On Wednesday, the Consumer Financial Protection Bureau (CFPB) proposed a rule to curb excessive overdraft fees charged by the nation’s largest financial institutions.
The Overdraft Notice of Proposed Rulemaking (ONPR) “would close an outdated loophole that exempts overdraft lending services from longstanding provisions of the Truth in Lending Act and other consumer financial protection laws.”
Under the proposed rule, overdraft services offered by banks and credit unions with more than $10 billion in assets would be subject to the same regulations as other types of consumer loans, including disclosing any applicable interest rates. The CFPB found that customers are “typically charged $35 for an overdraft loan, even though the majority of consumers’ debit card over drafts are for less than $26.”
Excessive Fees
In the CFPB’s 2023 Making Ends Meet survey, more than a quarter of consumers said that someone in their household was charged an overdraft fee or NSF fee within the past year, and 43% were surprised by their most recent account overdraft. Many consumers who were charged overdraft fees had access to a cheaper alternative, such as available credit on a credit card.
Banks and credit unions usually charge an overdraft fee to cover a deposit account holder’s debit transaction even though the customer does not have enough money in their account. The CFPB asserts that overdraft coverage is a loan to the customer, similar to credit cards, and should therefore be subject to the Truth in Lending Act, which requires disclosure of all applicable costs.
“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,” according to the CFPB. Some large banks have lowered or gotten rid of overdraft fees in recent years. For example, Bank of America reduced overdraft fees from $35 to $10 in 2022, and Ally Bank eliminated such fees in 2021. Despite the modifications in overdraft practices that reduced overdraft revenue to roughly $9 billion a year, the CFPB contends the changes are not enough.
The ONPR would require applicable financial institutions to treat overdraft loans like credit cards and other loans. Alternatively, banks could offer overdraft services as a “convenience” to customers, and charge a fee in line with their costs, which can be as low as $3. In a statement, President Biden called exorbitant overdraft fees “exploitation,” and said the new proposed rule is “just one part of my Administration’s broader plan to lower costs for hardworking families.”
Banks Warn of the Rule’s Potential Harm to Consumers
Financial institutions, large and small, are reacting to the CFPB’s proposed rule. American Bankers Association president and CEO Rob Nichols warned in a statement that: “The proposal would make it significantly harder for banks to offer overdraft protection to customers, including those who have few, if any, other means to access needed liquidity. The CFPB is effectively proposing to take away overdraft protection from consumers who want and need it.”
In a separate statement, Consumer Bankers Association president and CEO Lindsey Johnson said, “If enacted, this proposal could deprive millions of Americans of a deeply valued emergency safety net while simultaneously pushing more consumers out of the banking system.”
Credit union leaders argue the CFPB’s proposal would put all credit union overdraft programs at risk. Virginia Credit Union League President/CEO Carrie Hunt also released a statement noting: “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. 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.”
