Consumer Reports Blasts Credit Unions for Overdraft Income

California state report found credit unions make more than banks in fees

Consumer Reports, which frequently recommends credit unions over banks, appears to be having second thoughts, citing a California report that credit unions are charging higher overdraft fees than banks.

That’s not the only problem the consumer group and publication has with credit unions.

“Fee income is arguably part of a broader concern: That certain credit unions are exploiting their exemption from banking regulations while behaving more and more like banks,” Scott Medintz, a writer-editor at Consumer Reports, wrote recently in a report on the organization’s website. “For example, credit union membership has historically been restricted to a particular group—members of a certain profession, say—but now some credit unions let anyone join.”

He notes that, “Consumer Reports has frequently recommended credit unions because the earnings they generate are effectively returned to their customers in the form of higher savings and lower lending rates.”

However, he cited a recent report by the California Department of Financial Protection and Innovation that found that state-chartered credit unions brought in $183.1 million in overdraft fees in 2022, compared with $35.1 million that state-chartered banks brought in. The state’s credit unions charged $69.6 million in nonsufficient fund fees, compared with $38.2 million for banks, according to the report. As a result, NSF and overdraft fees made up a median 3.23% of California credit unions’ net income, compared with 0.16% for banks.

"The California data reveals stark differences between credit unions and banks, with credit unions making a significantly higher percentage of their income in overdraft fees, in some cases above 10 percent of total income, while banks averaged less than 0.5 percent,” said Jennifer Chien, a senior policy counsel who focuses on financial fairness at Consumer Reports. She added, “We suspect this pattern likely extends to credit unions across the country.”

Consumer Reports has made it clear that the organization is in favor of having the Consumer Financial Protection Bureau enact a final rule restricting overdraft fees. The CFPB has proposed limiting overdraft fees at credit unions and banks with assets of more than $10 billion.

Medintz wrote that Consumer Reports’ advocates favor a broader rule that would include more financial institutions, saying that as written, the rule only would apply to 20 credit unions. “Overdraft fees and NSF fees are not inherently junky,” he wrote. “Allowing an overdrawn transaction to go through can sometimes be a convenient service for consumers, and doing so costs a bank a modest amount of money (and exposes them to some risk).” He added that current fee levels are grossly out of proportion with what it costs financial institutions to handle overdrafts.

Medintz applauded National Credit Union Administration Chairman Todd Harper’s announcement that the agency will require credit unions to report their overdraft and non-sufficient funds fees if they have more than $1 billion in assets. The lower asset amount from the CFPB’s $10 billion choice means the NCUA plan would include 400 credit unions that have about 90% of the assets held by credit unions.

Consumer Reports is soliciting comments from readers about their experience with overdrafts and non-sufficient fund fees.

“Have you ever been hit by an overdraft fee?” the group asked, in requesting comments. “If so, please tell us about your experience – what caused you to overdraft your account? Were you charged by a bank or a credit union? Were you surprised by the fee, or did you expect it? How much were you charged and was the fee much more than the shortfall in your account? Do you think the size of the fee is fair?”

Financial services trade groups contend that consumers opt in to overdraft programs and many of them use the programs for short-term loans when they find themselves short of money.

“Credit union members opt in to programs, such as overdraft protection, because they find value in them,” America’s Credit Unions said, in a 2024 Advocacy Briefing distributed to 6,000 credit union advocates attending the group’s 2024 Governmental Affairs Conference this week in the nation’s capital. “Many American families live paycheck to paycheck, and programs like this offer a needed lifeline in times of financial crisis.”