On January 17, 2024, the CFPB proposed a 211-page rule to limit overdraft fees charged by the nation’s biggest financial institutions. The proposal is intended to close what the CFPB calls a loophole that exempts overdraft lending services from longstanding provisions of the Truth in Lending Act and other consumer financial protection laws.
The CFPB stated that very large financial institutions have been issuing highly profitable overdraft loans, resulting in billions of dollars in revenue annually. Under the CFPB’s new proposal, large banks would be free to extend overdraft loans if they complied with longstanding lending laws, including disclosing any applicable interest rate. Alternatively, banks could charge a fee to recoup their costs at an established benchmark – as low as $3, or at a cost they calculate, if they show their cost data. The proposed rule would require very large financial institutions to treat overdraft loans like credit cards and other loans to provide clear disclosures and other protections. The proposal provides clear rules to ensure consistency and clarity.
In addition, the CFPB is proposing to limit the longstanding exemption to overdraft practices that are offered as a convenience, rather than as a profit driver. The proposed rule would allow financial institutions to charge a fee in line with their costs or in accordance with an established benchmark. The CFPB has proposed benchmarks of $3, $6, $7, or $14 and is seeking comment on the appropriate amount.
The proposed rule would only apply to financial institutions with more than $10 billion in assets. CFPB research shows that these institutions typically charge $35 for an overdraft loan, even though the majority of consumers’ debit card overdrafts are for less than $26 and are repaid within three days. The CFPB estimates that this rule may save consumers $3.5 billion or more in fees per year. The potential savings would translate to $150 for households that pay overdraft fees. The CFPB analysis states that recent policy changes at some banks have lowered overdraft fee revenue to about $9 billion per year.
The CFPB was quick to point out that these policy changes only followed enforcement and supervisory efforts by the CFPB to root out illegal overdraft practices, such as charging fees to consumers who had enough money in their account to cover the transaction at the time the bank authorized it.
Overdrafts are a continued focus of both the CFPB and the Biden Administration. And because of that, all agencies and regulators have made it a point to review and understand overdraft practices at the institutions they manage. Regulators have also signaled that authorized positive/settle negative, as well as Representment fees, are a supervisory priority for 2024.
If you have any questions, please feel free to enter them into the forum or reach out to us at support@mycomplianceresource.com. Or if you’d like to brush up on best practices, I hosted a training session in September 2023 on Overdraft Fees and Their Risk to Your FI which you can find here.