MADISON, Wis.-Overdraft pricing policies, many set more than 10 years ago, may be coming back to haunt some CUs.
Lawsuits that allege unfair overdraft pricing are increasing, first targeting banks and now more credit unions. In the last two months nine CUs have been named in suits -- SchoolsFirst FCU, Star One CU, Kern Schools FCU, Education Employees FCU, Alliant CU, America's First FCU, Alabama Telco CU, Legacy Community FCU and Xceed Financial FCU.
Credit unions that have responded to the suits claim they are frivolous and that the credit union is not engaging in unfair business practices. Whether the plaintiffs will win in these cases is still to be determined, although some CUs have already reached settlements.
What is raising concerns among a number of CU CEOs and overdraft experts, however, is so-called "high-to-low" transaction posting practices established by credit unions in the early 2000. Moreover, many indicated that credit unions may not have been paying close attention to their posting practices until the recent headlines.
At issue is pool batch processing transactions, where the institution collects its ACH, debit and check batches and then posts from highest dollar amount to lowest, a practice that can lead to more overdrafts-and more bounced check fees. That practice has already forced numerous big banks to pay millions of dollars in settlements, including BofA,, which paid $410 million to settle its suit.
According to a NAFCU survey that appeared in the June issue of the trade association's Economic & CU Issues Monitor, 9.5% of CUs post high to low. Michael Moebs, economist and CEO at Moebs $ervices, Lake Bluff, Ill., said the credit union industry average is actually 5.5%. Many sources agree that the majority of the CUs that post high to low are doing so only with checks, and doing it because they want members' home and car payments to clear before smaller items.
However, others believe some credit unions may be posting high to low as a way to generate more fee income, often guided by pricing decisions made years ago when the focus on overdrafts was not what it is today.
'A Very Real Risk Here'
Ken Otsuka senior consultant, risk management at CUNA Mutual Group, cautions credit unions about posting high to low, whether they are pool batching or just ordering checks, noting such practices could draw attention from the CFBP or members seeking quick money via a lawsuit settlement.
"I think these credit unions should be concerned, because we are talking about any debit transaction, and that includes checks," said Otsuka. "There is very real risk here."
That risk could be exacerbated by lack of attention to overdraft practices. Ted Bilke, president of the San-Diego-based Symitar, confirmed to Credit Union Journal that thecompany has been receiving numerous calls in the last six weeks from CU clients.
"Those headlines started many customers talking with us candidly, and what we found is that a fair number have had their posting process in place for so long they were not sure really what payment options they had set up in their core system and they needed us to help them validate what their options are," said Bilke. "Since the posting options and practices were set at many credit unions, there have been leadership changes...and for a variety of reasons they are not fully aware of what choices they are making."
'All Over The Map'
Bilke admits, based on recent conversations with Symitar teams, that the number of CUs he believes post high to low for checks is larger than he previously thought. "I queried my implementation team and we offer three options on the Episys system-low to high, high to low, and draft number. I found credit unions are all over the map. My core team told me the most common practice is draft number, followed by high to low and then low to high. I don't have an accurate count because we don't track this, but in our 600 CU customers I think realistically one-third could post high to low."
CUNA EVP-General Counsel Eric Richard told Credit Union Journal the trade association's view is that posting checks high to low is not wrong. "It depends on why you are doing it, whether you are responding to what members want, and how much members know about your practice. We do hear from credit unions that some of their members have expressed strong preference to have their mortgage check processed before anything else."
A number of the overdraft lawsuits have alleged financial institutions are being deceptive with their transaction posting practices. Richard said transparency of the posting policy is a critical element in the debate over an institution's overdraft intentions. "People think there is an element of deception when they don't know of the posting practice and are surprised," said Richard, noting that a high level of transparency could make a positive difference during litigation.
Ruth Jenkins, CEO of the $425-million Heritage FCU in Newburgh, Ind., agrees. Her CU has been posting checks from high to low for the last 10 years and is clear to members about its policies. "Our disclosure specifically states that checks will clear from highest to lowest. It says. 'Our payment policy will cause your largest, and perhaps more important, items to be paid first (such as your rent or mortgage payment), but may increase the overdraft or NSF fees you have to pay if funds are not available to pay all of the items.' The disclosure is posted on our website, discussed with new members at the time of account opening, and provided annually to our members."
Heritage Federal's overdraft coverage is available for checks and ACH withdrawals, but not for POS transactions, a decision Jenkins said HFCU made to reduce the overall exposure to NSF activity for members and to help "drive the shared responsibility of account balance management."
Jenkins said HFCU has used John M. Floyd & Associates to work with its overdraft program, but said that work was completed before she arrived five years ago and she said she has no knowledge of what advice or direction her CU was provided at that time.
Stuart Perlitsh, CEO of the $325-million Glendale Area Schools FCU in Glendale, Calif., questions what recommendations overdraft consultants have given credit unions over the last 10 years. He is concerned for CUs that tout large increases in OD revenue, such as through testimonials, for example, that are posted for John M. Floyd & Associates on the CUNA Strategic Services website. While acknowledging part of the overdraft consultants' role is to help the FI increase OD revenue, Perlitsh pointed out that those testimonials discuss lifts of 186%, 200%, and 240% on overdraft fee income.
"One credit union reported an increase from $40,000 to $60,000 a month in fee income. 'It begs the question, 'How do you recognize an instantaneous shock of fee income when the number of accounts and price remain constant?'"
The $73-million Bridgeway FCU in Poughkeepsie, N.Y., in a JMFA testimonial says, "JMFA OVERDRAFT PRIVILEGE has really made a difference in a number of areas. 'First, we have seen a substantial increase (240 percent) in our non-interest income.'"
Companies Describe Policies
The testimonial refers to a decision to use JMFA in 2004, and the comments were attributed to CEO PJ Walker. Today, the CEO is Michelle McCourt. Credit Union Journal's effort to contact McCourt to ask if the credit union ever has used high-to-low posting for transactions were unsuccessful, and McCourt did not return the Journal's calls.
John. M. Floyd issued a statement saying its programs are in full compliance.
Credit Union Journal reached out to several OD consultants regarding their own recommendations to financial institutions related to the posting of items. Mike Sobba, CEO of Strunk & Associates, Houston, said his company has never recommended reordering of transactions of any kind from high to low. "There are financial institutions that did do that and now they are paying the price. We also learned that some of our competitors, in the past, had recommended the practice of posting high to low. In the end, the CFPB is going to make that an unacceptable practice."
Fiserv, which absorbed overdraft consultant Carreker several years ago, said it had no comment when asked by Credit Union Journal if Carreker has ever recommended high-to-low posting to FIs.
In Houston, Pinnacle Financial Strategies said it has never recommended high-to-low posting. Kelly Anderson, director of marketing and communication, told Credit Union Journal that Pinnacle's overdraft programs are focused on clearly communicating to members what the credit union's overdraft policies are so that members can make informed decisions and benefit from the program.
Michael Moebs asserted that the true intent of a credit union's overdraft program, whether it is member focused or focused on making money, can be determined by evaluating the CU's overdraft pricing, process, and the transparency to members. Moebs believes that a credit union processing transactions as they are received, charging less than $20 per overdraft (the CU average is $25, according to Moebs), communicating to members about its process and pricing with common-sense language, and using text alerts and e-mail to quickly provide notice of an overdraft, is doing the best job it can for OD users.
Against the Wind
Moebs, too, asserted that the days of reordering checks from high to low should be over, since Check 21 has virtually eliminated float. The economist and CEO said that his company used to recommend ordering checks from high to low to give members the benefit of float. "But since 2003, with the collapse of float, we stopped recommending high to low," he said.
With increased overdraft scrutiny coming from the CFPB, Bill Handel, VP of research and development for Raddon Financial Group, Lombard, Ill., says it's time to get away from any posting practices that are not clearly in members' best interests as "the winds are against that." He also said that the mindset surrounding overdrafts has changed as well, from ten years ago when overdraft helped to carry the cost of the checking account to today when CUs have to lessen their reliance on overdraft as a revenue source.