WASHINGTON—Legislation has been introduced in the U.S. Senate that would curtail the ability of banks and credit unions to impose overdraft fees on customers and members.
The Stop Overdraft Profiteering Act of 2018, a bill drafted by Sen. Cory Booker (D-NJ) and Sherrod Brown (D-OH), would prohibit overdraft fees on debit card and ATM transactions. FIs would still be able to levy overdraft fees on check-based transactions, but the number of charges would be limited and FIs would be prohibited from resequencing checks in order to maximize fees
The bill, if passed into law, would certainly influence financial institutions’ decisions regarding offering overdraft services, predicts one overdraft expert.
Michael Moebs, economist and CEO at Moebs $ervices, said are two unintended consequences of the bill, S.3343.
“Foremost those who will be hurt the most by this legislation are low-to-moderate income consumers, since the options of using banks, thrifts and credit unions for overdrafts could be taken away,” said Moebs, noting that many FIs would discontinue offering ODs if the bill became law, and some might stop due to the threat of the legislation itself. “This bill, too, could easily put tens of thousands of depository workers out of a job by eliminating a key revenue stream to depositories’ bottom lines.”
Other provisions of the legislation include:
- No overdraft (OD) fee allowed for one-time debit card or ATM transactions
- Three-day waiting period after opening a checking account to offer OD protection
- Consumers would be limited to one OD per month and six ODs per year
- Restrictions on overdraft pricing to OD cost plus cost of funds for the OD transaction
- The Bureau of Consumer Financial Protection would determine OD price with help from Fed, OCC, FDIC and NCUA
- No ODs for debit holds
- If an overdraft is repaid, the consumer cannot have OD activity reported to consumer reporting agencies
- Depositories offering OD protection must give reason for suspending or terminating OD protection
“The first few lines of this bill are key: ‘Amend Truth in Lending,’” said Moebs. “This bill wants all overdraft provisions of Truth in Savings (Reg DD) and Electronic Funds (Reg E) moved to Reg Z-Truth in Lending, and Reg Z changed. Since overdrafts are considered credit but not a loan, how will overdrafts under Reg Z be determined?”
43 Million Americans Use ODs
Moebs pointed out that more than 43-million Americans use banks, thrifts, credit unions, and payday lenders to cover shortfalls in their personal financial positions between paychecks. According to data from the Federal Reserve, depository call reports, and Moebs $ervices surveys of over 3,700 financial institutions, there was $33.6 billion in OD revenue for the 12 months ending March 31, 2018 for all banks, thrifts and credit unions – this excludes $7-$10 billion in revenue from payday lenders.
“This same data shows over 1.1 billion overdraft transactions for the year ending March 31, 2017. This is down 21% in the past 10 years due to greater technology to assist consumers with ODs and access to transaction account balances, and an increase in debit card use over paper check systems,” Moebs explained.
While some experts have stated the bill does not have a strong chance of being passed into law, Moebs said if the legislation were passed with no changes, the overdraft options consumers have would be substantially reduced.
“Meaning, if overdrafts were eliminated or substantially reduced, consumers would go more to payday lenders for title loans on cars, or home equity loans on homes,” he said. “The big winner would be loan sharks. The cost of making a loan for banks and credit unions is much higher than for payday lenders and Fintech firms.”
The CFPB was scrutinizing overdraft fees, but it’s been dropped from the agency’s agenda under Acting Director Mick Mulvaney.