Banks are preparing for an overdraft check by Biden’s banking regulators

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Federal regulators are expected to take steps in the coming months to cut overdraft fees, even after several larger banks voluntarily curtailed their practices.

Overdraft fees were in the crosshairs of the Consumer Financial Protection Bureau during the Obama administration and will likely be again when President Joe Biden’s nominee for director, Rohit Chopra, receives Senate approval as expected. The Office of the Comptroller of the Currency is already scrutinizing banks that may be overly dependent on fees to stay profitable, and other regulators are expected to act as well.

“Excessive overdraft fees, predatory lending, expensive debt traps, all of these things should be banned. They have no place in the federal banking system, ”OCC deputy director Michael Hsu told lawmakers in August, adding that his agency and other regulators are reviewing guidelines on the issue.

The OCC, the Federal Reserve, and the FDIC have a variety of tools, such as injunctions, in place to combat individual bank overdraft practices that pose security and solidity risks. The CFPB is expected to re-examine consumer protection standards, including a possible finding that overdrafts are a form of credit that should be subject to lending laws.

Major banks like Bank of America, PNC Bank and Ally Bank recently announced changes to how customer account overdrafts are assessed and processed, under tight scrutiny by consumer advocates and Democratic lawmakers like Senator Elizabeth Warren (D-Mass).

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 change, said Peter Dugas, executive director at financial services consultancy Capco.

“There are over 4,000 banks. There have been an extremely small number of banks that have made public statements to redesign or reform their overdraft products, ”Dugas said.

“Profitable customers”

Overdraft fees, averaging $ 35 per transaction, have long drawn the ire of consumers and consumer advocates, and regulatory scrutiny.

A 2013 CFPB study highlighted overdraft practices that the regulator found problematic, including the practice of banks to incorporate customer debit cards, ATMs and check transactions into specific orders in order to maximize overdrafts and fees. The study also found that banks had different limits on the number of overdrafts they could allow their customers in a single day.

Banks are required to give consumers the option of opting for overdraft programs before registering.

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

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

“For millions of American families, short-term liquidity products like overdraft protection provide a valuable emergency safety net to put groceries on the table, commute to work, pay their rent and cover other expenses in times of need,” said Dan Smith, director of regulatory affairs Affairs at the Consumer Bankers Association.

However, overdraft fees are often most incurred by the most economically vulnerable bank customers – regular customers. Approximately 9% of account holders paid around 84% of the total overdraft and insufficient funds (NSF) fees in 2019, according to a June 2020 report from the Center for Responsible Lending.

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

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

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

Unfinished business

The CFPB’s overdraft rules are likely to be changed.

In 2017, under then-director Richard Cordray, an Obama-appointed overdraft disclosure form, the CFPB released overdraft disclosure forms to help clients get more information before opting for programs to ensure they knew what they were signing up for. The CFPB under the Trump administration stopped ongoing work on overdraft programs.

Both Democratic lawmakers and consumer advocates want the CFPB to pick up on and reinforce these Obama-era efforts.

New York passed law last week requiring banks to process customer transactions immediately, rather than rearranging larger transactions first in order to maximize overdrafts and fees. The House and Senate Democrats tabled bills this year (HR 4277, P. 6277), which would prohibit the manipulation of the transaction sequence and would severely limit the number of fees that banks are allowed to charge their customers.

Aside from making adjustments to disclosure programs and the way fees are calculated, the CFPB could also specify that overdraft fees are a form of credit that would subject them to a variety of fair lending and other laws, requiring banks to determine if customers Overdrafts can repay extensions.

Linda Jun, senior policy counsel at Americans for Financial Reform, said the CFPB should treat overdraft protection as a short-term loan because “it really is”.

Banks warn that overly expensive or complicated disposition of overdraft programs could have negative effects on customers.

“Further restricting access to overdrafts would drive many consumers to predatory payday lenders and even drive them out of the well-regulated and well-monitored financial system,” said Smith.

Industry in transition

The overdraft market, which the CFPB, OCC and other regulators are reviewing, has seen some changes since 2017, when fees were most recently a major regulatory issue.

Several banks, including Ally Bank, PNC Bank, Bank of America Corp., Huntington Bank, and Chime, a fintech, have announced changes in recent months to cap overdraft fees. New services include giving customers more time to repay financial institutions’ overdrafts and better notifying customers when their account balances are low.

But without the weight of state regulations, industry-wide changes are unlikely as the high overdraft fees for banks are in dollars.

“The nice thing about rule-making is that everyone has to deal with it together,” said Rebecca Borné, Senior Policy Counsel at the Center for Responsible Lending.

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