Yesterday Politico published an article on credit unions written by a Brookings-based economist.
The title and subhead give his message:
Credit Unions are Making Money off People Living Paycheck to Paycheck
The subhead: There’s a new predator making money off overdraft fees: Credit unions.
The article was prompted by a new report required of all California state chartered banks and credit unions beginning with 2022 data. The first report is 17 pages and lists in data tables the total overdraft and NSF fees collected by each firm the year. The final column shows these dollar amounts as a percentage of net income and total revenue.
The author’s academic and /Congressional staff credentials suggest an objective study of an important topic: the sources and importance of non interest income.
However as I read the article Mark Twain’s observation came to mind: “Figures don’t lie, but liers do figure.” But this shortcoming should not cause readers to overlook lessons from even a biased report.
In addition to the headline, the author’s target shows early on: And the first report of that data reveals that many California credit unions are taking millions from their most vulnerable customers and spending it on perks and bonuses for executives that resemble those of big banks more than nonprofits.
He uses one ratio from the study, total fees as a percentage of net income and then prepares a brief table listing the ratios for 12 credit unions (out of 114) with highest combined $ fees.
However this single ratio can fluctuate dramatically depending on net income, independent of the numerator being studied-combined OD/NSF fees.
To suggest a credit union like FrontWave is abusing members because its ratio is 140% ignores the study’s second ratio which is 12% of total income. This ranking would give a very different listing.
FrontWave’s net income in 2022 declined by 33% from $8.4 to $5.6 million (.44 ROA) thus making the fee/net income ratio appear much higher than a “normal ROA” might present.
Whereas Dow Great Western’s ratio was a negative -200% and only 1.32% of total income. Was the credit union giving back more fees than they collected? No, the credit union reported a negative net income. Perhaps it should charge more fees?
Predetermined Conclusions
But the author has made up his mind, and now wants to condemn a practice without examining other relevant details, such as the actual fee charged per transaction. He downplays the other ratio of fees as a percentage of total revenue, which would show each firm’s dependence on this one area of income. These ratios range from 0% to 15%.
He makes no attempt to understand the data by calculating mean or the average fee-to-income ratio. His conclusions were formed before he knows what the data might mean:
Let’s be clear: Overdraft fees can be predatory. Every overdraft by definition turns money from someone who has run out of it into nearly pure profit for the bank or credit union that charged it because they get paid back immediately when the next deposit hits. Eighty percent of overdraft fees come from just 9 percent of account holders, highlighting that this product is targeted at people living paycheck to paycheck who run out of money from time to time.
Even given his limited analysis, the situation is dire:
The full picture among California’s 114 state-chartered credit unions is alarming. And not just in California. One suspects similar trends across the country. Several of Michigan’s largest credit unions have been sued for abusive overdraft practices and research from the Consumer Financial Protection Bureau shows credit unions averaging similar overdraft fees as banks.
A Political Lens
Near the end the author’s political bias comes out as he talks about democratic congressional members’ rhetoric against junk fees, and then this sentence: Todd Harper, chair of the National Credit Union Administration (NCUA) has spoken out against abusive overdraft practices, but the NCUA Board has a Trump-appointed, Republican majority that is continuing to deregulate.
All three board members are Trump-appointed. I’m not aware of any reg, rule or guidance letter that Harper has issued on this topic or that the other two board members opposed. The singling out of Harper’s alleged views (no links) raises the question whether this is just a comrade in arms fronting for someone.
The Benefit of a Critic’s View
The author is a sceptic of credit union business practices:
California’s data shows that some credit unions are making a lot of money from overdraft fees. California’s largest state-chartered credit union, Golden 1, took $24 million in overdraft from their members, while spending $6 million a year for naming rights for an NBA stadium in Sacramento. North Island Credit Union bought naming rights for a famed music venue in Chula Vista and created an exclusive entrance, ticket discounts and other perks for some of its members while taking over $10 million last year in overdraft and non-sufficient funds charges from its members.
Do these business practices sound like those of nonprofits designed to provide basic banking services to people who share what the law calls a “common bond,” such as a workplace or other connection required for membership? Or are they what would expect from for-profit banks?
A Wakeup Call
The author asserts this not a single state issue: California’s data is a wake-up call for the nation as a whole.
Even though he critiques mutiple credit union activities through his very limited NSF/OD lens, the article is a wake up call for those who believe credit unions are not banks in sheep’s clothing.
The article has all the indicators of a planned “hit piece” on credit unions. But to try to kill the messenger or discount all the data is to miss the point.
Even when a public critic may be wrong, the better approach is to engage on the issue with facts and logic that show a grasp of the issue. More rhetoric just makes the issue burn hotter but with no more light.
The need for fee transparency at the individual and macro levels is valid. Credit unions, consumers and analysts/regulators can all better understand the role these fees have in a firm’s business model.
Comparisons between credit unions can be valuable, if all the data is known. How do some have very low fees and others relatively higher?
Members can more easily learn as they seek information on fees as they do now about loan and savings rates.
The author believes the only solution to his alarming “problem” is more regulation.
But what kind of regulation would be relevant and consistent with one’s views on government’s role for coops and in markets? Should government regulate the fees somehow, mandate more disclosures, or control business practices as he hints by limiting fees to a percentage of net income.
More regulation will not stop credit unions tempted to put institutional priorities ahead of member-owner interests.
Regulators should ensure members have the tools to hold their repesentatives to account-with the information and the ability to openly raise these topics in the traditional annual meeting and director election format.
What is missing is not regulation but the ability of members to play an effective governance role as owners in their credit union. Enabling members to be more aware and active is critical to any credit union’s long term success.
No regulation, no matter how well intended, can replace members exercising their rights as owners. That’s how markets are supposed to work.
Good write-up today. Penalty income is an ugly and unfortunately necessary part of this industry. There is no room for abusive penalty income, though. The way this should be measured is as a percentage of net revenue (net interest income plus non-interest income). That’s about the only honest way to do it. Interest income comes with a cost, so it is dishonest to compare one income source to another while ignoring the burden of cost.
Looking at it as a percentage of profit does have merit, because without non-interest income (of which fee income is a part) credit unions would be unprofitable. There is not enough net interest margin alone to cover non-interest expense, credit losses, and cost of capital/reserves. Using that as fodder for a hit piece is an altogether different matter.