Bankers say CFPB overdraft rule harms vulnerable consumers most

Al Drago/Bloomberg

The Consumer Financial Protection Bureau's proposal to set maximum overdraft fees at $14 would force banks to restrict access to low-cost, full-service deposit accounts, hurting precisely the lower-income consumers that the rule is intended to help, bankers say.

In January, the CFPB proposed setting a price cap on overdraft fees at the largest 175 banks, one of a raft of regulatory proposals that are pressuring banks' fee income. The CFPB said it received 48,000 comment letters and among those, banks said they would be forced to restrict credit, impose higher minimum balance requirements and limit the availability of free or low-cost deposit accounts.

"With no meaningful source of revenue to support the cost of deposit products, the most likely outcome would be a retreat from consumer deposit products that benefit lower-income and underbanked consumers as banks simply refocus on lower-risk and higher-margin business lines such as commercial services," wrote Brent Tjarks, executive director of the Mid-size Bank Coalition of America, which represents more than 100 midsize banks. 

The rule, which applies only to financial institutions with assets over $10 billion, would classify overdraft services as extensions of credit and restrict banks from recouping more than their costs. 

"A proposal with the professed goal of improving the financial health of consumers would achieve the opposite result," the American Bankers Association said in a joint comment letter signed by 52 state bankers associations. "It would effectively bring an end to overdraft services for millions of consumers who choose to use the product to cover emergency expenses and other liquidity shortfalls, all to advance the [Biden] administration's political campaign against junk fees."

When the bureau issued its proposal, CFPB Director Rohit Chopra called overdraft fees "a massive junk fee harvesting machine." Several dozen of the comment letters were identical form letters from supporters of the plan that reiterated Chopra's comments. The CFPB has estimated that under its plan 23 million households that pay overdraft fees would save $150 a year.

Bankers have been up in arms about Chopra's campaign against so-called junk fees and the Biden administration's use of the term junk fees — including in the State of the Union address — to appeal to voters ahead of the 2024 presidential election. 

Four students in the master's program in public policy at the University of Virginia signed a letter stating that "overdraft fees have repeatedly taken advantage of Americans, particularly younger ones with less experience in banking."

The letter, signed by Hannah King, Matt Beiger, Kelly O'Connor, and Grace Makin, said that "overdraft fees [have become] a source of profit for banks and credit unions," citing $12.6 billion in revenue from overdraft fees in 2019.

Since then, however, banks have cut overdraft fees by 50% due to pressure from the CFPB and consumers. In 2021, Ally Financial in Detroit was the first bank to scrap all overdraft-related charges. In 2022, when Bank of America slashed overdraft fees to $10 from $35, a ripple effect spread across the industry. Consumers have saved up to $5 billion a year due to the changes, according to the Consumer Bankers Association. 

Despite the major decline in overdraft fees, the CFPB issued a complicated proposal to further rein them in.

It would eliminate the longstanding exemption of overdraft fees from the definition of finance charges in Regulation Z, which in implementing the Truth in Lending Act requires that lenders disclose finance fees upfront and in clear language.

Further, overdraft services accessible by a card would be subject to the Credit Card Accountability Responsibility and Disclosure Act's provisions of Reg Z.

Banks said the proposal threatens consumer-friendly options in overdraft such as sending low-balance alerts, linking a customer's checking account to another account, providing overdraft "grace periods" that allow a customer to make a deposit and avoid a fee, and imposing de minimis caps on total fees that a bank may charge per day. 

"The proposed rule puts this progress into serious jeopardy," wrote Tjarks.

Julie Gliha, vice president of regulatory compliance at the Iowa Bankers Association, said that many consumers desperately need and use overdraft services.  

"Customers consistently express appreciation for this service and feel the fee assessed against the account for this payment is reasonable — especially considering this one-time charge to pay the item helps them avoid merchant fees, late rent or mortgage payments, and provides them flexibility to cover emergencies," Gliha wrote. 

Regulation and compliance

CFPB proposes setting maximum overdraft fees at $14 for largest banks

January 17, 2024 5:00 AM

But the proposed rule does not prohibit overdraft fees entirely, but rather gives large financial institutions two ways to continue charging overdraft fees and avoid the new definition of finance charge and Reg Z disclosures. The first option is to set fees at or below the financial institution's break-even point. A second option is to charge a benchmark fee that would likely be between $3 and $14. The CFPB requested comments on the exemption and what the appropriate threshold should be. 

Bank trade groups also claim that the CFPB had not identified any market failure that requires the regulation and that its reinterpretation of TILA has no support in the statute itself. 

"Banks in general are under unprecedented pressure to reduce nearly all sources of revenue derived from deposit products, from the CFPB's persistent focus on so-called 'junk fees' to the Federal Reserve Board's proposal to curb debit card interchange fees," Tjarks wrote. "Even assuming that the bureau has the authority to redefine 'credit' under the Truth In Lending Act to shoehorn discretionary overdraft services into its scope — a point we do not concede — the one-size-fits-all approach put forth by the bureau will harm the very consumers it is meant to benefit."