CFPB Proposes Revisions to Overdraft Lending Rules to Reduce Junk Fees
Commentary by Steven Lofchie
The CFPB proposed revisions to overdraft lending rules to ensure that consumer credit protections apply to overdraft credit provided by very large financial institutions. The CFPB stated that the proposal would save consumers "billions each year in junk fees."
The CFPB proposal would amend Regulation E ("Electronic Fund Transfers") and Regulation Z ("Truth in Lending Act") by updating regulatory exceptions for overdraft credit provided by very large financial institutions. The CFPB stated that these institutions include banks and credit unions with more than $10 billion in assets. The CFPB argued that these institutions typically charge $35 for an overdraft loan when the majority of the debit card overdrafts are "for less than $26 and repaid within three days."
The CFPB stated that the proposal is intended to "close an outdated loophole that exempts overdraft lending services from longstanding provisions of the Truth in Lending Act" along with other related consumer financial protection laws. The proposal would categorize "above breakeven overdraft credit" as "covered overdraft credit," thus bringing it under the purview of Regulation Z. Under the proposal, these institutions could continue to charge overdraft fees if they disclose applicable interest rates and comply with other consumer lending rules, or they could charge a fee to recoup their costs at an established benchmark of $3, $6, $7 or $14 fees in order to reduce "junk fees" on consumers.
Comments on the proposal are due by April 1, 2024. The CFPB stated that it expects to implement a final rule by October 1, 2025, thereby providing extensive time for implementation.
Statements
CFPB Director Rohit Chopra argued that the new overdraft lending rule would address the shift that happened from modest overdraft fees to a significant profit-making scheme for large banks. He (i) pointed out past abusive practices by banks that exploited loopholes for excessive fee revenues, (ii) underlined the rule's aim to improve transparency and fairness and (iii) supported treating overdrafts similarly to other credit products.
Patrick McHenry (R-NC) Chair of the House Financial Services Committee and Andy Barr (R-KY) Chair of the Subcommittee on Financial Institutions and Monetary Policy criticized the CFPB's proposed overdraft rule, arguing that "one-size-fits-all consumer financial products and services diminish financial inclusion, limit consumer choice, stifle innovation, and ultimately raise the cost of banking for all consumers." They asserted that the proposal would "further reduce access to the short-term liquidity products that millions of Americans rely on to help make ends meet" and urged "the CFPB to withdraw this misguided proposal that harms the very consumers the agency was created to protect."
Commentary
It would be interesting to know how the CFPB determined that $3 could be an acceptable fee amount. Such a fee would require an assumption that no time of a bank employee is spent on overdrafts or else that the fee amount is not expected to cover the bank's costs.
Will the end result of the rule proposal be to hit bank pocketbooks and benefit consumers (as the CFPB Director contends), or will the result be that banks are less willing to carry accounts that become subject to overdrafts? This is an important empirical question, not just as to this particular rule, but as to other rules that may be intended to protect customers, but whose impact cannot be really predicted. If the proposal goes forward, the CFPB should do so in conjunction with a plan to test its results.