2024 NCUA CALL REPORT CHANGES INCLUDE BREAKING DOWN OVERDRAFT FEE INCOME

Some of you may be aware of this recent change to the NCUA 5300 Call Report, but many of our clients have been caught by surprise.  Basically, all federally insured credit unions with over $1 billon in assets must – beginning with the March 31, 2024 Call Report submission – break out overdraft and NSF fee income from other Non-Interest Income.

This is a new change for 2024 that was issued in December 2023 with a thirty-day comment period that ended January 8, 2024.  Only one commenter filed any official comment letter on the proposal.

While America’s Credit Unions have called for more transparency by the NCUA in making such Call Report changes, the reality is that NCUA did indeed post the proposed change, offered a thirty-day comment period and seemed to slide it by during the Christmas holiday period with almost no opposition whatsoever.

Of course, it does not take much analysis to read between the lines of this new Call Report requirement.

If you missed the NCUA notice of the new Call Report provisions, a link to their announcement is below:

https://ncua.gov/regulation-supervision/regulatory-reporting/cuonline/whats-new

Let’s look at the likely impact of this new requirement that got little attention when proposed but will have considerable impact over time.

First, it will generate headlines designed to further the efforts of those at CFPB and NCUA who want to see overdraft fee restrictions imposed by regulation on how much a federally insured credit union can charge for an overdraft or NSF fee.

Secondly, it will be data that NCUA can use to point to what it believes to be excessive dependance on overdraft income by credit unions today.  The use of this data in such a way is clear sign that, under the Harper chairmanship, NCUA is beginning to view itself more as a consumer protection agency in an attempt to copy-cat the CFPB than as a statutorily mandated safety and soundness regulator.

Thirdly, if anyone doubted that the NCUA Board intends to follow up on the CFPB’s current proposed overdraft rule with one of its own to apply to credit unions below $10 billion in assets and therefore exempt from the CFPB rule, this should put those doubts to rest.

NCUA is gathering the data to make its case that credit unions below $10 billion – where the line will be drawn no one knows, but our guess is that any NCUA rule will apply to all federally-insured credit unions with over $100 million in assets – are taking advantage of consumers of modest means.

Despite the dramatic impact on credit union safety and soundness of removing this voluntary source of fee income from members that surveys show actually like the program and totally ignoring the fact that members have expressly opted into their overdraft programs and utilize them as a cash management tool in lieu of turning to a payday lender or check cashing outlet, it is clear that NCUA is moving forthwith to establish its supposed bona fides as a consumer protection agency carrying forth the current administration’s campaign against anything its considers a “junk fee.”

Set aside the danger of NCUA assuming for itself the role of consumer protection agency at the expense of its designated role by Congress as a safety and soundness regulator, the gathering of this data in a public format such as the 5300 Call Report will not just be utilized by NCUA for future overdraft regulation.

Plaintiff attorneys nationwide, already having filed hundreds of class action lawsuits on inadequate overdraft disclosures and inordinate amounts of income being earned by financial institutions on “the backs of those who cannot defend themselves from these egregious fees,” will have access to this data as well.  It will find its way into even more legal actions against credit unions, supplemented by the actions of the federal credit union regulatory agency to gather the data in a nice little format for improper interpretation and to put the credit unions in a position of defending a program that the member voluntarily opted into and has used at their own discretion.

The direction of the overdraft issue is very concerning for all credit unions.  The CFPB has already gathered its comments for the final rule it is almost certain to approve before the end of 2024 for all financial institutions above $10 billion in assets.

NCUA, as evidenced by the gathering of this new Call Report data, is prepping for a follow-up rule to apply to federally-insured credit unions below $10 billion.

While the timeline on a final NCUA regulation will likely be 18 to 24 months after the CFPB finalizes its rule around the end of 2024 and makes it effective mid-year 2025, every indicator is moving toward NCUA taking action on overdraft programs by the end of 2026 if Chairman Harper remains chairman after the 2024 elections and if he has his way with his like-minded majority NCUA Board.

What will be the result?

In our view, credit unions will be less safe and sound without this source of voluntary fee income paid by members who opted into the program.  It’s simple math.  Remove a key source of non-interest income at a time when loan income is challenged by the marketplace and investment income is restricted by regulation – earnings and net worth will be impacted.

In an attempt to make up as much of that lost revenue as possible, credit unions will have to re-structure their checking programs to generate more income from all members – not just those electing to use the program as is the case with voluntary overdraft fees.  The day of free checking for all members will be sunsetting, according to most observers, once overdraft programs are removed as a viable source for credit union income.

From a safety and soundness perspective, credit unions will also have to take more risk in their lending and investment portfolios to make up the lost income and protect their net worth position.  NCUA will have to be open to that increased risk if the agency is going to close the door on the voluntary overdraft program income.

Most significantly, the elimination of overdraft programs will remove a consumer option that has kept millions of Americans doing business with their credit union or bank instead of going to a payday lender or check cashing outlet every other weekend when the groceries, car payment or rent is due and payday is still a few days away.

This new regulation from CFPB, coupled with a follow up from NCUA a year or so later, will do more to promote the growth and boom in the alternative lender industry than any single governmental action in history.  Payday lenders and check cashing outlets will be toasting the CFPB and NCUA by Christmas 2026.

And, lastly, get ready for the mergers that losing overdraft income will cause.  Our prediction is that 1500 to 2000 credit unions will not be able to survive the loss of this income and will be forced to merger.

Let’s face it.  Every means of making up that lost income requires scale.

More checking accounts to replace overdraft income with debit interchange revenue?  It takes scale with more checking accounts.

Expanding into business lending for more return and diversification of loan income sources?  It takes scale to hire the commercial lending expertise and to manage a commercial portfolio.

More indirect lending deeper in the loan pool?  No doubt this requires scale to overcome the increases in delinquency and charge off with the volume that will have to be generated under risk-based lending to come out ahead.

Investing in otherwise impermissible investments as allowed by NCUA to cover employee benefit costs?  Only credit unions with scale have the liquidity and investment know-how to travel those risk-filled waters.

Investing in CUSOs?  A great option, but it requires liquidity and the type of expanded management oversight that requires scale to monitor multiple businesses outside of the credit union itself.

In one of the great ironies of ironies, the very small, minority, community development and faith-based credit unions that Chairman Harper and the NCUA constantly promote as being the heartbeat of our movement and deserving of protection are among the most vulnerable to being unable to have the scale to survive the loss of this important income that is very key to many of them.

The overdraft rules to come are going to fundamentally change the credit union industry as we know it.  Fewer smaller to moderate sized credit unions – and bigger credit unions building more scale from the merger of their small brethren.

Unintended consequences when a safety and soundness regulator self-anoints itself as primarily a consumer protection agency.  But, hang on, it seems to be on its way.

The revisions to the 5300 Call Report reporting for 2024 is a clear indicator.  While only those of you over $1 billion in assets are covered by this overdraft income disclosure provision in 2024, it will sooner than later be required of all credit unions.

Regulation always creeps.  It often leaps.  But it never retreats.

Until next time.

Dennis Dollar