CBA Comments on CFPB Overdraft Review

July 2, 2019

CBA Comments on CFPB Overdraft Review


WASHINGTON – The Consumer Bankers Association this week submitted comments to the Consumer Financial Protection Bureau’s review of the Federal Reserve’s 2009 overdraft provisions of Regulation E, which implements the Electronic Fund Transfer Act.


“While we believe adjustments and clarifications to the rule may be warranted, CBA urges the CFPB to maintain the current requirements in place for all financial institutions,” CBA Senior Vice President and Associate General Counsel David Pommerehn wrote in the letter. “We believe the current [regulatory] mandates concerning overdraft services … afford consumers strong protections via detailed disclosures.  CBA writes to express our strong support for regulatory policy and oversight that will not impede banks’ current ability to offer a variety of overdraft payment services in order to meet their customers’ financial needs … Additionally, CBA strongly supports a harmonized and consistent regulatory framework for overdraft payment services as necessary to both support informed choices by consumers and facilitate compliance by banks of all sizes.”


“The possible monetary and non-monetary consequences of restricting overdraft services would be broad and complex for consumers, service providers and merchants.  For consumers, restrictions on overdraft services would reduce access to valuable liquidity.  Merchants and service providers would be adversely affected through loss of income from the sale of goods or services and higher costs as a result of returned payment items or disruption to their receivables cycle.”


Background on the Fed’s 2009 Changes


The Fed’s 2009 rule reflected significant changes to the existing overdraft laws to increase transparency and improve physical disclosures. Customers now have to affirmatively opt-in to overdraft services and receive numerous written disclosures. Consumers are free to opt in or out at any time and must receive a new disclosure with any overdraft they incur


When crafting the rule, the Fed considered held several consumer focus groups and determined the new rule should only apply to ATM and point of sale (POS) transactions and not physical checks or automated clearing house (ACH) transactions. This decision was supported by the Fed’s consumer focus groups, which found consumers “would prefer to have their checks paid into overdraft, because those transactions represent important bills” and “generally indicated that they were more likely to pay important bills using checks, ACH, and recurring debits, and to use debit cards on a one-time basis for their discretionary purchases.”


Consumer Need & How Consumers Benefit from Overdraft Services


Some groups have argued since the 2009 rule went into effect overdraft services are harmful to consumers and have assumed they were used by uninformed consumers. Research from Novantas has found these assumptions fundamentally incorrect. A majority of overdrafts come from highly informed consumers who use the services as part of informed decisions about what is best for their financial circumstances – and after clear, transparent disclosures from their bank.


Studies from the Federal Reserve, CFPB and Federal Deposit Insurance Corporation have shown a significant portion of Americans cannot cover a several hundred dollar emergency expense. Due in part to regulations, these consumers’ options are limited when it comes to receiving traditional forms of credit.


Placing restrictions on overdraft services would take away another well-regulated source of financial liquidity. This would cause consumer harm through returned payment fees, accumulation of higher merchant-imposed interest or late payment penalties for returned checks. Checks, as the Fed found, are most often used to pay consumers’ most important bills.


The Need for Consistent Regulations


Changing the rule for CFPB-regulated institutions would create a fragmented consumer protection framework.


“A fragmented regulatory approach would confuse consumers, because services would be administered differently among financial institutions depending on specific agency regulatory requirements, and it could create an uneven playing field between community banks and larger institutions operating under different requirements.  Simply put, anything but a harmonized and consistent regulatory framework could prevent consumers from being afforded the same consumer protection regardless of which bank serves their needs,” CBA’s letter states.


Potential Areas for Reg E Clarification


CBA believes the current opt-in and disclosure requirements should remain in effect but did note some areas where clarity is necessary.


Many consumers repeatedly opt-in and opt-out of overdraft protection. Regulation E requires a notice must be substantially similar to Model Form A-9 and include several provisions, but it does not say if the same forms must be given upon re-enrollment. The rule is also silent on whether additional communications outside of the required disclosures are categorized as UDAAP viable. The lack of clarity on this point could limit proactive communications with customers.


A full copy of CBA’s letter is available here.




About the Consumer Bankers Association:

The Consumer Bankers Association represents America’s leading retail banks. We promote policies to create a stronger industry and economy. Established in 1919, CBA’s corporate member institutions account for 1.7 million jobs in America, extend roughly $4 trillion in consumer loans and provide $275 billion in small business loans annually. Follow us on Twitter @consumerbankers.