CFPB Proposes Rule to Limit Overdraft Fees
The Consumer Financial Protection Bureau (CFPB) has proposed a rule to limit excessive overdraft fees charged by the nation’s biggest financial institutions. The proposal would close an outdated loophole that exempts overdraft lending services from longstanding provisions of the Truth in Lending Act and other consumer financial protection laws.
For decades, very large financial institutions have been able to issue highly profitable overdraft loans, which have garnered them billions of dollars in revenue annually. Under the 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. That could mean a fee as low as $3, or at a cost they calculate, if they show their cost data.
Banks charge a customer an overdraft fee if their bank account balance is negative. Overdraft started as a courtesy offered to some customers when paper checks used to take several days to clear, but it then evolved and got more expensive as debit cards became more popular. So a small debit card transaction could cost a banking customer $35 if their balance goes below zero.
The proposed rule would apply to insured financial institutions with more than $10 billion in assets, which covers approximately the 175 largest depository institutions in the country. 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.
Approximately 23 million households pay overdraft fees in any given year. 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 has taken multiple enforcement actions against banks such as Wells Fargo, Regions Bank, and Atlantic Union. Those institutions returned $205 million, $141 million, and $5 million respectively in unlawful fees, in addition to significant civil money penalties paid to the CFPB’s victims relief fund. CFPB also recently ordered Bank of America to pay $90 million for, among other things, double-dipping on non-sufficient funds fees.
Proposed Rule
The proposed rule would require very large financial institutions to treat overdraft loans like credit cards and other loans as well as to provide clear disclosures and other protections. Many banks and credit unions already provide lines of credit tied to a checking account or debit card when the consumer overdraws. The proposal provides clear rules of the road to ensure consistency and clarity.
The CFPB also 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.
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