Banks Brace for Overdraft Scrutiny From Biden’s Bank Regulators

Federal regulators are expected to take steps in the coming months to curtail overdraft fees even after several larger banks have voluntarily reined in their practices.

Overdraft fees were in the Consumer Financial Protection Bureau’s crosshairs during the Obama administration and are likely to be again if President Joe Biden’s nominee for director, Rohit Chopra, wins Senate confirmation as expected. The Office of the Comptroller of the Currency is already scrutinizing banks that might be overreliant on fees to remain profitable, and other regulators are expected to act as well.

“Excessive fees on overdrafts, predatory lending, high-cost debt traps, all these things should be prohibited. They don’t have a place in the federal banking system,” OCC acting director Michael Hsu told lawmakers in August, adding that his agency and other regulators are reviewing policies on the issue.

The OCC, the Federal Reserve, and the FDIC have a host of tools, like cease-and-desist orders, to target individual banks’ overdraft practices that pose safety and soundness risks. The CFPB is expected to take a renewed look at consumer protection standards, including a possible determination that overdrafts are a form of credit that should be subject to lending laws.

Big banks including Bank of America, PNC Bank and Ally Bank have recently announced changes to how they assess and process overdrafts on customer accounts, amid heavy scrutiny from consumer advocates and Democratic lawmakers like Sen. Elizabeth Warren (D-Mass).

Added pressure from Biden’s bank regulators is likely to reshape, but not eliminate, overdraft practices at banks of all sizes, especially those that have resisted changes, said Peter Dugas, an executive director at financial services consultancy Capco.

“There’s 4,000-plus banks. There’s only been an extremely small number of banks that have made public statements to reframe or reform their overdraft products,” Dugas said.

‘Profitable Customers’

Overdraft fees, which average $35 per transaction, have long drawn the ire of consumers and consumer advocates and scrutiny from regulators.

A 2013 CFPB study highlighted overdraft practices the regulator found problematic, including banks’ practice of putting customer debit card, ATM, and check transactions in certain orders to maximize overdrafts and fees. The study also found that banks had varying limits on the number of overdraft charges they allowed customers to rack up in a single day.

Banks are required to give consumers an option to opt-in to overdraft programs before they’re enrolled.

These programs provide big income streams for banks. The Federal Deposit Insurance Corp. found that mid-size and larger banks with at least $1 billion in assets collected $11.68 billion in overdraft and non-sufficient funds fees in 2019.

The banking industry says overdraft services help customers avoid bounced checks and steer them away from payday loans and other high-cost and risky credit products.

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

But overdraft fees often fall most heavily on the most economically vulnerable bank customers—repeat users. Approximately 9% of account holders paid around 84% of total overdraft and non-sufficient fund (NSF) fees in 2019, according to a June 2020 report from the Center for Responsible Lending.

“One out of 12 Americans spend $350 or more on overdraft fees. They’re very profitable customers,” said Aaron Klein of the Brookings Institution.

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

Arvest Bank declined to comment. Academy and Woodforest didn’t respond to requests for comment.

Unfinished Business

Change is likely to come to CFPB overdraft rules.

In 2017, the CFPB under then-Director Richard Cordray, an Obama appointee, released model disclosure overdraft disclosure forms aimed at getting customers more information before they opted into programs to ensure they know what they’re signing up for. The CFPB under the Trump administration shelved work that was underway on overdraft programs.

Both Democratic lawmakers and consumer advocates want the CFPB to pick up and enhance those Obama-era efforts.

New York enacted a law last week that requires banks to process customer transactions as they come in, rather than reordering larger transactions first to maximize overdrafts and fees. House and Senate Democrats have introduced bills this year (H.R. 4277, S. 6277) that would ban manipulating the order of transactions and place would hard limits on the number of fees banks can assess on customers.

Beyond tweaks to disclosure programs and the ways fees are assessed, the CFPB could also determine that overdraft fees are a form of credit, which would subject them to a host of fair lending and other laws and require banks to determine whether customers could repay any overdraft extensions.

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

Banks warn that making overdraft programs too expensive or complicated could have an adverse impact on customers.

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

Shifting Industry

The overdraft market that the CFPB, OCC and other regulators are reviewing has seen some changes since 2017, when the fees were last a major topic of regulatory concern.

Several banks, including Ally Bank, PNC Bank, Bank of America Corp., Huntington Bank and Chime, a fintech, have all in recent months announced changes meant to limit overdraft fees. The new services include giving customers more time to pay back any overdrafts the financial institutions covered and better notifications to customers when their account balances are low.

But without the weight of federal rules, industrywide changes are unlikely given the big dollars overdraft fees bring in for banks.

“The beauty in a rulemaking is that everybody has to deal with that together,” said Rebecca Borné, senior policy counsel at the Center for Responsible Lending.