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Solving the “Junk Fees” Issue with ChatGPT

What’s a “junk fee”? Simply put, it’s any charge beyond what you’ve agreed or expected to pay for a product or service. For a credit card, it can be a late fee. For debit, an overdraft or NSF fee. For a hotel, a “resort fee” slapped on the bill when you check out.

I didn’t come up with the phrase. That goes to the CFPB, or Senator Elizabeth Warren. Or a nameless intern with a knack for catchy terms.

Either way, it’s in the national discussion. The CFPB has an entire section dedicated to Junk Fees across a range of industries. They have things to say about overdraft fees, no doubt. I mean, we do agree on that.

President Biden Tweet About Junk Fees
POTUS attention

NAFCU took a different position, claiming that the current arrangement is fine and to let credit unions handle it. They’ll come up with the best strategy for their members and institution, as their press release explains.

So that’s one big topic. And the CFPB isn’t stopping at overdraft.

In early February 2023, they issued new guidance for credit card late fee structures. Naturally, the credit union industry had harsh words in response.

On a totally different topic, a certain conversational AI stole the spotlight, reaching 100 million users faster than any platform ever. ChatGPT single-handedly broke education, thought-leadership, and programming…or so the headlines would have you believe.

While it’s an amazing system, it’s also not going to steal everyone’s job, yet. However, it does open up an opportunity to have conversations which let us see different perspectives and expand our own critical thinking.

So as if I were assembling my first lightsaber, I elegantly smooshed (the Jedi term) these topics together.

Below is an unedited discussion on the “junk fees” topic between myself and ChatGPT, taking the role of a credit union executive and lobbyist who isn’t quite so keen on simply eliminating them.

Geek notes: You may notice it totally missed my point about CDFI (maybe I shouldn’t have written it out), but I do believe this is a direction worth pursuing. Reading through, I realize I should have asked for examples. Oh well, next time.

I was also surprised how it eventually started getting “persuaded” to my position, agreeing that junk fees should go, but not on how. I wonder…is this how a person may think, too?

Finally, I asked it to summarize it up in a way a geek would love. Here’s the gem we got:

“Together we can boldly go where no credit union has gone before, providing affordable and accessible financial services.”

ChatGPT

Image credits: DALL-E 2 AI image generator

Eliminating Junk Fees: A Human/AI Discussion

AI Chatting with Geek - DALL-E
No way I’m the “tall” one in this situation. Oh, am I the AI?

Joe

The concept of “junk fees” is in financial news regularly now. With the CFPB leading the charge against a range of punitive fee structures, it’s a matter of time before new rules go in place.

Even the President is in support of eliminating junk fees, as he posts about it often. As a member of the credit union community, I agree with this stance. The poorest members shouldn’t be the ones most impacted by the highest fees on a range of banking services.

Income can still be generated through value, rather than off those getting stuck with late payments and other charges.

Knowing my stance, take the position as a lifelong credit union executive and lobbyist who is against these policies.

They have a range of good arguments why these ideas are not beneficial for small credit unions, their members, or the industry as a whole (I don’t know what they are). With you roleplaying as that executive, let us engage in a reasoned discussion on the topic.

You go first and I will respond.

ChatGPT

As a credit union executive and lobbyist, I strongly believe that the concept of junk fees and the push to eliminate them is misguided and harmful to the credit union industry.

Small credit unions, in particular, rely on these fees as a source of revenue. Without them, we will have to resort to other measures to generate income, such as increasing interest rates, decreasing services, and even closing down branches. This will have a negative impact on our members, who will have fewer options and face higher costs.

Moreover, these junk fees are not inherently bad. They serve as a deterrent for late payments and other harmful financial practices. Without these fees, we risk encouraging irresponsible behavior that will harm both the credit union and its members.

Additionally, the proposed regulations are too broad and will harm the entire credit union industry. They will stifle innovation and growth, limit our ability to adapt to changing market conditions, and increase compliance costs.

In conclusion, the push to eliminate junk fees is misguided and harmful to the credit union industry and its members. We must resist this push and fight for a regulatory framework that allows us to continue serving our members effectively and efficiently.

Joe

I appreciate your position on the issue. On the point of small credit unions needing this fee revenue, I agree that we must find ways to help them remain viable in an ever more challenging financial world. And making sure they can continue to serve their members, often people with few or no other traditional banking options, is essential.

However, why are we immediately saying no to something which can help people, rather than using it as an opportunity to seek out new forms of revenue, enhancing how the credit union model works for their members and community?

This can be a springboard for innovation, not a new “write to your representative and say no” issue. I also agree that some fees make sense to discourage irresponsible financial behavior.

However, a number of large banks and even other credit unions have taken a no-fee approach, with negligible change in member practices.

Instead of using a stick, let’s devise a carrot to incentivize and empower healthier financial practices.

Then, we’re educating as well as assisting.

Whenever regulations are proposed, a standard refrain is that they are too broad and will stifle growth. To the contrary, such rules would only put limits on what isn’t allowed, not telling anyone you cannot innovate.

In fact, this should be taken as a golden ticket to put our thinking caps on and innovate our way out of the challenges faced. We can watch as new rules are implemented and confidently tell members and non-members, “credit unions don’t believe in such junk fees, and we work every day to help build our members and communities.

Financial wellness is at the core of our being, so while we may not always agree on the regulatory path, we will always be at the front of innovation for finding ways to provide banking opportunities to every American.

ChatGPT

I understand your perspective and I agree that seeking out new forms of revenue and enhancing the credit union model is important. However, the reality is that change doesn’t happen overnight, and the sudden elimination of junk fees could be devastating for some credit unions.

We need to be proactive in finding new sources of income, but it’s not something that can be done overnight without causing harm.

I also agree that we should focus on financial wellness and education for our members, and I commend the idea of incentivizing healthy financial practices. However, this needs to be done in a way that is sustainable for the credit union and its members, without relying on junk fees.

With regards to regulations, I do believe that too many regulations can stifle growth, especially for small credit unions that don’t have the resources to comply with them. The key is to find a balance between protecting consumers and allowing credit unions to serve their members effectively.

Ultimately, I believe that credit unions should strive to provide affordable and accessible financial services to their members. Junk fees may not be the ideal solution, but they are a reality for many credit unions, and eliminating them without a comprehensive plan for sustainability could have negative consequences.

We need to work together to find a better way to serve our members and communities while remaining financially viable.

Joe

Change does not happen overnight, which means we can find a compromise on the rule making as well. How would you feel about rules that take effect over a period of time, giving credit unions, especially smaller ones, opportunity to find those new sources of income?

We can also take a look at the Community Development Financial Institution program to see how it can play a role in assisting the transition for more highly affected credit unions.

In the meantime, members can benefit from reduced costs. This can also be supported by education campaigns for members to help them best understand how to avoid or reduce fees incurred.

At the same time, making fee structures clear can reduce expenses in collection and placement of them in the credit union. Financial wellness is a valuable part of the efforts, as we discussed and agreed upon.

However, you cannot educate everyone out of challenging financial situations.

Thus, we should look to larger social issues and ensure that credit unions have a leading role in helping address the impacts of socioeconomic pressures on affected populations.

Yes, we must find the balance for regulations to be effective in their goal and also not negatively impact credit unions. I believe we can do this while making sure credit unions are shining examples of affordable and accessible financial services.

Junk fees don’t have to be part of that future, even if it takes some time to get there.

ChatGPT

I absolutely agree with you on the importance of finding a compromise on the rule making, especially one that takes effect over time.

This would give credit unions, especially the smaller ones, an opportunity to adjust and find new sources of income. The Community Development Financial Institution program is definitely worth exploring as well.

In addition, the education campaigns are essential to help members better understand the fee structures and how to avoid or reduce fees incurred. Making fee structures clear can also reduce expenses in collection and placement of them in the credit union.

I also agree that credit unions should have a leading role in addressing the impacts of socioeconomic pressures on affected populations. Providing financial wellness and education to our members is important, but we must also recognize that many are facing larger social issues that impact their financial stability.

Overall, I believe that with cooperation and collaboration, we can find a balance between regulations that are effective in their goal and do not negatively impact credit unions.

Our goal should be to continue providing affordable and accessible financial services to all members, without relying on junk fees. We can work together to build a better future for credit unions and their members.

Joe

It appears we have more to agree about than disagree! I hope we can work together to deliver on the mission of “people helping people”, building financial wellness and empowerment for millions. While still ensuring credit unions can keep the lights on.

Thank you for engaging in this discussion.

ChatGPT

I completely agree. It’s always great to have a productive and respectful discussion, especially on an issue as important as this. I believe that by working together, we can deliver on the mission of “people helping people” and build a better future for credit unions and their members.

Thank you for taking the time to discuss this issue with me. Let’s keep this dialogue going and continue to work towards a solution that benefits everyone.

Product Refund Liability: Is Your Institution Exposed? [Guest Post]

Guest post from my business partner and dad, Keith Winn. Written by him, edited by me. It’s a big enough deal I think it’s necessary to share.

Something else to be worried about? Why not? It’s 2020.

In truth, the emerging risk shouldn’t surprise the banking industry. You’re already used to addressing NSF and OD fee class-action suits, ADA legal action, and, oh yeah, the effects of COVID-19. What’s one more thing?

It could be a lot. From a legal and compliance standpoint, this latest challenge could have severe implications for credit unions. Especially large institutions which embrace indirect in their auto loan portfolios.

As a great author once said, Don’t Panic. Let’s start at the beginning.

The Consumer Financial Protection Bureau

In March of 2019, the CFPB issued their Supervisory Highlights. The findings covered “examinations in the areas of automobile loan servicing, deposits, mortgage servicing”. Since we’re talking auto lending, let’s look deeper at why that topic was important to the CFPB.

According to the report, they wanted to review “auto loan servicing activities, primarily to assess whether servicers have engaged in unfair, deceptive, or abusive acts or practices (UDAAPs) prohibited by the Consumer Financial Protection Act of 2010 (CFPA).”

You’re not doing anything unfairly, deceptive, or abusive, right? So why is this even relevant? Digging further, we discover their real reason:

Reviewing “[u]nfair and deceptive practices regarding refunds for certain ancillary products.”

Ancillary Product refunds

Accounting Chart and Calculator
See your charts? That’s why this all needs a system.

Your borrowers do sometimes purchase ancillary products. It’s a great way to build non-interest income while protecting people from the financial effects of unexpected breakdowns, totaled vehicle insurance claim gaps, and more.

These products are financed within the loan. If the borrower later experiences an event such as trading or selling their covered vehicle, or has a total loss or repossession, the servicer (that’s you, the lender) or borrower may cancel these ancillary products.

Following cancellation, the borrower or lienholder would receive prorated refunds of the premium amounts for the unused portion of each product.

In these cases, the loan servicer initiates the cancellation refund with the provider. However, that process wasn’t always completing. The CFPB examiners identified several examples wherein borrowers did not receive the correct refunds on their extended warranties (VSC).

This finding addressed actions after a total loss or repossession.

Refund Issues

In one case, the examiners found the mileage was calculated on the vehicle’s total mileage instead of the actual miles driven by the borrower. Other cases showed that the servicer never requested a refund after the vehicle was reported as a total loss.

The average unclaimed refund was about $1,700.

These missed refunds caused the borrower to have a larger-than-expected deficiency. The CFPB deemed it unfair, calling them instances of UDAAP.

While the CFPB reached agreements and set up appropriate resolutions with the lenders and servicers involved, the wheels of future litigation were now in motion.

Which Protection Products?

Blue Umbrella
The issue is about as dizzying.

You offer auto loans. You and your dealers also offer ancillary products which can receive pro-rata refunds. The liability exists. Which protection products? As of publication, the following are worth your attention (keep in mind, others may also apply):

  • Credit Disability Insurance
  • Credit Life Insurance
  • GAP
  • Limited Auto Coverage (Tire & Wheel, Dent & Ding)
  • Vehicle Service Contract

The NADA Reacts

The National Association of Automobile Dealers (NADA) wasn’t sitting idly by. In April of 2019, they released their Voluntary Protection Products Policy (VPPP) (Requires login).

The focus of this new policy was to:

  • Affirm the dealer’s unequivocal commitment to a transparent and professional VPPP process
  • State how the dealership will implement and maintain the policy
  • Identify tasks the dealership will perform throughout the lifecycle of VPPPs. This starts with product selection and moves through a process for:
    • Product pricing, advertisement, presentation, sale, cancellation and, should the need arise, customer complaints

The VPPP is a comprehensive system with specific focus on this topic in Section VII: Product Cancellation. The new policy helps build a methodology to make the offering, sale, and cancellation processes simpler, and more consumer friendly.

However, use of the VPPP is optional. Unlike federally-chartered credit unions, there are no federally-mandated regulations.

Yes, in this case, life is easier for them. There’s no CFPB peeking under the hood. Nor is there any true Federal compliance expectation on the dealership. This, despite the fact they also work with product providers and administrators, as well as loan servicers/lenders.

Based upon previous and current CFPB opinions, agency actions, and overriding state laws, it appears the legal onus for timely and proper refunds on protection products may fall directly to the lender.

Which is why we are all here right now. Because that question is about to be tested.

Class Action: Breach of Contract

Scales with Coins and Clock
Time and money. Isn’t it always?

On July 1st, 2020, a class action lawsuit was filed in Denver, CO. The suit, on behalf of the plaintiff, is against 10 financial institutions, 7 of which are credit unions. Attorneys stated the defendant list may expand to 40, involving, “hundreds, if not thousands, of members.”

What’s at issue?

The allegation includes: “All persons who: (1) entered into finance agreements with GAP Waivers in Colorado that were assigned to (named institutions) (2) who paid off their finance agreements before the end of the original maturity date, and (3) who did not receive a refund of the unearned GAP fees.”

Sidenote: In the state of Colorado, regulations require all GAP waivers sold must be refundable.

They are seeking records going back 6 years. Are you prepared or equipped to pay out that many years of potentially missed refunds?

Going Beyond GAP?

Keep in mind: Refundable GAP may only be available in 14 states, so if your institution is not doing business in one of those states, you will likely not be named in this suit.

However, other products, such as VSC, are generally refundable in all states…so you may not be out of the woods.

Direct or Indirect Loans?

iPhone Calculator and Cash plus Notebook
Step 1: Add numbers. Step 2: Continue reading.

That’s the million-dollar question. Literally. Are the risks higher for one category? Should credit unions consider changing their lending policies?

Direct

Direct lending puts you in control, with lines of communication to the borrower and product administrator. When cancellations arise, that administrator knows the regulations for each of your servicing states, so the process occurs smoothly.

Once notified of an early cancellation by the borrower or financial institution, your administrator processes the refund and forwards it to the lienholder. It is then checked for accuracy, and applied to your borrower’s outstanding balance or as a direct refund.

That’s it. Uncomplicated. No lawyers necessary.

Indirect

Indirect lending is…different. Combine the many dealers in your network with their own providers, which can vary with each protection product. You could end up with hundreds of variables and permutations. In other words, a lot to manage.

After that complexity, what information does your institution get? A buyer’s order. On which you learn the name of the product and the price they charged your borrower.

You’re in the dark and at the same time, potentially exposed to liability. Imagine how that problem can compound with 100, 500, or 1,000 indirect loans each month.

And that’s where a growing list of institutions now find themselves.

Solutions

Rubiks Cube Solved
The easier solution?

Stop Indirect Lending

We realize this is an unlikely and undesirable solution. It doesn’t try to overcome the liability issue, rather, it sidesteps it altogether, reducing exposure moving forward. However, even if you stopped indirect lending today, you’d still have potential liability from previous years.

So even as a nuclear option, it’s still incomplete. Being ready to address the liability remains essential. Which leads us to…

Build a Process

Tracking these cancellations and earned refunds for all products in your loan portfolio (even when not your own) is a challenge. And it requires a process. Unfortunately, building this indirect “system” will not be quick, easy, nor cheap.

Your institution would need to invest in building a tracking platform with ongoing resources to ensure the timeliness and accuracy of refunds. Spell out dealer responsibilities in your agreements. Consider filtering out certain dealers (based on their product offering) to keep the workload lower.

That’s on top of maintaining your ongoing dealer relationships.

Of course, now your institution must account for these increased costs. Without any more income. Since these products are not your own, the only profit is from interest on the amount added to the loan. How are institutions handling this quandary?

One lender launched a “product return” fee, assessed against the dealer reserve at the loan origination. Is that strategy for you? We cannot say.

Subscribe to a 3rd Party Service

Unfortunately, even if your institution already subscribes to an indirect loan service, they may not currently have the technology to keep you out of this or similar class actions.

Since this is an emerging issue which will likely affect institutions across the country, we can make two “assumptions”:

  1. Indirect loan platforms are building solutions
  2. These solutions will be available at an unknown cost to your institution soon

Other “stand-alone” solutions may be available. We know of at least one company which claims to handle indirect-based product cancellation tracking and fulfillment. Contact your current vendor to see how their product lineup can help protect you.

Take Steps to Protect Your Institution Now

Knight Armor
Chivalry and swords stuck in stone. You know the drill.

The importance and impact of the CFPB actions, alongside the ongoing class-action cannot be over-emphasized. Auto loan protection products play an essential role in reducing risk for borrowers and lenders. Now, they can also become an unexpected cost to your institution.

All lenders need to take a close look at the CFPB actions as well as emerging class action suits. If you’re involved in indirect lending, attention today is even more crucial.

Begin researching the systems and process needed to address this new challenge. Then create a path for your financial institution to become (and remain) compliant, while ensuring fairness to borrowers.

To stay current on topics important to your position and the institution as a whole, be sure to Subscribe to the Learning Library. They dive deep into a wide range of protection services, highlighting risks and concerns you likely never considered.

Plus, find new ways to better serve borrowers while growing non-interest income. All that with just an email. So until next time, keep it honest!

It’s About The Members, Remember? (Payday Lending)

Update 8/31/18: A reader graciously made me aware of an NCUA program empowering credit unions to provide payday lending alternatives. It is used by a bit over 500 credit unions and discussion is invited from institutions on how to evolve it in the future.

See more direct from NCUA. Looks like a great opportunity to keep your members out of the payday lending debt cycle.

Originally published on CUInsight.com

This post is a continuation of “Your Mission Demands It“.  We’re focusing on payday lending and how its very existence should sadden all credit union supporters.

Credit. And. Union.

Your credit union members are everything to the institution.  Literally.  Without them, you’re not a credit union.  You’re a credit.  With no credit.  So I think it is important to bring to light the topics which are affecting members that others might have missed.  And then, how you can help fulfill your mission…you know, serving your members (even those who may not yet have a credit union relationship)!

Today, let’s have a little talk about payday lenders.  For many people in this country, they’re the closest thing they have to a bank.  Of course, you know the cost of such an arrangement. Or maybe not.  Spoiler: It’s substantial.

Some users understand this, unfortunately, they don’t have much of a choice, or they prefer the instant exchange of check for cash. It’s a big industry, with $38.5 billion in volume in 2009 (yeah, I know, I couldn’t find a newer figure…assistance?).

As of 2017, the industry collects $9 Billion (that’s billion with a B) in fees each year.  What does your credit union charge for depositing a check? And for cashing it? Not a gazillion dollars?  That’s what I thought.

Financial Insecurity Costs

Needless to say, payday lenders are commonplace for people without financial security. You read studies which mention them as living paycheck-to-paycheck. This means all their necessities are paid in the moment, and they hardly ever get ahead of debts.

Remember how I’ve said it’s expensive to be poor? Payday lenders provide the service of speed. When rent, electric, water, and car payments are all due, while the refrigerator and pantry are both empty, money from one check buys another week/month of security.

Getting that money as quickly as possible is essential. At that point, giving up some in the form of interest rates or fees is a small price to pay to keep the water running.

Not surprisingly, usage of payday lenders is rare for those with more financial security. If you have disposable income and savings, and a place your money can reside, why pay someone else massive interest rates to get only some of it in cash?

Piling the Expense. Over and Over.

A person who goes to payday lenders is likely to use them repeatedly. The average is 8-10 transactions per year, where 80% of them are re-borrowed within a month, with 25% building fees greater than what they received in credit. These can be at over 900% APR.

What’s your ceiling unsecured loan rate? Anyway, this isn’t illegal. Well, it is for members of the military, as Congress banned them (for being too financially dangerous) during the George W. Bush years.

But for everyone else, all’s good here. And these companies aren’t considered predatory lenders. But not for the reasons you may think.

Pre-2017 CFPB: The Actions

Remember the CFPB? While under the leadership of Richard Cordray (pre-2017), they looked at payday lenders to better understand if this rapidly growing industry was harming its customers. In October of 2017, they released a rule to help people avoid falling into payday lender debt traps.

It required lenders to determine upfront whether people could afford to repay their loans. Along with a number of other consumer-safety focused policies, it took 5 years to develop, using insights from more than 1 million public comments.

For the unbanked, it was good policy. In the case of consumers who truly needed this service, it presented an enormous opportunity for credit unions to step in and offer fair services for these people.

Post-2017 CFPB: The Inactions

But 2017 came around and Cordray was out and Mick Mulvaney was in. This rule was immediately scrapped. Entirely unrelated, Mulvaney took over $60,000 in campaign contributions from payday lenders.

He also dropped an investigation into one of the largest payday lenders that had been ongoing within CFPB for years before his entry. They also were Mulvaney campaign contributors.

Insulated from investigation or regulation, the payday lending industry is booming. Which means more people who can’t afford to pay are now paying outrageous fees to access their money. They’re just like the credit union movement, except without all of the core principles.

Credit Unions Speak Out…Right?

So, in pursuit of their missions, credit unions have been quick to speak out in support of the unbanked and the prior efforts of the CFPB, right?

Oh, you don’t hear anything, either?

I have heard a lot of grumbling over CFPB regulatory compliance challenges. And you’re right, most credit unions should not be subjected to the same regulatory burden as JP Morgan Chase.

But where is the speaking out for people whose lives are dictated by the debt they accumulate with these payday lenders?

Credit unions can be an enormous voice for “the little guy”. Besides it being the right thing, people who use payday lending are probably enormously profitable potential members of your credit union. And you’ll never hit them with 900% APR.

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