COMMENT CALL: The Consumer Financial Protection Bureau (CFPB) has proposed a rule that would limit overdraft fees at the largest U.S. banks and credit unions.
The basics of the proposal
The proposal, which would not take effect until at least late 2025, would give the nation’s biggest banks and credit unions options for setting fees when they pay a transaction that would otherwise overdraw a consumer’s account:
- They could charge a break-even fee — based on their costs — or a benchmark fee determined by the CFPB. The agency has proposed to set a benchmark fee of either $3, $6, $7 or $14, which would not require financial institutions to calculate their own costs and losses for providing overdraft services. The CFPB calculated how much it would cost to cover costs and losses based on data collected from various financial institutions, resulting in those four proposed benchmarks. The CFPB is seeking comment on which of the benchmarks is appropriate.
- Alternatively, banks and credit unions could treat overdraft protection as a line of credit, subject to the same consumer protections as credit cards under Truth in Lending Act, including disclosures of annual percentage rates.
Rule would apply directly only to the biggest institutions
The proposal would apply only to institutions with assets of $10 billion or more, a category that includes roughly 175 of the nation’s more than 9,000 banks and credit unions. Those large providers collect about two-thirds of all overdraft fee revenue, the CFPB said. Banks and credit unions with less than $10 billion in assets would be exempt.
No Wisconsin credit unions have more than $10 billion in assets, and so the rule would not directly impact League members.
However, The League anticipates that smaller credit unions would feel market pressure to conform to the new rule’s standards and cap their overdraft protection fees.
The CFPB’s justification for the rule
The new proposal is another in a series of CFPB initiatives targeting what it calls “junk fees.”
“Decades ago, overdraft loans got special treatment to make it easier for banks to cover paper checks that were often sent through the mail,” said CFPB Director Rohit Chopra. “Today, we are proposing rules to close a longstanding loophole that allowed many large banks to transform overdraft into a massive junk fee harvesting machine.”
Banks and credit unions collected more than $15 billion in overdraft and non-sufficient fund fees in 2019, according to the CFPB. But a growing number of banks and credit unions have eliminated overdraft fees and others have voluntarily stopped charging non-sufficient fund fees in recent years. (Overdraft fees are charged to temporarily cover a transaction when consumers overdraw their accounts. Non-sufficient fund fees are charged when an institution declines to pay an item that would result in a negative balance on an account.)
“We’re proposing a rule that would establish clear, bright lines and ensure customers know what they are getting when it comes to overdraft,” Chopra said. “Right now, overdraft lending is one of the only types of consumer loans where consumers are not told an APR or given lending disclosures.”
Industry reactions
The League opposes the CFPB’s proposal, along with our national counterpart, America’s Credit Unions (formerly NAFCU and CUNA, which recently merged).
League president Brett Thompson said, “These are highly regulated and clearly disclosed fees. This rule would only make it harder for credit unions to offer overdraft protection to consumers who need it, especially in today’s tough economy.”
Jim Nussle, the chief executive of America’s Credit Unions, said the new rule would threaten “a lifeline many consumers in financial distress rely on to make ends meet.”
America’s Credit Unions and two national bankers’ trade groups jointly sent the CFPB a letter this month urging it to convene a small-business review panel to comment on the rule, a step the CFPB is required to take before it adopts regulations that could substantially affect small companies. “Regardless of which banks are directly subject to the bureau’s rule, all banks would face market pressure to conform their practices to the bureau’s rule,” the trade groups wrote. However, the CFPB refused to convene that panel, because its rule would directly apply only to large banks and credit unions.
Make your voice heard
The League will comment in opposition to the CFPB’s proposal, but we need your help. Please take some time to review the proposal and share your feedback with us. What would you like the CFPB to know about the impact this rule might have on your operations and on your members? The more specific you can be, the more influence our comments will have.
Please share your thoughts with Paul Guttormsson by March 25, so that our comment letter (which is due April 1) can reflect your views.