WASHINGTON –Some 142 consumer, civil rights, military, legal services, and community groups have submitted comments in “strong support” of the Consumer Financial Protection Bureau’s (CFPB) proposed rule governing the overdraft lending practices of the largest financial institutions.
Credit unions are opposed to the CFPB’s efforts amid a broader crackdown on “junk fees” (see related story).
The National Consumer Law Center also submitted a longer, more detailed set of comments. The groups say that by closing an outdated loophole designed in the check era, the proposed rule will promote more honest, fair, and affordable forms of overdraft coverage and “prevent big banks from charging junk fees that push people out of the banking system.”
“Banks should not be allowed to harm families by hiding their costs in back-end junk fees,” said Carla Sanchez-Adams, senior attorney at the National Consumer Law Center. “We strongly support the proposed rule, which will provide consumers with needed financial relief and help to restore trust in big banks.”
‘Punitive’ Figure
The groups said big banks typically charge $35 for each overdraft, which they described as a “punitive amount far in excess of the minimal cost to the financial institution of covering an overdraft. Banks also engage in practices that cause overdraft fees to snowball, discouraging some people from keeping money in a bank and causing others to lose their bank accounts.”
In a statement, Adam Rust, director of financial services for the Consumer Federation of America, said, “It’s one thing to charge a fee to recover a cost, but quite another to gouge consumers for honest mistakes. Because of a loophole, too many banks have become accustomed to profiting from overdrafts. The CFPB’s proposal restores balance and should underscore how banks have been granted charters to make loans, facilitate payments, and hold deposits, and not to extract profits from the public through inflated junk fees.”
What Proposal States
Under the CFPB proposal, as long as financial institutions charge a modest “benchmark” fee set by the Bureau or a breakeven fee that covers the FI’s costs, they could still offer overdraft services without complying with credit laws.
For higher-priced overdraft credit, very large financial institutions would have to comply with the protections of the Truth in Lending Act and, for hybrid debit-credit cards, with the credit card protections.
“We urge the CFPB to set the benchmark fee at $3. Rather than deterring overdrafts, high fees give banks incentive to push people into overdrafting,” said Sanchez-Adams of NCLC. “Banks that price their accounts transparently, using a breakeven fee instead of imposing abusive overdraft fees, will have an easier time competing with banks that hide costs in back-end junk fees.”
Focus Moves to Smaller FIs
The groups added they believe the CFPB “appropriately started” with the biggest banks, but they are calling for the CFPB to issue a subsequent rulemaking to cover smaller institutions.
“While it may take more time for the CFPB to collect the data it needs to propose a similar rule for smaller financial institutions, the CFPB should collect data and monitor overdraft practices at smaller institutions and plan for future rulemaking,” the groups said.
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