Overdraft Regulation: Is There a Silver Lining for Credit Unions?

Abstract

This research brief examines the potential impact of overdraft regulation on credit unions using a unique data set developed from a survey of 185 credit unions' overdraft practices. It provides the first-ever empirical overview of credit unions' overdraft practices, as well as data on credit union products that compete with overdraft: credit card and payday loans. The study finds that in the unlikely worst-case scenario under the Reg E revisions, in which no credit union members opt-in for overdraft services, total average fee income could sink as much as 11% and that overall ROA could fall by as much as 9 basis points. A smaller impact is more plausible, however, given that credit unions will control the overdraft opt-in solicitation process and that repeat overdrafters -- the source of the majority of overdraft fees -- often value the service and would likely opt-in. The study concludes by suggesting that credit unions see repeat overdrafting as presenting an opportunity to serve members with affordable, short-term loans coupled with financial counseling -- a return to employer-based credit unions' roots as the original (and affordable) payday lenders. Offering affordable credit coupled with financial counseling has proven a successful product for the credit unions that have attempted it and presents a major opportunity to profitably build member loyalty.

Keywords: credit union, overdraft, payday, credit cards, Reg E