Banks Prepare for Overdraft Review by Biden Banking Regulators

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Federal regulators are expected to take action over the next few months to reduce overdraft fees even after several major banks voluntarily curtailed their practices.

Overdraft charges were in the sights of the Consumer Financial Protection Bureau during the Obama administration and likely will be again if President Joe Biden’s nominee for director, Rohit Chopra, gets Senate confirmation as scheduled. The Office of the Comptroller of the Currency is already reviewing which banks may be too dependent on fees to remain profitable, and other regulators are expected to act as well.

“Excessive overdraft fees, predatory loans, high cost debt traps, all of those things should be banned. They have no place in the federal banking system, ”OCC acting director Michael Hsu told lawmakers in August, adding that his agency and other regulators were reviewing policies on the issue.

The OCC, Federal Reserve, and FDIC have a host of tools, such as cease and desist orders, to target certain banks’ overdraft practices that pose security and risk risks. solidity. The CFPB should review consumer protection standards, including possibly determining that overdrafts is a form of credit that should be subject to lending laws.

Major banks, including Bank of America, PNC Bank and Ally Bank, recently announced changes to the way they assess and handle overdrafts on accounts receivable, under close scrutiny from consumer advocates and Democratic lawmakers. like Senator Elizabeth Warren (D-Mass).

The additional pressure from Biden’s banking regulators is likely to reshape, but not eliminate, overdraft practices at banks of all sizes, especially those that have resisted the changes, said Peter Dugas, executive director of the consulting firm. in Capco Financial Services.

“There are over 4,000 banks. There have been only a very small number of banks that have made public statements to reframe or reform their overdraft products, ”Dugas said.

“Profitable customers”

The overdraft fees, which average $ 35 per transaction, have long angered consumers and consumer advocates and garnered the attention of regulators.

A 2013 CFPB study highlighted overdraft practices that the regulator found problematic, including the practice of banks of placing customer debit card, ATM and check transactions in certain orders to maximize overdrafts and fees. The study also found that banks had varying limits on the number of overdraft fees they allowed customers to accumulate in a single day.

Banks are required to give consumers the opportunity to enroll in overdraft programs before enrolling.

These programs provide great sources of income for the banks. The Federal Deposit Insurance Corp. found that mid-sized and larger banks with at least $ 1 billion in assets collected $ 11.68 billion in overdraft fees and insufficient funds in 2019.

The banking industry says overdraft services help customers avoid bad checks and keep them away from payday loans and other expensive and risky credit products.

“For millions of American families, short-term liquidity products such as overdraft protection provide a valuable emergency safety net to put food on the table, get to work, pay their rent and cover. other expenses when needed, ”said Dan Smith. , head of regulatory affairs for the Consumer Bankers Association.

But overdraft fees often weigh the most on the most economically vulnerable bank customers, repeat users. Around 9% of account holders paid around 84% of total overdraft and insufficient funds (NSF) fees in 2019, according to a June 2020 Report of the Center for responsible lending.

“One in 12 Americans spends $ 350 or more on overdraft fees. They are very profitable clients, ”said Aaron Klein of the Brookings Institution.

Arvest Bank, based in Bentonville, Ark., And Academy Bank, based in Kansas City, generated more overdraft fees than their total profits in 2020, according to a report released by Klein and Brookings. in March. The same situation applies to Woodlands, Texas, the Woodforest National Bank, which operates branches in Walmart stores, according to the report.

Arvest Bank declined to comment. Academy and Woodforest did not respond to requests for comment.

Unfinished

The change is likely to come to the CFPB overdraft rules.

In 2017, the CFPB, led by then-director Richard Cordray, appointed by Obama, released sample overdraft disclosure forms aimed at getting clients more information before they choose programs for make sure they know what they are signing up for. The CFPB under the Trump administration put aside ongoing work on overdraft programs.

Democratic lawmakers and consumer advocates want the CFPB to resume and strengthen the efforts of the Obama era.

New York enacted a law last week that requires banks to process customer transactions as they arrive, rather than rearranging larger transactions first to maximize overdrafts and fees. House and Senate Democrats introduced bills this year (HR 4277, P. 6277) which would prohibit manipulation of the order of transactions and impose strict limits on the number of fees that banks can impose on customers.

Beyond adjustments to disclosure programs and how fees are assessed, the CFPB could also determine that overdraft fees are a form of credit, subjecting them to a host of fair loan laws and regulations. to other laws and would require banks to consider whether customers could repay any overdraft. extensions.

Linda Jun, senior policy adviser at Americans for Financial Reform, said the CFPB should treat overdraft protections like a short-term loan because “that’s what it really is.”

Banks warn that making overdraft programs too expensive or complicated could have a negative impact on customers.

“Further restricting access to overdraft would lead many consumers to predatory payday lenders and may even force them out of the well-regulated and well-supervised financial system altogether,” Smith said.

Changing industry

The overdraft market that the CFPB, OCC and other regulators are reviewing has seen some changes since 2017, when fees were last a major area of ​​regulatory concern.

Several banks, including Ally Bank, PNC Bank, Bank of America Corp., Huntington Bank and Chime, a fintech, have all announced changes in recent months to limit overdraft fees. New services include giving customers more time to pay off overdrafts covered by financial institutions and better notifications to customers when their account balances are low.

But without the weight of federal rules, industry-wide changes are unlikely given the large dollar overdraft fees for banks.

“The beauty of regulation is that everyone has to deal with it together,” said Rebecca Borne, senior policy advisor at the Center for Responsible Lending.


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