Banking and Finance Law Daily Industry responds to CFPB request for feedback on Overdraft Rule
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Monday, July 8, 2019

Industry responds to CFPB request for feedback on Overdraft Rule

By Colleen M. Svelnis, J.D.

Industry associations, consumer groups and a coalition of state Attorneys General have commented in response to the CFPB’s request regarding the Bureau’s review of its Overdraft Rule. The comments concern the analysis of the Rule and its economic impact.

The Bureau has started its first review, pursuant to the Regulatory Flexibility Act, of the overdraft fee amendments to Reg. E—Electronic Fund Transfers (12 CFR Part 1005) that limits overdraft fees on ATM and debit card transactions. The CFPB requested comments on its plans and the Overdraft Rule, including the economic impact of the Rule, effect on smaller entities, and other relevant information. Many comment letters were submitted in response to the Bureau’s request, from a variety of industry associations and consumer groups, as well as a comment letter from 25 state Attorneys General.

The Reg. E overdraft rule was adopted by the Federal Reserve Board in 2009, before the CFPB was created. The Overdraft Rule imposed disclosure requirements on financial institutions that wished to charge overdraft fees and gave consumers the right to reject overdraft services in order to avoid the fees. It was included in Reg. E as republished by the Bureau (see Banking and Finance Law Daily, May 13, 2019).

Serious mistake to rescind. Twenty-five state Attorneys General have submitted a letter to CFPB Director Kathleen Kraninger in response to the Bureau’s request for comment urging the CFPB to keep the Overdraft Rule and to continue "to vigorously enforce" the Rule. The AGs letter called any decision to rescind or roll back the requirements of the Overdraft Rule "a serious and harmful mistake" and stated that there is "no basis to believe that the Overdraft Rule has economically harmed small financial institutions,"

The Overdraft Rule "has enabled consumers to make more and better-informed choices about overdraft services for the limited set of transactions covered, while reducing the overall number of and aggregate amount of overdraft fees substantially for those who have chosen not to opt in to overdraft services pursuant to the Rule," according to the letter. The AGs also pointed out that consumers with frequent overdrafts, "who on average tend to live under more economically and financially precarious circumstances," have benefited particularly from the Rule. The AGs argued that "the fact that the Overdraft Rule appears to have marginally reduced the revenues and profits of many large and small banks because millions of consumers individually chose not to opt in to costly overdraft services is no argument against the Rule. "

The attorneys general further confirm their support for expanding the Overdraft Rule to cover other transactions such as checks and automated clearinghouse transactions, and to require that all overdraft fees be proportional to the amount paid by a bank to cover the overdrawn transaction.

The letter acknowledged the burden on small banks and businesses, but stated "we do not believe that protecting the earnings and profits of financial institutions, whether large or small, should come at the expense of consumers or the stability of the U.S. financial system."

No changes recommended. The ABA recommends no changes to the Overdraft Rule in its comment letter. The comment letter stated that the rule "has empowered customers to make informed and responsible account management choices when seeking, declining, or changing overdraft coverage." According to the comment letter, the regulatory framework established by the Rule "ensures that consumers have the information necessary to make informed choices regarding overdraft." The association also stated that the results of a survey it conducted in June 2019 regarding the overdraft programs of its member banks confirm the association’s view that the Overdraft Rule is "an effective, pro-consumer rule, which ‘should be continued without change’."

The ABA stated in the comment letter that the Bureau and banking agencies should adopt regulatory policies that promote a variety of bank-provided options for consumers to meet short-term liquidity needs; and, in support of that goal, recommend no changes to the rule, "so that those consumers who make an informed choice to use debit card overdraft services continue to have this option."

No additional regulatory requirements. ICBA concluded in its comment letter that "the current regulatory environment coupled with the Rule work in tandem to protect the interests of consumers." Any amendments in the Rule’s compliance requirements "would be onerous and costly for community banks to implement, and counter to the RFA’s purpose of minimizing the economic impact of rules on small entities," according to the letter.

According to the ICBA, overdraft services are an important aspect of community banks’ relationships with their customers. The letter described how the increased regulatory scrutiny of consumer overdraft payment programs has affected many aspects of how community banks and other financial institutions offer these services to consumers, as well as how they monitor and manage these services.

ICBA believes that the Overdraft Rule fulfills the purpose of the Electronic Funds Transfer Act by "enhancing consumer awareness and understanding" of overdraft services and the associated fees and options through the use of the mandated disclosures. The letter stressed that regulatory policy should emphasize consumer choice so that consumers can choose services that are right for them and avoid being locked into an ill-fitting overdraft payment service or program.

ICBA asked the CFPB not to impose any additional regulatory requirements on financial institutions offering overdraft services. Instead, the letter suggested collaborating with other regulatory agencies to:

  • ensure that any regulatory guidance provide financial institutions the flexibility to meet the needs of their customers;
  • provide compliance certainty in the marketplace; and
  • streamline any existing or future guidance while remaining mindful of the relationship-based business model of community banks versus the more impersonal large banks.

More clarifications ok; no to additional requirements. In its comment letter, Consumer Bankers Association concluded that, "while adjustments and clarifications to the Rule may be warranted," it urged the CFPB to maintain the current requirements in place for all financial institutions and to avoid imposing any additional requirements under the Rule.

The letter states that the current Regulation E and DD mandates concerning overdraft services "meet the goals of promoting the principles of customer choice, transparency, and fairness in deposit account relationships" and "afford consumers strong protections via detailed disclosures."

CBA warned the Bureau to use caution "so as not to eliminate the ability of consumers to choose the services they want and, when applying policy considerations, ensure a consistent regulatory approach that can be followed by institutions of all sizes." However, the CBA stated clearly that they oppose the expansion of the opt-in requirement for check and ACH transaction, and that the rule should not be expanded beyond the current requirements.

Reform is necessary.According to the Center for Responsible Lending (CRL), comprehensive overdraft reform is needed. CRL argued that a shift toward more upfront pricing for checking accounts would provide incentive for financial institutions to have more responsible checking account models, "rather than one that preys upon those with the least resources." They made three recommendations.

  1. Regulate overdrafts as credit under Regulation Z, subject to an ability-to-repay assessment and repayment through installments. The letter pointed to data showing that many consumers are charged fees annually. When financial institutions routinely pay a customer’s transactions when the account lacks sufficient funds, the financial institution is clearly extending credit to that customer, and the product should be regulated as credit.
  2. Require that fees be reasonable and proportional to cost. If overdraft fees are not treated as credit and their fees as finance charges, they should be required to be reasonable and proportional to the cost to the institution of covering the overdraft.
  3. Limit overdraft fees to one fee per month, and six per year, and prohibit predatory posting practices.

Companies: American Bankers Association; Consumer Bankers Association; Center for Responsible Lending; Independent Community Bankers of America

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