In remarks last week to the Consumer Federation of America’s 34th Annual Financial Services Conference, Acting Comptroller of the Currency Michael Hsu took banks to task for contributing to income and wealth inequality through overdraft programs by earning $15.5 billion in overdraft fees in 2019 that “are being paid by those customers who are the most financially vulnerable.”  (Mr. Hsu stated that “overdraft use has continued to grow in recent years.”  However, the amount paid by consumers in overdraft fees in 2019 is substantially below where it has been in previous years.)  His remarks follow the CFPB’s announcement on December 1 that it will be enhancing its supervisory and enforcement scrutiny of banks that are heavily dependent on overdraft fees and Director Chopra’s comments in which he 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.”

In his remarks, Mr. Hsu acknowledged that many banks have changed their overdraft programs “to make them more pro-consumer,” including a number of banks cited by name.  Nevertheless, Mr. Hsu indicated that “new rules and the credible threat of enforcement actions for harmful practices should help ensure that at least some progress will be made in the future, bank reform efforts notwithstanding.”

Mr. Hsu’s remarks were much more balanced than CFPB Director Chopra’s recent comments and also included specific policy recommendation.  Thus, Mr. Hsu acknowledged that “low- to no-cost” overdraft programs can have value for consumers by “empower[ing them] to pay their bills on time, avoid high-cost alternatives, and improve their credit profile.“  He offered the following suggestions for overdraft programs that could support what should, in his view, be the goal of such programs: “to improve people’s financial health—i.e., their ability to spend, save and borrow so they are empowered rather than hindered”:

  • Requiring consumer opt-in to an overdraft program;
  • Providing a grace period before charging an overdraft fee;
  • Allowing negative balances without triggering an overdraft fee;
  • Offering balance-related alerts to consumers;
  • Giving consumers access to real-time balance information;
  • Linking a consumer’s checking account to another account for overdraft protection;
  • Collecting overdraft or NSF fees from a consumer’s next deposit only after other items have been posted or cleared; and
  • Not charging separate and multiple overdraft fees for multiple items in a single day and not charging additional fees when an item is re-presented.

We think these suggestions are all worthy of consideration, at least if implemented voluntarily as best practices or industry-wide through notice-and-comment rulemaking (so there is a level playing field and so affected banks have the opportunity to communicate potential unanticipated consequences and how specific proposals might operate in practice.  (We understand the recommendation about collecting fees from ensuing deposits to address only the posting order on fees and not to suggest imposing barriers to clearing overdrafts through deposits, which would make affording overdraft privileges or alternative products much more difficult).

Mr. Hsu ended his remarks by promising to “continue to encourage banks to offer other innovative products that address growing consumer demand for small-dollar, short-term credit in responsible, safe, sound, and financially healthy ways.”  We fully support OCC efforts to provide alternatives to overdraft as a form of credit.  In our view, overdraft lines of credit and deposit advances, for example, have the potential to better serve financially stressed consumers than overdrafts by providing lower-cost and more predictable “credit” than overdrafts.  We hope the OCC retains some measure of realism that these products cannot be “low- cost to no-cost” and still have widespread utility for credit-starved customers.  Indeed, the insistence on artificially low rate caps is precisely what doomed prior government programs that attempted to foster subprime credit availability.