Element of TCF's Fee-Heavy Model Comes Under Regulatory Scrutiny

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TCF Financial faces possible legal action from the Consumer Financial Protection Bureau over the way the Wayzata, Minn., company charges overdraft fees.

The $20 billion-asset company disclosed late Wednesday that it faces a potential enforcement action from the Consumer Financial Protection Bureau over the opt-in provisions in its overdraft protection practices. A TCF spokesman said the company is taking steps to respond to the CFPB by the agency's Nov. 23 deadline.

Still, the disclosure brings to the surface investors' longstanding concern that TCF's fee-heavy business model could make it a regulatory target.

"It just creates a level of uncertainty," Chris McGratty, an analyst at Keefe, Bruyette & Woods said.

"The receipt of a letter from the CFPB implies that this issue now moves from a potential investor concern to one that could have more real consequences," Scott Siefers, an analyst at Sandler O'Neill, wrote in a research note to clients. Though TCF has taken steps in recent years to diversify, its "legacy" fee operations remain controversial, he added.

The news also comes at a time when the CFPB has signaled that it plans to make overdraft fees a priority.

The agency in April hit the $121 billion-asset Regions Financial with a $7.5 million fee tied to the Birmingham, Ala., company's overdraft fees. The order — the first of its kind for the CFPB — claimed that Regions had been charging customers who did not opt in for overdraft coverage.

Actions tied to overdraft fees stem from a 2010 rule from the Federal Reserve Board that required customers to opt in for debit card overdraft protection services. That rule was issued as part of a broader initiative to force banks to scale back on excessive consumer fees.

The CFPB in June 2013 also issued a white paper that examined the banking industry's overdraft practices.

"Overdrafts can provide consumers with access to funds, but the growing costs of overdraft practices have the capacity to inflict serious economic harm," CFPB Director Richard Cordray said in the report.

Despite indications that the CFPB was ready to zero in on overdraft policies, some industry observers said TCF's disclosure caught them by surprise.

"It's just a constant battle on the part of these banks to figure out what the CFPB wants them to do," said Robert Clarke, a senior partner at Bracewell & Giulliani and a former comptroller of the currency.

The notification sent to TCF — called a Notice of Opportunity to Respond and Advise, or NORA letter — is a preliminary step before a formal enforcement action. Such notices provide recipients with a chance to respond and make a case to the agency, industry experts said.

"It's a staff-level process," said Nicholas Smyth, a lawyer at Reed Smith and a former enforcement attorney with the CFPB. "Once the institution submits its NORA response, then the [CFPB] staff decides" if it wants to recommend legal action.

More often than not, NORA notifications result in a public enforcement action, Smith said.

TCF, meanwhile, said it is taking steps to address the issues raised in the CFPB's Oct. 29 letter.

"We believe our overdraft 'opt-in' practices comply with all applicable laws and regulations, and we look forward to outlining our position in our response to the CFPB's" letter, TCF spokesman Mark Goldman wrote in an emailed statement.

The threat of legal action comes as TCF has made large-scale changes in its business model to become less reliant on service charges. TCF, which is widely credited with pioneering free checking in the mid-1980s, for years made a large portion of its revenue from fees.

When provisions of the Dodd-Frank Act cut into TCF's interchange revenue from debit cards — a move the company initially fought — management began to make a bigger push into specialty lines of finance.

TCF is generating an increasing percentage of its fees from loan sales and servicing. Deposit charges make up about a third of TCF's fee-based revenue today, compared to nearly half in 2010, based on company filings.

Still, TCF has generated nearly $82 million in overdraft-related service charges this year, or about 9% of its total operating revenue, based on a report from Sandler O'Neill. That amount is "several times higher" than that of a typical bank, Siefers wrote in his client note.

The CFPB's interest in overdraft policies also comes at a critical time for TCF as Bill Cooper, its chairman and chief executive, plans to retire. Craig Dahl, TCF's president, is set to succeed Cooper at the end of this year.

Cooper is expected to remain chairman through 2017.

The CFPB letter is not the first time Cooper has tangled with federal regulators over TCF's fee-heavy strategy. The company filed a lawsuit against the Fed in 2010 over the Durbin Amendment's caps on interchange revenue, arguing that the caps were unconstitutional.

Though TCF dropped the case less than a year later, it firmly established Cooper — and TCF by extension — as an outspoken voice on regulatory matters. Still, most industry observers said it is highly unlikely Cooper's outspoken nature has put his company in regulators' crosshairs.

"I think that would be off base," Smith said. "I think the CFPB has a well-publicized process for picking subjects for its investigations," such as consumer complaints or media reports.

Cooper, in fact, has praised the CFPB in the past for reining in abusive practices in the banking system. "So far, the big boogeyman that [bankers] expected to come out of that thing hasn't come out of it," he said in a 2012 interview with American Banker.

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