Consumer Bureau Reviews Regulations Limiting Overdraft Fees

The Consumer Financial Protection Bureau is reviewing a 10-year-old federal rule that limits banks’ ability to charge overdraft fees without customers’ permission.

The move opens the door to a potential overhaul of regulations that the CFPB has previously said saved consumers significant amounts in overdraft fees but which the banking industry has said needs an update.

The analysis will help the bureau determine whether the rule should remain intact, be amended or “rescinded to minimize any significant economic impact,” the CFPB said in a notice Monday.The effort is part of a new CFPB initiative to assess how existing regulations affect small businesses.

Under the existing rule, banks and other financial institutions that issue credit or debit cards are required to get customers’ permission before enrolling them in overdraft protection programs. Consumer advocates have argued customers should be able to choose to have their purchase declined rather than unwittingly incur a $35 overdraft fee for a $3 latte.

The requirements led to “a material decrease in the amount of overdraft fees paid by consumers” the CFPB found in a 2013 report. But that report also found that consumers with overdraft protection were more vulnerable to high fees and having their accounts involuntarily closed, incurring $196 in overdraft fees on average. Those with overdraft protection had their accounts closed at a rate 2.5 times higher than those without the service.

“I am most concerned about the CFPB using [the review] to water down the rule,” said Linda Jun, senior policy counsel at Americans for Financial Reform. “For vulnerable consumers, overdraft fees often compound their vulnerabilities by making it even harder to recover.”

The public will have 45 days to submit comments on the issue, the CFPB said.

Banks typically charge customers $35 each time they attempt to withdraw more than they have in their accounts. The industry made more than $11.5 billion in overdraft fees last year, according to FDIC data.

This comes at a time when Democrats in Congress are taking a closer look at the way the banking industry operates. Sen. Bernie Sanders, I-Vt., and Rep. Alexandria Ocasio-Cortez, D-N.Y., have introduced legislation that would cap credit card interest rates at 15 percent, and Sen. Elizabeth Warren, D-Mass., has proposed making it easier to jail bank executives for corporate misdeeds.

Democratic Sens. Cory Booker of New Jersey and Sherrod Brown of Ohio introduced a bill last year to ban overdraft fees on debit card transactions and ATM withdrawals in many circumstances.

These Democratic plans have little chance of passing Congress this year, but banking industry analysts say they are likely to become talking points during the 2020 presidential campaign. They could also lay the groundwork for banking industry reform if Democrats take control of the Senate.

“This represents a risk to banks as it will further politicize overdraft fees,” Jaret Seiberg, an analyst with Cowen’s Washington Research Group, said in a research note.

Even if the CFPB’s effort results in just modest changes, there could still be political fallout, said Seiberg. “It won’t matter if the banks asked for this. Progressives will attack the industry for trying to escape the overdraft regulations,” he said.

The CFPB has been undergoing a transformation under the Trump administration. The watchdog bureau has adopted a business-friendly approach to the financial world’s prickliest issues, including a focus on educating consumers to make better decisions and rolling back regulations. The bureau has proposed rolling back rules on payday lenders and limiting debt collectors to calling consumers seven times a week, while sending an unlimited number of emails and texts.