Courtesy overdraft fees hit credit union customers, too

— -- While President Obama and members of Congress take aim at controversial overdraft loans, government credit unions are quietly offering this product in their backyard.

At the White House Federal Credit Union, a short walk from the Oval Office, customers are automatically signed up for a product called Overdraft Privilege. When customers don't have enough money to cover transactions, the credit union may pay checks and debit card purchases, then charge a fee of $25 each time.

This coverage is a "safety net," says Christopher Clark, business development manager at the credit union, whose members include White House employees and their family. "We look at it as a tool just to assist (customers) as needed."

At least 13 other government credit unions, including the Treasury Department Federal Credit Union and the United States Senate Federal Credit Union, also extend this form of high-cost credit even if consumers haven't asked for it.

While government credit unions are far from the only ones that practice courtesy overdraft, as the industry likes to call it, they're emblematic of a practice that has become widespread, and deeply entrenched, in the financial industry. It's a practice that raises questions about whether credit unions — which often bill themselves as the fee-friendly alternative to banks — have become too aggressively banklike in their quest for revenue.

"It's disappointing if the most influential Washington, D.C., credit unions are using practices designed by consultants to extract money out of their members," says Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group. "Government credit unions should serve as a model for what's right rather than a poster child for what's wrong."

Government credit unions aren't run by the government but are legally owned by their members, including some of the administration officials and members of Congress pushing for overdraft reform. Credit unions say they automatically extend overdraft loans because members want the service. And they point out that as not-for-profit institutions, they want to meet their customers' needs.

At the United States Senate Federal Credit Union, which counts senators and other government employees among its members, courtesy overdraft is provided because, "If we didn't, (consumers) would go somewhere else and get it," says CEO Susan Enis.

Not everyone wants to be signed up, however. Sen. Chris Dodd, D-Conn., chairman of the powerful Senate Banking Committee, is a customer of the Senate credit union. He's also been an outspoken critic of overdraft practices, vowing to crack down if regulators keep letting institutions automatically sign consumers up.

"All banks and credit unions should be required to get customers' OK before they sign them up for overdraft services," Dodd says.

Even though financial institutions often charge the same fee whether they pay or deny the bounced transaction, covering it ultimately generates more revenue, says Brad Nickum, who used to work at Earnings Performance Group and Profit Technologies, which consulted with institutions on overdraft programs.