Banks Slam Overdraft Limits as Violation of CFPB’s Own Statute

Banks are sounding the alarm that the Consumer Financial Protection Bureau will contravene its own founding statute if it limits how much they can charge when customers overdraw their accounts.

Their complaints, raised in comments to the agency that closed this week, center on how the CFPB wants to define overdraft accounts in its proposed rule, which is part of the Biden administration’s broader effort to fight so-called “junk fees,” or costs hidden from customers.

The rule would let banks treat the overdraft as a loan to customers that charges interest. But the 2010 Dodd-Frank Act, which created the CFPB, bars the agency from setting interest rates. Banks say the caps on such fees, ranging from $3 to $14, therefore amount to an illegal limit on interest.

Banks could go above the cap only as a “breakeven,” if they show their costs for giving people overdraft protection exceeds the capped amount.

“By imposing additional—and onerous—requirements on overdrafts priced above the breakeven or benchmark fee, the Proposal impermissibly establishes a usury limit,” the American Bankers Association said in a comment letter to the agency.

The banks’ concerns will likely resurface in any litigation challenging the CFPB’s rule once it’s finalized.

Banks currently charge an average of $35 to cover overdrafts, according to the bureau. While some major banks such as Citigroup Inc. and Capital One Financial Corp. have already stopped charging overdraft fees, the CFPB estimates its proposal could save consumers $3.5 billion a year from the banks that still charge the fees.

‘Breakeven Standard’

The proposal, released Jan. 17, would dramatically reshape overdraft programs for 175 of the country’s biggest banks and credit unions, covering those with at least $10 billion in assets and dramatically curbing billions of dollars in profits they make from overdraft fees.

The CFPB is also proposing to subject overdraft programs to standards requiring lenders to disclose more information to consumers and assess their ability to repay. Those changes would reverse Federal Reserve rules issued in 1969 and 2009 stating that overdraft protections aren’t loans.

Banks in their comment letters said the Truth in Lending Act doesn’t specifically include overdraft programs, making it improper that the CFPB wants to regulate such charges under the 1968 law. They also raised concerns the CFPB is inappropriately attempting to subject overdraft to provisions in the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act, such as limiting fees for accounts linked to a debit card.

The Bank Policy Institute, a lobbying group for the biggest banks, said in its letter that the TILA and Credit CARD Act protections are better suited for credit cards and other loans governed by contracts that specifically lay out the repayment, interest, and other terms. Overdraft programs are different because they are discretionary, the BPI wrote.

“A bank providing discretionary overdraft products has no legal obligation to cover overdrafts and, when it chooses to do so, may demand payment from the depositor at any time for the costs it incurred,” the group said.

But one of the Credit CARD Act’s key sponsors said overdraft fits squarely within the existing regime for regulating consumer credit.

The 2009 law was intended to promote upfront pricing, ensure credit is extended only after determining a borrower’s ability to repay, and end deceptive and unfair fees, former longtime Rep. Carolyn Maloney (D-N.Y.) wrote to the CFPB.

“All of those purposes are served by applying the Credit CARD Act to cards used to obtain overdraft credit,” Maloney wrote.

Industry Changes

Banks collect around $9 billion per year in overdraft fees, but that revenue has fallen in recent years largely due to changes put in place by large banks, the CFPB says.

One major lender, PNC Bank—a unit of PNC Financial Services Group Inc.—established a “Low Cash Mode” program including a 24-hour grace period for covering overdrafts, low-balance alerts, and options for customers deciding whether to decline a purchase or pay an overdraft.

PNC said the CFPB’s proposal “penalizes” banks for adopting similar features and jeopardizes services that customers rely on.

“We are worried that the Proposal does not go far enough in addressing the full scope of overdraft program elements that affect consumers and that it risks creating unintended consequences that would ultimately harm them,” PNC’s letter said.

Small-Bank Exemption

Most consumer groups say banks will find a way to serve customers under the CFPB’s proposal.

“Some overdrafts may be curtailed, but that will be positive for many consumers, who will have more money in their pockets, will adjust, and will find better ways to manage,” the National Consumer Law Center said in a letter.

Consumer advocates did agree with big-bank trade groups on one point: the rule should also apply to small banks and credit unions that rely more heavily on overdraft revenue, the groups argued. Several smaller banks with less than $10 billion in assets relied on overdraft fees to make a profit, the Brookings Institution found.

“Because there is a formula banks can use to calculate their breakeven point, smaller institutions do not need an exemption from the forthcoming rule based on the size of their institution,” Public Citizen said in a comment letter.

Excluding small banks and credit unions will lead to a tiered system of protections, the ABA warned.

“To our knowledge, this is the first time a regulator has suggested that a consumer is not entitled to the same protections based on the asset size of the institution where the consumer chooses to bank,” the trade group’s letter said.