CFPB Director Chopra used the release of two new reports about bank overdraft practices to warn banks—and responsible executives—that they could be at risk if the banks engage in overdraft practices deemed to violate Dodd-Frank’s “UDAAP” prohibition. Prior to the issuance of the two new reports, the Bureau’s most recent report on overdrafts was issued in August 2017 under the leadership of former Director Cordray. Two earlier reports were issued in June 2013 and July 2014, also under former Director Cordray.
Following a pattern established under former Director Cordray, the CFPB used relatively neutral language in its formal documents and more aggressive language in its press release, leaving the most alarming comments for the Director to personally deliver. Thus, the press release advised that the CFPB will be “enhancing” its supervisory and enforcement scrutiny of banks that are heavily dependent on overdraft fees. However, in a conference call with reporters, Director Chopra reportedly attacked big banks for “harvest[ing] billions in overdraft fees off Americans during the pandemic” and stated that bank overdraft practices reflect a “clear market failure.” Ominously, in words that apply not just to bankers structuring overdraft programs but to all executives managing consumer financial services programs, he warned: “The CFPB will also seek to uncover the individuals who directed any illegal conduct.”
Significantly, neither the Director nor the recent CFPB reports identify specific overdraft practices of concern. Rather, the Director seemingly objects to the aggregate dollar amounts banks have generated from overdraft fees. However, a recent study commissioned by the Consumer Bankers Association (CBA) shows that overdraft fees have declined 40% in the past decade, a circumstance apparently unremarked by the CFPB. And, in any event, high fees alone are not unlawful.
So far, the CFPB has been silent on whether the Bureau plans to engage in rulemaking on overdrafts. However, Director Chopra has indicated that policy guidance may be forthcoming, and the Bureau’s Fall 2021 rulemaking agenda, which is expected to be released very soon, could reveal if the Bureau is considering rulemaking or intends to rely only on supervision and enforcement to address overdraft fees.
For a number of reasons and as detailed at greater length in a CBA white paper we helped author, we believe that formal rulemaking would serve as a far better approach than a return to “regulation by enforcement.”
- The CFPB has had years to initiate rulemaking establishing clear standards for overdraft fees. While the CFPB undoubtedly has the power to extract a costly settlement from a “poster-child” of its choice, enforcement in the absence of clear standards is fundamentally unfair.
- Because of uncertainties about the facts and circumstances of the underlying conduct, consent orders cannot clearly communicate the Bureau’s regulatory expectations to industry.
- Rulemaking would give the CFPB the opportunity to adopt uniform industry-wide rules. These rules could (and should) be made equally applicable to large and small banks alike. By levelling the playing field, the CFPB could ensure that banks willing to push the overdraft fee envelope do not gain a competitive advantage over their competitors with more conservative practices.
- As the President and CEO of the CBA has observed, the nation’s banks have introduced new products and adopted best practices, even in the absence of regulation or aggressive agency enforcement regarding overdrafts. These best practices, including real-time payment updates and account alerts, 24-hour grace periods and forgiveness of de minimus overdrafts, could serve as the basis for rulemaking but would be wholly inappropriate as requirements effectively mandated through enforcement orders.
- The establishment of industry standards through consent orders and informal policy “guidance” (backed by the threat of draconian potential sanctions) deprives the Bureau of the benefits, and regulated parties of the protections, afforded by the notice and comment rulemaking mandated by the Administrative Procedure Act.
In addition to working with our bank clients over the years to ensure that their overdraft practices are as clear and fair as possible, we have helped them structure and document alternative products, such as overdraft lines of credit and deposit advances, which can serve financially stressed consumers better than overdrafts. Years ago, the FDIC and OCC made it impracticable for banks to offer deposit advances, a development we roundly criticized, but the OCC, at least, subsequently realized that deposit advances can actually serve consumer needs.
The CFPB has now leveled a shot over the bow. We expect to be kept busy in ensuing months working with our clients to further refine (and defend) their overdraft practices, to develop overdraft alternatives and, in the event of rulemaking, to work collaboratively with the CFPB to ensure the best and fairest regulations possible.