CBA: CFPB’s One-Sized-Fits-All Overdraft Proposal Exceeds the Bureau’s Authority, Chills Competition, and Would Harm the Most Vulnerable Consumers

April 1, 2024

WASHINGTON, D.C. – The Consumer Bankers Association (CBA) today submitted a comment letter responding to a Consumer Financial Protection Bureau’s (CFPB) proposed rule that would effectively set a single government-mandated price on overdraft services offered by leading financial institutions across the country.

CBA President and CEO Lindsey Johnson described CBA’s concerns that the CFPB failed to appropriately account for its proposal’s adverse impacts to consumers in a new statement:

“The CFPB does not recognize or acknowledge that its rulemaking poses serious harm to consumers. Because the proposal would require banks to treat overdraft services as credit, many customers who don't qualify for traditional credit products could lose access to an important safety net.

“Overdraft services offered by banks are an essential backstop for many consumers. Notably, consumers who frequently use overdraft services are twice as likely to report being rejected for a credit card than consumers that haven’t used overdraft in the past year. These consumers rely on overdraft services to put food on the table; keep their lights on; and get to work each day.

“The Bureau may tout its proposal as a flashy headline in the middle of an election year. But they are creating risks to the financial well-being of the most vulnerable consumers.”

The CFPB’s proposal would deem overdraft services provided by banks of $10 billion or more in assets as credit under the Truth in Lending Act, including the rules applicable to credit cards if a debit card can access the overdraft service. The proposal purports to offer two exemptions: (1) if services are provided at cost, under a CFPB proposed “proposed breakeven” calculation; or (2) if the services are provided at a CFPB-mandated price. 

As CBA’s comment letter explains, few financial institutions are likely to implement any version of the proposal other than the CFPB-mandated price due to the proposal’s lack of clarity about important compliance issues; the inability to earn revenue; and the proposal’s incomplete understanding of the product market.

Further, the proposal exceeds the CFPB’s statutory authority and fails to meet the requirements of the Administrative Procedure Act.

In the letter, CBA outlines the following concerns with the Bureau’s proposal:

  • The CFPB has no authority to change the statutory definition of credit.
    • Overdraft fees are service charges imposed for keeping an account open if the account holder overdraws. The product bears none of the legal hallmarks of credit: The customer does not reach out to the bank to borrow money. There is no underwriting because the same terms and fees apply to all users. And overdraft fees, which are fixed, are not like interest, which involves the application of a specific rate to varying principal balances.
  • The CFPB similarly lacks authority to prevent financial institutions from earning revenue on overdraft services.
    • The Truth in Lending Act does not give the CFPB authority to cap prices on services by financial institutions. 
  • The CFPB fails to appropriately consider how its proposal could harm consumers.
    • The proposal does not account for the increased costs consumers will need to pay due to late payments and more expensive, less-regulated forms of liquidity like payday loans, pawn, and car title loans due to potentially diminished access to overdraft services. 
  • The proposal relies on decades-old data.
    • The proposal cites data from 2011-2012 in describing the contours of the market for overdraft services. In doing so, the CFPB fails to appropriately acknowledge its own data that runs contrary to its assertions – and more importantly, significant innovation and competition in the market for overdraft services.

To read the full comment letter, click HERE.

Background

The CFPB's proposal fails to appropriately acknowledge more recent CFPB data that suggests overdraft revenue has been reduced by over $5.5 billion a year moving forward, saving consumers nearly $2 billion annually.

According to the CFPB, overdraft/NSF revenue in May 2023 was down nearly 50 percent from pre-pandemic levels.

  • Per CFPB summaries of industry innovation, 17 of the top 20 banks based on overdraft revenue have either eliminated overdraft fees or included a cushion of at least $5 before an overdraft fee is charged.
  • Each of the top 20 banks based on overdraft revenue have instituted a daily cap on the number of overdraft fees.
  • Sixteen of the top 20 banks based on overdraft revenue have eliminated “extended” or “sustained” overdraft fees, charged when the account is not brought back to a positive balance after a certain period of time.
  • And as of June 2023, 14 of the CFPB’s top 20 banks based on overdraft revenue have introduced “Next Day Grace” or eliminated overdraft fees.

CBA Advocacy

  • To view CBA’s recent national empirical survey on consumer need for overdraft products, click HERE.
  • To read CBA President and CEO Lindsey Johnson’s recent written Congressional testimony on why financial regulatory policy should be guided by sound policy, not partisan politics, click HERE.
  • To read CBA’s blog post on the improper use of its Making Ends Meet survey to justify its overdraft proposal, click HERE.
  • To read CBA SVP, General Counsel, Head of Regulatory Affairs David Pommerehn’s written congressional testimony on overdraft click HERE.