Guidance Issued to Examiners for Assessing COVID-19 Impacts

Recognizing the significant and long-lasting effects of the coronavirus pandemic on financial institutions, federal and state financial regulators on June 23 issued joint guidance for how examiners should assess the effects of COVID-19 on the safety and soundness of banks and credit unions.

The guidance directs examiners to assess institutions according to existing agency policies and procedures, and to consider the appropriateness of management actions to address COVID-19 challenges. It provides specific instructions for examiners when considering an institution’s risk assessment, capital adequacy, asset quality, management actions, earnings, liquidity and market risk sensitivity.

“Examiners should assess the reasonableness of management’s actions in response to the pandemic given the institution’s business strategy and operational capacity in the distressed economic and business environment in which the institution operates,” the agencies said. “When assigning the composite and component ratings, examiners will review management’s assessment of risks presented by the pandemic, considering the institution’s size, complexity, and risk profile.”

The guidance states that examiners will not criticize financial institutions for the appropriate use of government backstops to meet liquidity needs, such as the Federal Reserve's discount window or the National Credit Union Administration's Central Liquidity Facility.

When determining whether a formal or informal enforcement is necessary, examiners should consider whether the institution appropriately planned for resiliency and operational continuity, has implemented prudent policies and is pursuing “realistic resolution of the issues confronting the institution,” they added.

Read more.

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Fee Income at Civic FCU Was $886 Per Member for 2019

A reader recently pointed out that Civic Federal Credit Union (Raleigh, NC) is reporting fee income from services of almost $886 per member for 2019.

Fee income from services include overdraft fees, ATM fees, credit card fees, wire fees, account research fees, late fees, statement production fees, dormant account fees, transaction service fees, safekeeping fees, etc.

According to the credit union's December 2019 Call Report, it had $601,678 in fee income from 679 members.

Its fee income per member was the second highest among all credit unions -- only topped by North Bay Credit Union (Santa Rosa, CA) at $936.25 per member.

The credit union's fee income per member is well above the industry's standards.

The average fee income per member for the industry was $57.05. The median fee income per member was $49.56.

Additionally, fee income for 2019 as a percent of assets was 1.42 percent. In comparison, the industry average for 2019 was 0.66 percent with the median fee income to asset ratio of 0.52 percent.

Civic FCU's fee income as a percent of assets is in the industry's top quartile.

This credit union was chartered in December 2017 by the National Credit Union Administration for the purpose of making member business loans. It is possible that the credit union's business model accounts for the higher fee income per member.

Navy FCU Faces Class Action Lawsuit over NSF Practices

Navy Federal Credit Union (Vienna) is facing a class action lawsuit over its non sufficient fund (NSF) practices.

The lawsuit alleges that the credit union's NSF practices are predatory and deceptive.

The plaintiff claims that Navy Federal Credit Union’s fee schedule and account documents are counter-intuitive and deceptive.

In addition, the lawsuit states that Navy FCU charges multiple NSF fees on the same transaction.

The lawsuit alleges that Navy FCU purposefully reprocesses a transaction even though the credit union knew the account did not have sufficient funds to cover the transaction, so as to increase NSF revenues.

The lawsuit was filed January 28, 2019 in the U.S. District Court for the Eastern District of Virginia.

Massachusetts Dishonored Check Fee Set at Maximum of $7.23, Goes Into Effect on July 1

The state of Massachusetts set the maximum dishonored check fee that state-chartered banks and credit unions may assess at $7.23. This fee will go into effect on July 1, 2017.

The 2017 deposit return items (DRI) fee is based upon deposit return item cost data from a sample of state-chartered banks and credit unions.

The state surveyed 72 financial institutions. The sample was evenly divided between banks and credit unions.

The cost of processing deposit returned items ranged from $1.21 to $30.38 per item with a median cost of $7.23.

The survey found that credit unions had a higher average cost of processing dishonored checks than banks -- $9.35 versus $7.43.

Unfortunately, this state-mandated price control will cause half of the state's institutions to incur a loss in processing dishonored checks.

This is bad public policy.

Read the decision.

Study: Fee Income Surpasses Net Income at 76 Percent of CUs

For most credit unions, fee income exceeds net income.

According to research by Moebs $ervices, 76 percent of credit unions have fee income greater than net income. In comparison, Moebs $services found that fee income exceeded net income for only 25 percent of banks.

The study noted that the increase in fee revenue at credit unions was tied to the growth in checking account at credit unions.

Mike Moebs stated that the increase in checking accounts at credit unions has allowed credit unions to take advantage of increased transaction revenue from interchange and overdrafts.

Massachusetts' Regulator: Dishonored Check Fee Set at $7.17 Per Item

The Massachusetts Division of Banking has set the maximum fee for dishonored checks (deposit returned items) at $7.17, which was the median cost for a sample of state chartered financial institutions to process deposit returned items. This maximum fee goes into effect on June 1.

Previously, the maximum fee was $6.84 per item.

Massachusetts State Law authorizes the commissioner of banks to annually establish a reasonable fee that compensates a bank or credit union for the direct cost incurred in processing deposit return items.

The fee was determined from cost data of 75 state chartered banks and credit unions. The sample included 38 banks and 37 credit unions.

The cost of processing a deposit return item ranged from $1.21 to $30.38 per item. The average per item cost for banks and credit unions were $7.41 and $9.32, respectively.

Based upon the survey, half of the banks and credit unions will not be able to recoup their cost for processing a deposit return item.

This fee does not seem reasonable to me if a financial institution cannot recoup its cost for processing a dishonored check.

Read the decision.

NCUA: Monthly Membership Fees Impermissible

The National Credit Union Administration (NCUA) issued a legal opinion letter that federal credit unions (FCUs) may not charge a periodic membership fees.

The letter was in response to my inquiry whether federal credit unions may charge monthly membership fees.

The NCUA wrote that the Federal Credit Union Act (FCUA) permits FCUs to charge a uniform, one-time entrance fee to members under Section 109 of the FCUA.

The legal opinion letter goes on to state that FCUs may also charge other fees for account services and other financial products. These fees are legally distinct from a membership fee.

However, the letter states that these fees and charges, however, may not be membership fees that serve as a condition on continued membership.

So, it will be interesting to see what NCUA does with regard to Arizona FCU's charging a $3 monthly membership fee, since the beginning of 2013.

Read the letter.

Massachusetts: Maximum Fee for Dishonored Checks Is $6.84

The Massachusetts Division of Banking has set the maximum fee for dishonored checks (deposit returned items) at $6.84, which was the median cost for a sample of state chartered financial institutions to process deposit returned items. This maximum fee goes into effect on June 1.

Previously, the maximum fee was $5.71 per item.

Massachusetts State Law authorizes the commissioner of banks to annually establish a reasonable fee that compensates a bank or credit union for the direct cost incurred in processing deposit return items.

The fee was determined from cost data of 74 state chartered banks and credit unions. The sample included 39 banks and 35 credit unions.

The cost of processing a deposit return item ranged from $1.21 to $22.65 per item. The average cost for banks and credit unions were $6.97 and $8.95, respectively.

Based upon the survey, half of the banks and credit unions will not be able to recoup their cost for processing a deposit return item. That is just wrong.

Banks and credit unions should have the freedom to set their prices, not have them dictated by the state. Price controls have the unintended consequence of distorting economic decisions.

Read more.

Credit Union Overdraft Fees Up 14 Percent Since 2009

According to a MarketWatch article, credit unions have raised their overdraft fees 14 percent since 2009 to a median fee of $28.50 in 2014, while banks have only raised their fees 3 percent over that same time period.

Read the article.

Is Arizona FCU $3 Per Month Membership Fee Legal?

A 1993 National Credit Union Administration (NCUA) legal opinion letter would suggest that a monthly membership fee may be illegal.

The legal opinion letter was in response to a request from the Wisconsin Credit Union League on whether a FCU could pass along its League dues to its membership inthe form of an annual assessment. NCUA stated that this practice is impermissible.

NCUA analysis found that Section 109 of the FCU Act allowed FCUs to charge "a uniform entrance fee if required by the board of directors" when becoming a member of the FCU.

The letter goes on to state that "no annual membership fees of FCU members may be assessed except for the initial entrance fee."

I would presume that the same would apply to a monthly membership fee.

I did not find any subsequent letter that overturned this opinion.

If the assessment of a monthly membership fee is illegal, NCUA should require Arizona FCU to cease and desist from this practice. It should also require Arizona FCU to reimburse all monthly membership fees paid by members.

It seems that there may be a class action lawsuit that is waiting to be filed.

Read the letter.

CUs Generate More Revenues from Checking Accounts Than Banks and Thrifts

Moebs Services found that checking accounts at credit unions collected three times the fee revenue of bank checking accounts and five times the revenues of thrift checking accounts.

The results are from a survey of 2,890 Financial Institutions by Moebs Services between January 2, 2014 and January 10, 2014.

Checking account revenues at credit unions was 78 basis points (bps). In comparison, revenues on checking accounts for banks and thrifts were 25 bps and 15 bps, respectively.

Moebs Services noted that while credit unions have the reputation for low prices, they traditionally do not waive service fees. As a result, credit unions collect more revenues from their checking accounts than banks and thrifts.

Go to Moebs Services website.

Almost 59 Percent of Large CUs Rely on Fee Income to be Profitable

Credit unions are increasingly relying upon fee income for their profitability.

Almost 59 percent of all credit unions with at least $100 million in profits as of June 30, 2013 would have been unprofitable if it were not for the contribution of fee income.

For half of these credit unions with $100 million or more in assets, fee income represents at least 16.77 percent of total revenues. Total revenues is defined as total interest income plus total noninterest income minus total interest expenses.

For one quarter of these credit unions, fee income as a percent of total revenues is at least 23.66 percent.

The following table lists the twenty-five credit unions with the highest ratio of fee income to total revenues through the first six months of 2013. All twenty-five of these credit unions had fee income to total revenues ratio in excess of 40 percent.



Given the reliance on fee income for their profitability, a November 22 article by SNL noted that credit unions "could face tough choices should fees come under additional scrutiny by regulators or consumers."

G-Fees Should Not Be Use as a Piggy Bank

As the congressional budget conference looks for ways to cut spending and increase revenue, bank and credit union trade groups urged them not to consider Fannie Mae and Freddie Mac’s guarantee fees, or g-fees, as a potential revenue source. Congress used a 10 basis point increase in the 2011 g-fee to fund two months of payroll tax relief, for example, which the groups said is already affecting potential homebuyers and refinancers.

“G-fees are a critical risk management tool used by Fannie Mae and Freddie Mac to protect against losses from faulty loans,” the groups said. “Increasing g-fees for other purposes effectively taxes potential homebuyers and homeowners looking to refinance their mortgages.” They added that using g-fees as a revenue tool would constrain congressional options as the House and Senate take up housing finance reform in the coming months.

Read the letter.

Credit Unions Raise OD Fees, Bank OD Fees Unchanged

The Washington Post reported on a study released by Moebs Services that showed "credit unions have been raising overdraft fees on ATM withdrawals, checks and debit card purchases at a faster pace than banks to offset a decline in consumers overdrawing their accounts."

According to the article, the median overdraft charge at banks was $30 a transaction for the past four years. However, the median overdraft fee at credit unions has risen from $25 to $28 per transaction in the past two years.

But the article does not adjust for the difference in tax treatment between credit unions and banks, as credit unions are exempt from federal corporate income taxation. If you adjust for the difference in tax treatment, the credit union median tax adjusted overdraft fee is closer to $40 per transaction -- $10 higher than the median overdraft fee charged by banks.

To derive the median tax adjusted overdraft fee divide the current median overdraft fee by (1 minus the tax rate). For this analysis, the tax rate was assumed to equal 30 percent.

This would suggest that the tax exemption is not being passed through to the credit union member.

Small Illinois CU Issuing Fee Harvesting Credit Card

Credit Union Times is reporting that Services Credit Union of Naperville (IL) is issuing a fee-harvesting credit card.

According to the article, the cards are issued through the credit union; but serviced through Continental Finance Company, which advertises that it "is one of America's leading originators of credit cards for consumers with less-than perfect credit."

To review the fees and interest rates on the Cerulean Card, click here.

Continental Finance on its webpage has the audacity to talk about the credit union difference of people helping people. If this is people helping people, then I don't want to be helped.

The Credit Union Times' article notes that Daniel Plauda, who is the President of the Illinois Credit Union League, is also the CEO of the credit union.

Read the story.

Large CUs with the Highest Fee Income

While credit unions have a reputation of charging lower fees, some large credit unions are aggressively relying on fee income for their profits.

According to NCUA's Call Report instructions, fee income is defined as fees charged for services (i.e., overdraft fees, ATM fees, credit card fees, etc.).

At the end of 2012, One Nevada Credit Union reported the highest level of fee income as percent of its average assets at 3.72 percent for credit unions with at least $500 million in assets. Two other credit unions, Denali Alaskan and TwinStar, have fee income as a percent of average assets in excess of 3 percent.

In comparison, for all credit unions with at least $500 million in assets, the median fee income as a percent of average assets was 0.69 percent. Twenty-five percent of all large credit unions have fee income in excess of 0.99 percent of average assets.

The following table ranks the top 50 credit unions in fee income as a percent of average assets. Also, reported in the table is the fee income and the return on average asset for 2012.

More on Membership Dues

The decision by Arizona FCU to charge a $3 per month membership fee has attracted a lot of attention.

The latest discussion on this topic appears at The Financial Brand, which poses the question should credit unions charge membership dues.

Read The Financial Brand.

Arizona FCU Charging a $3 Monthly Membership Fee

DepositAccount.com is reporting that Arizona FCU is charging members a $3 per month membership fee.

The fee started in January of this year; but is waived for members under age 18 and for Representative Payee accounts. In other words, almost all adult members pay this fee.

I wonder what the Move Your Money crowd thinks about this fee.

Skip-a-Payment

Does an aggressive promotion of skip-a-payment embody a core credit union principle of of promoting thrift?

In the opinion of one credit union CEO, it does not.

According to Bruen's Credit Union Blog, the "aggressive promotion and encouragement to use this program goes against the credit union grain. Skipping payments is hardly a good practice for any member since it keeps them in debit that much longer."

Chuck Bruen, the CEO of First Entertainment Credit Union in California, was reacting to a story about a 400 percent increase in skip-a-payment fees at Alabama's largest credit union, Redstone FCU.

Read the blog post.

$35 Merger Fee Rescinded

Earlier this week, I reported the on Educational Systems FCU charging a $35 merger fee to members of Montgomery County Teachers (MCT) FCU.

After receiving complaints from MCT's members over the $35 merger fee, Educational Systems FCU decided to rescind the fee.

Chris Conway, the President and CEO of Educational Systems FCU, wrote; "As an alternative to the account conversion fee, I am instead asking you to invest in MCT by doing more business with the Credit Union."

Also based upon the fee disclosures, Educational Systems should be able to quickly recoup the forgone income from the rescinded merger fee.