When New York governor Andrew Cuomo was preparing to leave office, one of his final actions was to sign into law the requirement that New York state chartered banks pay consumers’ checks in the order in which they are received, or from the smallest to largest dollar value on each business day. The opposite approach, meaning paying the largest value check first can create more overdraft transactions, typically creating more fee revenue for banks and more charges for consumers. This anti-consumer approach was a strategy that some consultancies were promoting in the 1990’s and early 2000’s to financial institutions. The consultant would take a cut of the increased revenue generated. Most banks no longer use this tactic, plus the use of checks has plummeted, so the actual impact will be modest, but the topic of overdrafts is front and center with federal regulators and legislators. As an article in the American Banker outlined, check clearing order is a topic being pursued in Washington D.C. along with:
- The amount of overdraft fees charged
- The types of transactions permitted to overdraw an account
- The order of payment for all transaction types, not just checks.
Heres’ an excerpt from the article:
In Washington, pressure on overdraft fees from Democratic lawmakers has been mounting. In May, Sen. Elizabeth Warren, D-Mass., criticized JPMorgan Chase CEO Jamie Dimon for collecting overdraft fees during the pandemic. A month later, Rep. Carolyn Maloney, D-N.Y., reintroduced a bill that would prevent banks from reordering customers’ transactions, limit the number of times banks can collect overdraft fees and ensure that the fees charged are “reasonable and proportional” to the overdraft itself.
The Office of the Comptroller of the Currency is currently conducting a review of banks’ overdraft practices, acting Comptroller Michael Hsu told the Senate Banking Committee at a hearing this month.
Hsu also described an interagency effort to address what’s known as the “$35 coffee” problem, which refers to consumers who make small-dollar purchases that cause overdrafts and lead to large fees.
“Excessive fees on overdrafts, predatory lending, high-cost debt traps — all these things should be prohibited. They don’t have a place in the federal banking system,” Hsu said during the committee hearing on Aug. 3. “We are looking very closely at overdrafts right now.”
Meanwhile, the Consumer Financial Protection Bureau is “continuing to closely monitor developments” in the overdraft market, which “has the potential to be very costly to consumers,” a CFPB spokeswoman said.
The CFPB, which is currently being led by acting Director Dave Uejio, has made no changes yet. President Biden’s pick to lead the agency, Rohit Chopra, awaits confirmation.
The outcome of the OCC review has the potential to be a game-changer regarding overdraft fees, according to Pew’s Horowitz.
“That could be consequential,” he said. “In the near term, that’s something that could have a big impact because the largest banks in the country are OCC banks, and they have the most customers.”
What happens at the CFPB is also important, according to Horowitz. He said that meaningful CFPB action on the issue of reordering transactions would “accelerate the benefits to consumers and help households that are living paycheck to paycheck.”
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group