WASHINGTON–Consumer groups wasted little time in responding positively to the new CFPB proposal related to overdrafts, while credit unions are strongly criticizing the plan.
As CUToday.info reported here, 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 Bureau called overdrafts a “junk fee harvesting machine.”
The proposal seeks to close a regulatory loophole that has permitted financial institutions to offer overdraft services but exempted them from prohibitions in the Truth in Lending Act (TILA).
The proposal applies only to institutions of more than $10 billion in assets; approximately 21 credit unions are above that threshold.
A ‘Devastating Blow’
“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.
Virginia League: Proposal ‘Endangers’ Overdraft
In addition, the Virginia Credit Union League issued a statement in response to the proposal (there are two CUs of more than $10 billion in Virginia) saying the plan is a threat to the ability of credit unions to offer overdraft programs.
"We are working our way through the 200-plus page proposed rule, but our initial take is this: While the rule targets institutions with more than $10 billion in assets, the realities of the marketplace mean that overdraft programs at all credit unions are endangered," said League President/CEO Carrie Hunt. "We know that credit unions have responsible programs that provide members a valued service at a reasonable cost. CFPB again misses the point that not all fees are abusive. They are the cost of doing business and can be a deterrent.
“We remain deeply concerned about the legislative and regulatory headwinds credit unions are fighting when it comes to non-interest income," continued Hunt. “With (the) CFPB proposal, pending action by the Federal Reserve Board on debit card interchange fees, and an ongoing legislative battle on credit card interchange fees, every credit union needs to understand that the risk to the credit union model continues to rise and their engagement on the advocacy front is critical."
Consumer Groups Strongly Support Proposal
Two of the nation’s largest consumer groups have taken an opposite position from credit unions when it comes to the proposal.
“For too long, financial institutions have profited from our financial insecurity, earning billions from high fees that bear little or no relationship to the actual cost of an overage,” said Adam Rust, director of financial services for the Consumer Federation of America. “A bank charter is a privilege, not an excuse to rip people off.
“Banking is supposed to be about making loans, taking deposits, and facilitating payments, but at some point, some banks decided it was also about charging junk fees,” Rust continued. “The CFPB’S proposed rule restores balance in the relationship between consumers and their financial institutions.
The CFA added the CFPB proposal gives financial institutions a choice, stating, “…if a bank wants to make obscene profits on overdraft fees, then the service will be regulated as credit, but if it keeps prices to a reasonable and proportional level, it has a safe harbor.”
Praise from NCLC
The National Consumer Law Center also praised the CFPB proposal.
“We applaud the CFPB for working to stop big banks from profiting off overdraft fees that punish families for being financially insecure,” said Carla Sanchez-Adams, senior attorney at the NCLC. “Overdraft fees are a hidden form of high-cost credit, a junk fee, far higher than banks’ cost of covering an overdraft.”
The organization noted that even though some banks and credit unions have chosen to eliminate or reduce overdraft-related fees, consumers still pay about $9 billion a year in overdraft fees, costing an average of $150 a year for families that pay overdraft fees, according to the CFPB. More than a quarter of consumers told the CFPB that someone in their household was charged an overdraft fee within the past year.
The NCLC further noted that lower-wage workers, young people, people of color, and other financially strapped consumers pay a disproportionate share of overdraft fees.
‘Manipulative Practices’
“Banks could cover overdrafts for free as a courtesy, which some do, or could offer and encourage their customers to choose lower cost overdraft coverage. Instead, too many large banks use manipulative practices to push extremely high-cost overdraft fees that disproportionately impact their most vulnerable customers,” Sanchez-Adams added. “Overdraft fees arose in the check era, but have evolved into a way of extracting profits from those least able to bear those costs. The CFPB rule would save consumers $3.5 billion and eliminate outdated exemptions for exploitative fees.”
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