning with these expectations can build trust, strengthen member loyalty, and avoid potential legal and reputational pitfalls. ADVANTAGE is here to support credit unions in navigating these changes and implementing strategies that balance compliance, member needs, and institutional growth.

Taking Action Today

The NCUA’s emphasis on reducing consumer harm offers credit unions a valuable opportunity to reassess their practices and strengthen member relationships. By taking a proactive approach, you can ensure your overdraft program remains compliant and member-focused.

Ready to take the next step? Contact ADVANTAGE today to explore how we can help your credit union refine its overdraft program and position your institution for long-term success.

About ADVANTAGE

ADVANTAGE, powered by JMFA, is dedicated to empowering financial institutions with strategic solutions for growth and success. Our comprehensive services include overdraft program consulting and compliance, checking account acquisition strategies, contract negotiation expertise, and consulting for technology strategy, evaluation and selection. With a rich history of serving credit unions nationwide, we are committed to delivering exceptional value and fostering long-lasting partnerships. Choose ADVANTAGE, to elevate your performance, identify new opportunities, and build more value.