Generally, the Board also believes that an FCU charging a reasonable and proportional overdraft fee in connection with an overdraft loan is appropriate in most cases to compensate the credit union for providing an important source of temporary liquidity to borrowers. However, the Board has serious fairness concerns regarding the potential harm to borrowers caused by allowing an FCU to charge overdraft or NSF fees in connection with a PALs II loan payment given the increased principal amount allowed for PALs II loans.
Charging overdraft fees related to a PALs II loan payment is likely to cause substantial borrower harm. The Board envisions PALs II loan borrowers typically will be in a vulnerable financial position and unable to take on additional expenses. Charging an overdraft fee in this situation will likely weaken the borrower’s financial position further and can have cascading consequences including an inability to repay the PALs II loan. Moreover, charging an overdraft fee in addition to requiring repayment of the overdrawn balance makes the borrower even less likely to meet other expenses or obligations.
The Board recognizes that allowing overdraft or NSF fees will make an FCU more likely to extend an overdraft loan to provide temporary liquidity for a PALs II loan borrower
A borrower cannot reasonably avoid injury that results from an unpredictable event. The decision whether to extend an overdraft loan and charge an overdraft fee, rests entirely with the FCU and not with the borrower. Accordingly, the borrower does not have an ability to anticipate which items that could overdraw the account that the FCU will honor and take appropriate action to minimize the potential for overdraft fees. Even if the borrower, in the abstract, should have the ability to anticipate such an event, behavioral economics research shows that borrowers are prone to hyperbolic discounting of the risk of potential negative events, making such an ability to anticipate the overdraft more theoretical than actual.
Moreover, a borrower cannot reasonably avoid injury that results from an involuntary event. The Federal Trade Commission (FTC) has compiled an extensive factual record showing that “the precipitating cause of default is usually a circumstance or event beyond the debtor’s immediate control.” Accordingly, “among those defaults that do occur, the majority are not reasonably avoidable by consumers. Instead, default is a response to events that are largely beyond the consumer’s control.” Although some precaution “can reduce the risk of default . . . no reasonable level of precautions can eliminate the risk. Moreover, some consumers are unable to take various precautionary steps.” While an overdraft loan prevents a borrower from defaulting, many of the same circumstances that would cause a borrower to default would also cause a borrower to overdraw an account. Furthermore, in the case of PALs II loan borrowers, the member borrower may have limited ability to take precautionary steps to limit the harm caused by overdrafts given the borrower’s financial position.
The Board agrees that the decision to extend an overdraft loan to a borrower is a business decision for each FCU to make in accordance with its own risk tolerance
Allowing an FCU to charge overdraft fees related to a PALs II loan payment offers an insubstantial benefit to borrowers or competition in the payday lending marketplace when measured against the potential for substantial borrower harm. However, the tradeoff for that liquidity is the potential for additional overdraft fees that could cause the borrower to experience other negative consequences such as the loss of a vehicle or eviction while trying to pay off overdraft fees. Moreover, while the Board acknowledges that this provision could result in borrowers receiving less overdraft loans or payday loans New Mexico FCUs receiving less fee income, the Board believes that overdraft loans related to PALs II loans leave the borrower less financially stable and that FCUs already receive sufficient income through application fees and higher APRs charged on PALs II loan balances. Accordingly, the Board believes, on balance, that potential borrower harm outweighs potential tangible benefits.
