An article recently published by the Brookings Institution as an op-ed entitled “A few small banks have become overdraft giants” serves as a warning that bank overdraft practices are likely to face increased attention from the “new CFPB.”
Authored by Aaron Klein, a Brookings Senior Fellow, the article reports that overdraft revenues accounted for more than half of the net income of six small banks in 2020 and criticizes regulators for “tolerat[ing] banks that are mostly or entirely dependent on overdraft fees for profitability.” The author labels banks that are heavily reliant on overdrafts for their profits “a combination of payday lenders and check cashers.” He calls on bank regulators to “crack down on these institutions that are operating in neither a safe nor sound manner” and “to consider whether the overdraft product is really a loan, not a fee.” Mr. Klein also calls on the CFPB “to engage.” He asserts that “calling [overdrafts] a fee may exempt [them] from certain regulations, but it does not change [their] nature [as a loan].”
Under former Director Cordray’s leadership, the CFPB took several preliminary steps towards overdraft rulemaking. In its Spring 2015 rulemaking agenda, it stated that it was “considering whether rules governing overdraft and related services are warranted, and, if so, what types of rules would be appropriate.” It also issued a June 2013 white paper, a July 2014 report, and an August 2017 report on checking account overdraft services. The August 2017 report was accompanied by four one-page prototype model forms for banks to use to disclose overdraft fees and obtain a consumer’s consent to the bank’s overdraft service for ATM and one-time debit card transactions. In November 2017, the CFPB published a notice in the Federal Register announcing that it planned to seek OMB approval to conduct online testing of ATM/overdraft disclosures.
The CFPB took no action regarding overdraft regulation under the leadership of either former Acting Director Mulvaney or former Director Kraninger. In December 2020, House Financial Services Committee Chairwoman Maxine Waters sent a letter to then President-elect Joe Biden recommending various actions that the Biden Administration should take in the financial services arena. Overdraft protection was among the areas in which she recommended that the CFPB issue new rules with stronger consumer safeguards.
Regardless of whether the “new CFPB” rekindles its interest in overdraft rulemaking, banks should be prepared for overdraft practices to be a focus of increased attention from the “new CFPB” in supervision and enforcement.