WASHINGTON—In a move that could have far-reaching implications for the market and overdraft fees, the Consumer Financial Protection Bureau has proposed a rule it said is designed to “rein in excessive overdraft fees” charged by the nation’s biggest financial institutions, and is proposing benchmarks of $3-$14 per overdraft.
The proposal applies to institutions of $10 billion or more in assets, which would affect approximately 21 credit unions.
Some of the nation’s largest banks have already significantly reduced their overdraft fees, finding other ways to make up the fee income. As CUToday.info has been reporting, credit unions and other financial providers have been waiting to see what the CFPB had planned.
“The proposal would close an outdated loophole that exempts overdraft lending services from longstanding provisions of the Truth in Lending Act and other consumer financial protection laws,” the CFPB said. “For decades, very large financial institutions have been able to issue highly profitable overdraft loans, which have garnered them billions of dollars in revenue annually. Under the proposal, large banks would be free to extend overdraft loans if they complied with longstanding lending laws, including disclosing any applicable interest rate. Alternatively, banks could charge a fee to recoup their costs at an established benchmark – as low as $3, or at a cost they calculate, if they show their cost data.”
America's CUs Criticize Proposal
The national credit union trade group blasted the CFPB proposal.
“The CFPB has deliberately exceeded its intended purpose at the expense of the hardworking Americans they claim to protect,” said America’s Credit Unions CEO Jim Nussle in a statement. “Its latest overdraft fee proposal is another devastating blow to working class Americans as it takes away a lifeline many consumers in financial distress rely on to make ends meet. We have worked tirelessly to ensure our credit union members can provide the services their members need when it comes to their financial planning and goals when opting into these products. The Bureau must be held accountable for its war on American families and Main Street America.”
America’s CUs further said in bullet points it released that:
- Overdraft is an optional product and consumers are not being forced into it—they’re making a choice to use it because it benefits them and they are aware of the cost.
- The overall junk fees effort, purportedly intended to help consumers, is instead, perversely pushing consumers away from relationship banking institutions like credit unions into potentially riskier providers.
‘Junk Fee Harvesting Machine’
In a statement, CFPB Director Rohit Chopra added, “Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper checks that were often sent through the mail. Today, we are proposing rules to close a longstanding loophole that allowed many large banks to transform overdraft into a massive junk fee harvesting machine."
The proposed rule would apply to insured financial institutions with more than $10 billion in assets, which covers approximately the 175 largest depository institutions in the country. These institutions typically charge $35 for an overdraft loan, even though the majority of consumers’ debit card overdrafts are for less than $26, and are repaid within three days, according to the Bureau.
“Approximately 23 million households pay overdraft fees in any given year,” the agency said. “The CFPB estimates that this rule may save consumers $3.5 billion or more in fees per year. The potential savings would translate to $150 for households that pay overdraft fees.”
Big Changes Since 1968
Much has changed since1968 when Congress enacted the Truth in Lending Act and included an exemption related to overdrawn accounts, according to the CFPB.
“However, in the 1990s and early 2000s, with the rise of debit cards, institutions began raising fees and using the exemption to churn high volumes of overdraft loans on debit card transactions. Annual overdraft fee revenue in 2019 was an estimated $12.6 billion. And, in 2022, Wells Fargo and JPMorgan Chase led the way – accounting for one-third of overdraft revenue reported by banks over $1 billion,” the CFPB said.
“Recent policy changes at some banks have lowered overdraft fee revenue to about $9 billion per year,” the Bureau continued in its statement. “The policy changes followed enforcement and supervisory efforts by the CFPB to root out illegal overdraft practices, such as charging fees to consumers who had enough money in their account to cover the transaction at the time the bank authorized it.
To be Treated Like Loans
Under the CFPB proposal, very large financial institutions to treat overdraft loans like credit cards and other loans as well as to provide clear disclosures and other protections. Many banks and credit unions already provide lines of credit tied to a checking account or debit card when the consumer overdraws, the agency said, adding the proposal provides “clear rules of the road to ensure consistency and clarity.”
The CFPB said it is also proposing to limit the longstanding exemption to overdraft practices that are offered as a convenience, rather than as a profit driver. The proposed rule would allow financial institutions to charge a fee in line with their costs or in accordance with an established benchmark. The CFPB has proposed benchmarks of $3, $6, $7, or $14 and is seeking comment on the appropriate amount.
Additional Details
For additional information:
- Read the text of the CFPB’s proposed rule, Overdraft Lending: Very Large Financial Institutions.
- Read the Unofficial Redline of the Overdraft Lending: Very Large Financial Institutions Proposed Rule.
Comments must be received on or before April 1.
- Read the CFPB’s fact sheet on the proposed rule.
- Read the CFPB’s research report, Overdraft and NSF Practices Report.
- Read Director Chopra’s remarks on the proposed rule.
- Read more about the CFPB’s work on junk fees.
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